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IO and perfect competition_Presentation

# IO and perfect competition_Presentation - Industrial...

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1 Industrial Organization & Perfect Competition

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2 Perfectly Competitive Markets Structure Assumptions Many buyers and sellers Homogeneous product or output Note: these first two assumptions imply that the perfectly competitive firm is a price taker. P(x) = P* = n where n is the demand for the individual firm’s output. Also note that if P(x) is just P*, then mr=P*, too. “Free” entry and exit Full and symmetric information
3 Perfectly Competitive Markets Every demander is a price-taker (no buyer can influence the price). Every supplier is a price-taker (no seller can influence the price). The market price is known to all potential buyers and sellers and anyone who wishes to trade at that price can do so.

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4 An Example Jonathan’s farm is perfectly competitive and uses the inputs shown to produce the quantities of apples indicated on the table. Jonathan's Apple Farm Production Function Apples (tons/year) Land (acres) Labor (hired) Proprietor's time (hours) 0 100 0 1,100 50 100 2,500 1,100 100 100 3,700 1,100 150 100 5,000 1,100 200 100 6,800 1,100 250 100 10,000 1,100 300 100 15,000 1,100 350 100 27,000 1,100
5 Production Detail Apple Farm Production Function (detail) Apples (tons/year) Land (acres) Labor (hired) Proprietor's time (hours) 200 100 6,800 1,100 210 100 7,320 1,100 220 100 7,900 1,100 230 100 8,530 1,100 240 100 9,220 1,100 250 100 10,000 1,100 260 100 10,800 1,100 Here is some finer detail regarding the apple farm.

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6 Factor Prices Jonathan is a factor price taker. Use these factor prices to build the cost tables. Prices Labor's time \$8.00 per hour Owner's time \$12.00 per hour Rent \$124.00 per acre
7 Costs Jonathan's Apple Farm Costs Apples (tons/year) Land Hired Labor Proprietor's time Total Cost Average Cost Marginal Cost (midpoint formula) 0 12,400 0 13,200 25,600 50 12,400 20,000 13,200 45,600 912 296 100 12,400 29,600 13,200 55,200 552 200 150 12,400 40,000 13,200 65,600 437 248 200 12,400 54,400 13,200 80,000 400 400 250 12,400 80,000 13,200 105,600 422 656 300 12,400 120,000 13,200 145,600 485 1,360 350 12,400 216,000 13,200 241,600 690

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8 Finer Cost Details Jonathan's Apple Farm Costs (detail) Apples (tons/year) Land Hired Labor Proprietor's time Total Cost Average Cost Marginal Cost (midpoint formula) 200 12,400 54,400 13,200 80,000 400 210 12,400 58,560 13,200 84,160 401 440 220 12,400 63,200 13,200 88,800 404 484 230 12,400 68,240 13,200 93,840 408 528 240 12,400 73,760 13,200 99,360 414 588 250 12,400 80,000 13,200 105,600 422 632 260 12,400 86,400 13,200 112,000 431
9 Graph of Jonathan’s Cost Curves The marginal cost of each ton of apples is shown as the red line. The average cost is shown as the blue line. Notice that the marginal cost = average cost at average cost’s minimum. Jonathan's Cost Functions 0 100 200 300 400 500 600 700 800 900 1,000 0 100 200 300 400 Apples (tons/year) \$/ton Average Cost Marginal Cost (midpoint formula)

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10 Profit Maximization Profit ( Π ) = total revenue(tr) - total cost(tc). Profit depends on the firm’s output level (x). So… Π (x) = tr(x) - tc(x) Define marginal revenue (mr) = tr/ x marginal cost (mc) = tc/ x NOTE: Since we have a perfectly competitive firm P=mr for all levels of production.
11 Profit Maximization General rules for profit maximization: If x* maximizes Π , then mr = mc at x* x* is a profit max and not a profit min at x* it’s worth operating Reminder: since the firm is perfectly competitive, P=mr for all values of x.

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12 Jonathan’s Profit and Loss Suppose the market price is \$600/ton.
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IO and perfect competition_Presentation - Industrial...

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