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Pure Competition - FIRM BEHAVIOR ~ i H=TR TC TC PART 1.3...

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Unformatted text preview: FIRM BEHAVIOR ~ i H=TR+TC ' , TC PART 1.3- DONE}. . _. ' TR LEFT» TODD ' ' ' DIFFERENT-MARKET STRUCTURE.S._ ' —-+ y(-_V . V. 'MOIHOPOIYF Oli'gopoly . Monopolistic ' -'Perfe_'¢t. . '_ Competitidn I’Com’PietgitiOHI.-l.‘1':' - ~_ CHARACTERISTICS OF A PERFECTLLY COMPETITIVE MARKET -, 11. THERE ARE MANY SELLERS V i __ 2? THEREARE MANY BUYERS ' "*3 THE PRODUCT IS HOMOGENEOUS ' (IDENTICAL) A - - 4. THERE ARE No BARRIERS To ENTRY _' . [5. SELLER (BUYERS) ARE PRICE TAKERS- ’ , = EXANIPLE Agriculture (Wheat farmerS a cloSe I ‘1 example) WHAT DOES TR (OR TR) CURVE LOOK LIKE j " FOR A E[RM IN A PURELY COMPETITIVE MARKET? , , ’ 7 A. ,REALLVPRETTV SIMPLE V WHAT NOW? THE FIRM WANTS TO MAX I, v PROFITS (II= TR— TC) ANDIT TAKESP A ' OR THE MARKET PRICE AS GIVEN. IT WILL ' - THEN PICK THE OUTPUT (Q) WHERE TR _> - > ' ' ' :TC BY THE MAXIMUM AMOUNT, __ , GRAPHICALLY ' “(‘9‘ . 171.12. ' ”See page '135vtext ~ _ - Another approach to profit max1m1z1ng behavmr by a firm 1n a perfectly competltlve', .V ' ' market ' MC (marginal cost), MR (marglnal revenue) I A ' ' ' . Approach ‘ - . 0 NIR= ATR/AQ but remember P is A given to the firm 1n this type of ' market ‘ ‘ ' -. so....-... MR= m. ; , . , ~ .1" AQ ’ 4 '0 Since the AQs cancel out we are left . . f ' ’ With the folloWing ,o MR= P or for a firmin a j competltlve market, marginal revenue is equal to the price glven p 3 f V ” 1' I I, .1 by the market MC (MARGINAL COST) MR (MARGINAL REVENUE) ' , APPROACH - PROFIT MAXIMIZING (II) OUTPUT . — ‘ DECISION FOR A FIRM IN A PERFECTLY COMPETITIVE MARKET 4 SINCE FIRM IS A PRICE TAKER, THE 9 - MARKET PRICE (P) IS GIVEN OR FIXED FOR THE FIRM ' IN THIS CASE _ LETS SAY—i);$4 FOR THE INDIVIDUAL FIRM IN A COMPETIVIVE MARKET, THE MARKET . , PRICE Is ITS MR (MARGINAL REVENUE) . MR =ATR/AQ =1 $4 ONE WHEAT FARMER (FIRM)- KEY RULE PICK THE OUTPUT LEVEL WHERE MR = MC CONCEPTUAL EXPLANATIOsz » LET’S LOOK AT AN EXAMPLE — _ ’ - MARKETPRICEIS $14; V ' Mum" C MARKETFORWHEAT - ”w. ’ ONE WHEAT FARMER (FIRM) ' MARKET PRICE FALLS , V ONE WHEAT FARMER ‘ i (FIRM) a MARKETPRICE FALLS (AGAIN) '5‘ ' " ° -. , mg ‘ " ONEWHEATFARMER j . '- PERFECT COMPETITION _. . . ‘ FIRMS sHORT RUN SUPPLY CURVE p ’ E0: No Output 3 4 .i. .y _ -' Ell: Produce q1-— minimize loss ” ' P2= Produce q2 —- maximize profit P3: ProdHee q3 - maximize prefit etc. V I H so: A C0) 4: E 7 ~ .1. a S SUPPLY CURVE IS THAT PORTION OF ITS MC _ _ _ r CURVE ABOVE AVC __ i s m ' . Firm ' LON G RUN EQUILIBRIUM ' ” 7] 5 SHORT RUN PROFITS ATTRACT . - - } MORE PRODUCERS IN THE LONG ' RUN . _ _ _ _. I 7 y Io SHORT RUN LOssES CAUSE FIRMS TOEXITINTHELONGRUN ' . ASSUMES. FIRMS CANFREELYENTER ORLEAVETHE : TINTHELONG“; RUN . . . .. _. , / . ' :: -_C0NCLUSI;0N . ' 0' WITH FREE ENTRY AND EXIT, IN ~ THELONGRUNAFIRMINA ' ‘ PERFECTLY COMPETIVE MARKET WILL EARN ZERO ECONOMIC PROFITS ' - ~ - -- REMEMBER FIRMS WILL STILL ' V ‘ COVER IMPLICIT COSTS ‘f . . ...
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