23MeierPP09_18e - Chapter 9 Chapter Perfect (Pure)...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 9 Chapter Perfect (Pure) Competition Four Market Models Pure Competition Pure Market Structure Continuum Four Market Models Pure Monopoly Pure Pure Competition Market Structure Continuum Four Market Models Extremes Extremes Pure Competition Pure Monopoly Market Structure Continuum Four Market Models Monopolistic Competition Monopolistic Pure Competition Pure Monopoly Market Structure Continuum Four Market Models Oligopoly Oligopoly Pure Competition Monopolistic Competition Pure Monopoly Market Structure Continuum Four Market Models Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Market PURE COMPETITION • Largest number of sellers Largest • Standard product Standard • No power - price taker No • Easiest entry and exit Easiest • No advertising No Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Market PURE MONOPOLY • One seller One • No close substitutes No • Considerable power - price maker Considerable • Entry is blocked Entry • Some advertising Some Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Market MONOPOLISTIC COMPETITION • Many sellers Many • Differentiated product Differentiated • Some power - price maker Some • Easy entry and exit Easy • Emphasis on advertising Emphasis Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Market OLIGOPOLY • Few sellers Few • Standard/differentiated products Standard/differentiated • Considerable power - price maker Considerable • Difficult entry Difficult • Some/considerable advertising Some/considerable Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Market PURE COMPETITION P ATC $111 P MC D AVC $111 S= S= Σ MC’s D 8 Q Firm (price taker) 8000 Q Industry Industry PURE COMPETITION Perfectly Elastic Demand Perfectly P Price Taker Role Demand = AR = P = MR Quantity Demanded (sold) Perfect Competition Perfect Demand, Marginal Revenue, and Total Revenue Price, average and marginal revenue, total revenue (dollars) P 1179 1048 917 917 786 655 524 393 262 131 0 1 2 3 4 5 6 7 8 TR D = MR 9 10 Quantity Demanded (sold) PURE COMPETITION Most Profitable Output Most Two Methods Total Revenue – Total Cost Marginal Revenue – Marginal Cost TOTAL REVENUE TOTAL COST TR = P x Q TR TC = TFC + TVC EP = TR - TC Total-Revenue-Total Cost Approach Total Total Total Fixed Variable Total Product Cost Cost Cost 0 1 2 3 4 5 6 7 8 9 10 $ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 $ 0 90 170 240 300 370 450 540 650 780 930 $ 100 190 270 340 400 470 550 640 750 880 1030 Total Revenue $ 0 131 262 393 524 655 786 917 1048 1179 1310 Price: $131 Profit - $100 $100 - 59 -8 + 53 + 124 + 185 + 236 + 277 + 298 + 299 + 280 Total-Revenue-Total Cost Approach Total Total Total Fixed Variable Total Product Cost Cost Cost 0 1 2 3 4 5 6 7 8 9 10 $ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 $ 0 90 170 240 300 370 450 540 650 780 930 $ 100 190 270 340 400 470 550 640 750 880 1030 Total Revenue $ 0 81 162 243 324 405 486 567 648 729 810 Price: $81 Profit - $100 $100 - 109 - 108 - 97 - 76 - 65 - 64 - 73 - 102 - 151 - 220 Total-Revenue-Total Cost Approach Total Total Total Fixed Variable Total Product Cost Cost Cost 0 1 2 3 4 5 6 7 8 9 10 $ 100 $ 0 $ 100 100 100 100 90 190 100 100 170 270 100 Still no 240 profit 340 100 300 but losses are 400 100 370 470 less than the 550 100 450 firm’s fixed costs 100 540 640 100 650 750 100 780 880 100 930 1030 Total Revenue $ 0 81 162 243 324 405 486 567 648 729 810 Price: $81 Profit - $100 $100 - 109 - 108 - 97 - 76 - 65 - 64 - 73 - 102 - 151 - 220 TOTAL REVENUE TOTAL COST Produce when: Produce TR > TVC Losses < TFC Total-Revenue-Total Cost Approach Total Total Total Fixed Variable Total Total Product Cost Cost Cost 0 1 2 3 4 5 6 7 8 9 10 $ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 $ 0 90 170 240 300 370 450 540 650 780 930 $ 100 190 270 340 400 470 550 640 750 880 1030 Total Revenue $ 0 71 142 213 284 355 426 497 568 639 710 Price: $71 Profit - $100 $100 - 119 - 128 - 127 - 116 - 115 - 124 - 143 - 182 - 241 - 320 Total-Revenue-Total Cost Approach Total Total Total Fixed Variable Total Total Product Cost Cost Cost 0 1 2 3 4 5 6 7 8 9 10 $ 100 $ 0 $ 100 100 100 100 90 190 100 100 170 270 No profit and the 100 240 340 100 300 400 loss is greater than 100 fixed costs 370 470 its 100 450 550 100 540 640 100 650 750 100 780 880 100 930 1030 Total Revenue $ 0 71 142 213 284 355 426 497 568 639 710 Price: $71 Profit - $100 $100 - 119 - 128 - 127 - 116 - 115 - 124 - 143 - 182 - 241 - 320 Shut Down! TOTAL REVENUE TOTAL COST Shut down when: Shut TR < TVC Losses > TFC Total revenue and total costs (dollars) Total-Revenue-Total Cost Approach Total-Revenue-Total 1,700 P 1,600 Total 1,500 Revenue 1,400 1,300 1,200 1,100 1,000 900 900 800 800 700 700 600 600 500 500 400 400 300 300 200 200 100 100 0 Total Cost 1 2 3 4 5 6 7 8 9 10 11 12 13 14 10 Q Total revenue and total costs (dollars) Total-Revenue-Total Cost Approach Total-Revenue-Total 1,700 P 1,600 Total 1,500 Revenue 1,400 1,300 Maximum 1,200 Economic Break-Even Point 1,100 Profits (Normal Profit) 1,000 TR(P=$131) 900 900 $299 800 800 700 700 600 600 500 500 400 400 300 300 200 200 100 100 0 { Total Cost Break-Even Point (Normal Profit) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 10 Q MARGINAL REVENUE MARGINAL COST • P > AVC: produce AVC: MR = MC MR EP = (P-ATC) x Q EP • P < AVC: shut down AVC: Product Price (Average Revenue) $131 $131 131 131 131 131 131 131 131 131 131 131 131 Quantity Total Marginal Demanded Revenue Revenue (Sold) 0 1 2 3 4 5 6 7 8 9 10 $ 0 131 262 393 524 655 786 917 1048 1179 1310 ] ] ] ] ] ] ] ] ] $131 131 131 131 131 131 131 131 131 131 MARGINAL REVENUE MARGINAL COST P = AR = MR AR Most Profit: Most (P = AR =MR) = MC (P Marginal-Revenue-Marginal Cost Approach Average Average Average Price = Total Total Fixed Variable Total Marginal Marginal Economic Cost Revenue Prof./Loss Cost Product Cost Cost 0 1 2 3 4 5 6 7 8 9 10 100.00 100.00 50.00 50.00 33.33 33.33 25.00 20.00 16.67 14.29 12.50 11.11 10.00 90.00 85.00 80.00 75.00 74.00 75.00 77.14 81.25 86.67 93.00 103.00 190.00 ] 135.00 ] 113.33 ] 100.00 ] 94.00 ] 91.67 ] 91.43 ] 93.75 ] 97.78 ] 90 80 70 60 70 80 90 110 130 150 $ 131 131 131 131 131 131 131 131 131 131 - $100 $100 - 59 -8 + 53 + 124 + 185 + 236 + 277 + 298 + 299 + 280 Marginal-Revenue-Marginal Cost Approach Average Average Average Price = Total Average Total Fixed Variable Total Marginal Marginal Economic Cost Revenue Prof./Loss Cost Product Cost Cost 0 1 2 3 4 5 6 7 8 9 10 100.00 100.00 50.00 50.00 33.33 33.33 25.00 20.00 16.67 14.29 12.50 11.11 10.00 90.00 85.00 80.00 75.00 74.00 75.00 77.14 81.25 86.67 93.00 103.00 190.00 ] 135.00 ] 113.33 ] 100.00 ] 94.00 ] 91.67 ] 91.43 ] 93.75 ] 97.78 ] 90 80 70 60 70 80 90 110 130 150 $ 131 131 131 131 131 131 131 131 131 131 - $100 $100 - 59 -8 + 53 + 124 + 185 + 236 + 277 + 298 + 299 + 280 Total Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach 200 P 150 131 100 50 50 MC MR ATC AVC 0 1 2 3 4 5 6 7 8 9 10 Q Total Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach 200 P Economic Profit 150 131 100 97.78 MC MR ATC AVC 50 50 0 1 2 3 4 5 6 7 8 9 10 Q Total Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach 200 P Economic Profit 150 131 100 97.78 MC MR ATC AVC 50 50 0 1 2 3 4 5 6 7 8 9 10 Q Total Total revenue and total costs (dollars) P MR=MC P MC Profit per unit L M Economic Profit N MR ATC AVC O output X Q Marginal Revenue Marginal Marginal Cost Approach Short-run loss minimization If the price is lowered from $131 to $81 The MR = MC point changes... Marginal-Revenue-Marginal Cost Approach Average Average Average Price = Total Total Fixed Variable Total Marginal Marginal Economic Cost Revenue Prof./Loss Cost Product Cost Cost 0 1 2 3 4 5 6 7 8 9 10 100.00 100.00 50.00 50.00 33.33 33.33 25.00 20.00 16.67 14.29 12.50 11.11 10.00 90.00 85.00 80.00 75.00 74.00 75.00 77.14 81.25 86.67 93.00 103.00 190.00 ] 135.00 ] 113.33 ] 100.00 ] 94.00 ] 91.67 ] 91.43 ] 93.75 ] 94.78 ] 90 80 70 60 70 80 90 110 130 150 $ 81 81 81 81 81 81 81 81 81 81 - $100 $100 - 109 - 108 - 97 - 76 - 65 - 64 - 73 - 102 - 151 - 220 Total Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach 200 150 100 81 50 50 0 P MC ATC AVC MR 1 2 3 4 5 6 7 8 9 10 Q Total Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach 200 150 100 81 50 50 0 P MC Economic Loss ATC AVC MR 1 2 3 4 5 6 7 8 9 10 Q Marginal-Revenue-Marginal Cost Approach Average Average Average Price = Total Total Fixed Variable Total Marginal Marginal Economic Cost Revenue Prof./Loss Cost Product Cost Cost 0 1 2 3 4 5 6 7 8 9 10 100.00 100.00 50.00 50.00 33.33 33.33 25.00 20.00 16.67 14.29 12.50 11.11 10.00 90.00 85.00 80.00 75.00 74.00 75.00 77.14 81.25 86.67 93.00 103.00 190.00 ] 135.00 ] 113.33 ] 100.00 ] 94.00 ] 91.67 ] 91.43 ] 93.75 ] 94.78 ] 90 80 70 60 70 80 90 110 130 150 $ 71 71 71 71 71 71 71 71 71 71 $100 $100 - 119 - 128 - 127 - 116 - 115 - 124 - 143 - 182 - 241 - 320 Total Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach 200 150 100 71 50 50 0 P MC ATC AVC MR 1 2 3 4 5 6 7 8 9 10 Q Total Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach 200 150 P MC With economic losses, ATC at what point should the 100 AVC firm shut down operations? 81 MR 50 50 0 Economic Loss 1 2 3 4 5 6 7 8 9 10 Q Total Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach 200 150 100 71 50 50 P MC ATC AVC MR When price is inadequate to meet minimum AVC, 0 the1firm should shut1down 23456789 0 Q Marginal-Revenue-Marginal Cost Approach P Costs and revenues (dollars) Break-even ATC (normal profit) point MC P5 P4 P3 P2 P1 produce unless revenue is at least able to meet AVC MR 5 MR AVC MR 4 MR 3 MR 2 Firm should not 1 Q Q2Q3 4Q5 Q Marginal-Revenue-Marginal Cost Approach Marginal-Revenue-Marginal P Costs and revenues (dollars) Break-even ATC (normal profit) point MC P5 P4 P3 P2 a greater quantity will be supplied MR 5 MR AVC MR 4 MR 3 At a higher price 2 Q2Q3 4Q5 Q Q Marginal-Revenue-Marginal Cost Approach Marginal-Revenue-Marginal P Costs and revenues (dollars) Break-even ATC (normal profit) point MC P5 P4 P3 P2 P1 Cost Curve at points above AVC represent the short-run supply curve MR 5 MR AVC MR 4 MR 3 MR 2 The Marginal 1 Q Q2Q3 4Q5 Q Marginal-Revenue-Marginal Cost Approach Marginal-Revenue-Marginal P Costs and revenues (dollars) Short-run ATC Supply Curve (blue) MC P5 P4 P3 P2 P1 MR 5 MR AVC MR 4 MR 3 MR 2 1 Q2Q3 4Q5 Q Q MR-MC Application Problem Average Average Average Total Fixed Variable Total Marginal Cost Cost Product Cost Cost P = MR $ 66 0 1 2 3 4 5 6 7 8 9 10 60.00 60.00 30.00 30.00 20.00 20.00 15.00 12.00 10.00 8.57 7.50 6.67 6.00 45.00 105.00 42.50 72.50 40.00 60.00 37.50 52.50 37.00 49.00 37.50 47.50 38.57 47.14 40.63 48.13 43.33 50.00 46.50 52.50 45 40 35 30 35 40 45 55 65 75 P>ATC Produce EP = $144 EP $144 ($66 - 50) x 9 MR-MC Application Problem Average Average Average Total Fixed Variable Total Marginal Cost Cost Product Cost Cost P = MR $ 56 0 1 2 3 4 5 6 7 8 9 10 60.00 60.00 30.00 30.00 20.00 20.00 15.00 12.00 10.00 8.57 7.50 6.67 6.00 45.00 105.00 42.50 72.50 40.00 60.00 37.50 52.50 37.00 49.00 37.50 47.50 38.57 47.14 40.63 48.13 43.33 50.00 46.50 52.50 45 40 35 30 35 40 45 55 65 75 P>ATC Produce EP = $62.96 EP $62.96 ($56 - 48.13) x 8 MR-MC Application Problem Average Average Average Total Fixed Variable Total Marginal Cost Cost Product Cost Cost P = MR $ 46 0 1 2 3 4 5 6 7 8 9 10 60.00 60.00 30.00 30.00 20.00 20.00 15.00 12.00 10.00 8.57 7.50 6.67 6.00 45.00 105.00 42.50 72.50 40.00 60.00 37.50 52.50 37.00 49.00 37.50 47.50 38.57 47.14 40.63 48.13 43.33 50.00 46.50 52.50 45 40 35 30 35 40 45 55 65 75 P<ATC P>AVC Produce EL = $7.98 EL $7.98 ($46 - 47.14) x 7 MR-MC Application Problem Average Average Average Total Fixed Variable Total Marginal Cost Cost Product Cost Cost P = MR $ 41 0 1 2 3 4 5 6 7 8 9 10 60.00 60.00 30.00 30.00 20.00 20.00 15.00 12.00 10.00 8.57 7.50 6.67 6.00 45.00 105.00 42.50 72.50 40.00 60.00 37.50 52.50 37.00 49.00 37.50 47.50 38.57 47.14 40.63 48.13 43.33 50.00 46.50 52.50 45 40 35 30 35 40 45 55 65 75 P<ATC P>AVC Produce EL = $39 EL $39 ($41 - 47.50) x 6 MR-MC Application Problem Average Average Average Total Fixed Variable Total Marginal Cost Cost Product Cost Cost P = MR $ 38 0 1 2 3 4 5 6 7 8 9 10 60.00 60.00 30.00 30.00 20.00 20.00 15.00 12.00 10.00 8.57 7.50 6.67 6.00 45.00 105.00 42.50 72.50 40.00 60.00 37.50 52.50 37.00 49.00 37.50 47.50 38.57 47.14 40.63 48.13 43.33 50.00 46.50 52.50 45 40 35 30 35 40 45 55 65 75 P<ATC P>AVC Produce EL = $55 EL $55 ($38 - 49) x 5 MR-MC Application Problem Average Average Average Total Fixed Variable Total Marginal Cost Cost Product Cost Cost P = MR $ 26 0 1 2 3 4 5 6 7 8 9 10 60.00 60.00 30.00 30.00 20.00 20.00 15.00 12.00 10.00 8.57 7.50 6.67 6.00 45.00 105.00 42.50 72.50 40.00 60.00 37.50 52.50 37.00 49.00 37.50 47.50 38.57 47.14 40.63 48.13 43.33 50.00 46.50 52.50 45 40 35 30 35 40 45 55 65 75 P<ATC P<AVC Shut down EL = $60 EL $60 MR-MC Application Problem Average Average Average Total Fixed Variable Total Marginal Cost Cost Product Cost Cost P = MR $ 32 0 1 2 3 4 5 6 7 8 9 10 60.00 60.00 30.00 30.00 20.00 20.00 15.00 12.00 10.00 8.57 7.50 6.67 6.00 45.00 105.00 42.50 72.50 40.00 60.00 37.50 52.50 37.00 49.00 37.50 47.50 38.57 47.14 40.63 48.13 43.33 50.00 46.50 52.50 45 40 35 30 35 40 45 55 65 75 P<ATC P<AVC Shut down EL = $60 EL $60 MR-MC Application Problem Average Average Average Total Fixed Variable Total Marginal Cost Cost Product Cost Cost P = MR $ 75 0 1 2 3 4 5 6 7 8 9 10 60.00 60.00 30.00 30.00 20.00 20.00 15.00 12.00 10.00 8.57 7.50 6.67 6.00 45.00 105.00 42.50 72.50 40.00 60.00 37.50 52.50 37.00 49.00 37.50 47.50 38.57 47.14 40.63 48.13 43.33 50.00 46.50 52.50 45 40 35 30 35 40 45 55 65 75 ? MR-MC Application Problem Average Average Average Total Fixed Variable Total Marginal Cost Cost Product Cost Cost P = MR $ 75 0 1 2 3 4 5 6 7 8 9 10 60.00 60.00 30.00 30.00 20.00 20.00 15.00 12.00 10.00 8.57 7.50 6.67 6.00 45.00 105.00 42.50 72.50 40.00 60.00 37.50 52.50 37.00 49.00 37.50 47.50 38.57 47.14 40.63 48.13 43.33 50.00 46.50 52.50 45 40 35 30 35 40 45 55 65 75 P>ATC Produce EP = $225 EP $225 ($75 – 52.50) x 10 Long-run Competitive Equilibrium Long-run P Economic ATC Profit P MC $111 S= S= Σ MC’s $111 How D about the AVC long-run? D 8 Q Firm (price taker) 8000 Q Industry Industry Long-run from Long-run short run profits • New firms enter the industry • EP falls because of competition • Firms continue to enter as long as there is EP • EP eventually disappears • Long run: just normal profit; EP=0 Long-run from Long-run short run losses • Firms leave the industry • EL falls for those remaining • Firms continue to leave as long as there is EL • EL eventually disappears • Long run: just normal profit; EP=0 Long-Run Constant-Cost Industry P P=$50 P3 P1 P2 S D3 D1 D2 Q3 Q1 Q2 Q 100,000 110,000 90,000 Long-Run Increasing-Cost Industry P $55 $50 $45 LRS P3 P1 P2 D3 Q3 90,000 D1 Q2 D2 Q Q1 100,000 110,000 Long-Run Decreasing-Cost Industry P $55 $50 $45 P3 P1 P2 S D3 Q3 90,000 D1 Q2 110,000 D2 Q Q1 100,000 Long-Run Competitive Equilibrium P MC Price ATC MR Price = MC = Minimum ATC (normal profit) Q P Q Quantity Pure Competition and Efficiency Pure Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Price > MC Overallocation Price < MC Pure Competition and Efficiency Pure Productive Efficiency Resources are Allocative Efficiency Price > MC Overallocation Price < MC Price = Minimum ATC efficiently allocated Price = MC under competition Underallocation Pure Competition and Efficiency Some Qualifications... Some • Economies of Scale Economies • Technological Progress Technological • Range of Consumer Choice Range ...
View Full Document

Ask a homework question - tutors are online