08_Producer2-PURE COMPETITION_

08_Producer2-PURE COMPETITION_ - Firms: Price Takers (Pure...

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1 Firms: Price Takers (Pure [Perfect] Competition) (Revenue for Price Takers & Production) (Section 8) I. Price Takers (Pure competition mkt) vs. Price Searchers (other mkts) A. Pure (perfect) competition (price takers) We have talked about costs but this is only ½ of the story ; in the next sections we will talk about revenue Price takers - Any firm that takes the price of the product as given & beyond its control (we will talk about these in this section) Why would a firm be a price taker 1. Firms all produce identical products *2. Each seller is small relative to the total market 3. It is easy (cheap) to enter or exit market No price decision to be made in this market; suppliers take prices as given [They sell same amount at market price as if they lower price and sell none if they raise their price above the market]
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2 Real world? What does the demand curve for an individual price taker’s product look like? B. Price searchers Price searchers - Firms that face a downward sloping demand curve for their product. (we will talk about this next section)
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3 II. Price takers market A. Characteristics of price-taker (pure competition) market 1. All firms in the market produce an identical product 2. A large number of firms exist in the market 3. Each firm supplies only a small portion of the total amount supplied in the market 4. No barriers to entry into market (firms can easily enter and exit market) Graphs:
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4 B. How does the price taker maximize profits? 1. Total revenue & total cost approach Price = $131 TFC=$100 Total Product (output) (Q) TVC TC TR Profit 0 0 1 90 2 170 3 240 4 300 5 370 6 450 7 540 8 650 9 780 10 930 Graph:
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5 2. Marginal revenue & Marginal cost approach Set MR=MC; Why? Price = $131 Total Product TC AFC AVC ATC MC MR Profits 0 100 1 190 2 270 3 340 4 400 5 470 6 550 7 640 8 750 9 880 10 1030 Graph: How does a price taker max profits? Why is MR=MC close to real world?
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6 a) Losses & when to go out of business Suppose that the market changes so the price drops below firm’s ATC at all levels of output; should the firm shutdown? Ex (revisited) But suppose price to $81 or price 71 Total Product TC ATC AVC MC MR (P=$81) Profits (P=$81) MR (P=$71) Profits (P=$71) 0 100 1 190 2 270 3 340 4 400 5 470 6 550 7 640 8 750 9 880 10 1030 Graph Price=$81( ):
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7 Graph Price=$71( ): Punch line : Real World : - Amusement parks - Cargo ships
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8 C. Firm’s short-run supply curve Graph : In short-run: How much does firm supply if price= 1 p How much does firm supply if price= 2 p How much does firm supply if price= 3 p At which price above does the firm earn positive profits? At what price above does firm earn zero (economic) profits? (these are called normal profits)
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9 Market supply curve : Sum up all firms in industry. Assume 1000 identical firms.
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08_Producer2-PURE COMPETITION_ - Firms: Price Takers (Pure...

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