Professional Documents
Culture Documents
eleven
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
Perfect Competition in the Market for Organic Apples
After studying this chapter, you
should be able to:
Competitive Markets
LEARNING OBJECTIVES
perfect competitor faces a
CHAPTER 11: Firms in Perfectly
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 2 of 35
Firms in Perfectly Competitive Markets
11 – 1
The Four Market Structures
Competitive Markets
MARKET STRUCTURE
CHAPTER 11: Firms in Perfectly
PERFECT MONOPOLISTIC
CHARACTERISTIC COMPETITION COMPETITION OLIGOPOLY MONOPOLY
Number of firms Many Many Few One
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 3 of 35
1 LEARNING OBJECTIVE
Competitive Markets
Perfectly Competitive Markets
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 4 of 35
Perfectly Competitive Markets
11 - 1
A Perfectly Competitive Firm
Faces a Horizontal Demand
Curve
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 5 of 35
2 LEARNING OBJECTIVE
How a Firm Maximizes Profit in a
Perfectly Competitive Market
Profit Total revenue minus total cost.
Profit = TR - TC
Competitive Markets
11 - 2
The Market Demand for Wheat
versus the Demand or One
CHAPTER 11: Firms in Perfectly
Farmer’s Wheat
Don’t Confuse the Demand Curve for Farmer Douglas’s Wheat with the Market Demand Curve for Wheat
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 6 of 35
How a Firm Maximizes Profit in a
Perfectly Competitive Market
TR TR P Q
AR so, AR P
Q Q Q
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 7 of 35
Equilibrium condition
𝜋 =𝑅−𝐶
Competitive Markets
CHAPTER 11: Firms in Perfectly
𝜕𝜋
To maximise π , =0
𝜕𝑄
𝜕𝑅 𝜕𝐶
= − =0
𝜕𝑄 𝜕𝑄
i.e., MR –MC = 0
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 8 of 35
Contd..
The first order condition for profit maximization = P = MR = AR = MC
𝜕2 𝜋
=<0
CHAPTER 11: Firms in Perfectly
𝜕𝑄2
𝜕2𝑅 𝜕2𝐶
= 𝜕𝑄 2 − 𝜕𝑄 2
<0
𝜕2𝑅 𝜕2𝐶
Since 𝜕𝑄 2 =0 𝑠ℎ𝑜𝑢𝑙𝑑 𝑏𝑒 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒
𝜕𝑄 2
Which means the slope of the MC curve should be greater than the slope of the MR curve
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 9 of 35
3 LEARNING OBJECTIVE
Illustrating Profit or Loss
on the Cost Curve Graph
Profit = (P x Q) TC
Competitive Markets
( P Q ) TC
CHAPTER 11: Firms in Perfectly
Profit
Q Q Q
Or
Profit
P ATC,
Q
Profit = (P ATC)Q
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 10 of 35
Illustrating Profit or Loss
on the Cost Curve Graph
Showing a Profit on the Graph
11 - 4
Competitive Markets
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 11 of 35
11 - 1
3 LEARNING OBJECTIVE
Determining Profit-Maximizing Price and Quantity
Competitive Markets
CHAPTER 11: Firms in Perfectly
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 12 of 35
Illustrating Profit or Loss
on the Cost Curve Graph
Illustrating When a Firm Is Breaking Even or Operating at a Loss
P > ATC, which means the firm makes a profit
P = ATC, which means the firm breaks even (its total cost equals it total revenue)
Competitive Markets
11 - 5
A Firm Breaking Even and Experiencing Losses
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 13 of 35
Illustrating Profit or Loss
on the Cost Curve Graph
Remember that Firms Maximize Total Profit, Not Profit per Unit
Competitive Markets
CHAPTER 11: Firms in Perfectly
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 14 of 35
Firm making loss
Competitive Markets
CHAPTER 11: Firms in Perfectly
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 15 of 35
4 LEARNING OBJECTIVE
Deciding Whether to Produce or
to Shut Down in the Short Run
two choices:
CHAPTER 11: Firms in Perfectly
Continue to produce
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 16 of 35
11 - 2
When to Close a Laundry
Competitive Markets
CHAPTER 11: Firms in Perfectly
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 17 of 35
Deciding Whether to Produce
or to Shut Down in the Short Run
The Supply Curve of the Firm in the Short Run
11 - 6
The Firm’s Short-Run Supply Curve
Competitive Markets
CHAPTER 11: Firms in Perfectly
11 - 8
The Effect of Entry on Economic Profits
CHAPTER 11: Firms in Perfectly
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 19 of 35
“If Everyone Can Do It, You Can’t Make Money At It” –
The Entry and Exit of Firms in the Long Run
Economic Profit and the Entry or Exit Decision
ECONOMIC LOSSES LEAD TO EXIT OF FIRMS
Competitive Markets
11 - 9
The Effect of Exit on Economic Losses
CHAPTER 11: Firms in Perfectly
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 20 of 35
“If Everyone Can Do It, You Can’t Make Money At It” –
The Entry and Exit of Firms in the Long Run
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 21 of 35
6 LEARNING OBJECTIVE
Competitive Markets
Perfect Competition and Efficiency
Productive Efficiency
CHAPTER 11: Firms in Perfectly
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 22 of 35
11 - 2
6 LEARNING OBJECTIVE
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 23 of 35
Perfect Competition and Efficiency
Allocative Efficiency
Firms will supply all those goods that provide
Competitive Markets
Allocative Efficiency
Competitive Markets
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed. 25 of 35