chapter firms in competitive markets 13. what is a competitive market? the meaning of competition...
TRANSCRIPT
Chapter
Firms in CompetitiveMarkets
13
What is a Competitive Market?
• The meaning of competition• Competitive market
– Market with many buyers and sellers– Trading identical products– Each buyer and seller is a price taker– Firms can freely enter or exit the market
2
What is a Competitive Market?
• The revenue of a competitive firm– Maximize profit
• Total revenue minus total cost
• Total revenue = price times quantity = P ˣ Q
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What is a Competitive Market?
• The revenue of a competitive firm• Marginal revenue
– Change in total revenue from an additional unit sold
• For competitive firms– Marginal revenue = P
4
Profit Maximization& Competitive Firm’s Supply Curve
• A simple example of profit maximization• Maximize profit
– Compare marginal revenue with marginal cost• If MR > MC – increase production• If MR < MC – decrease production
5
Profit Maximization& Competitive Firm’s Supply Curve
• The marginal-cost curve and the firm’s supply decision
• Three general rules for profit maximization:– If MR > MC - firm should increase output– If MC > MR - firm should decrease output– If MR = MC - profit-maximizing level of output
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Profit Maximization& Competitive Firm’s Supply Curve
• The marginal-cost curve and the firm’s supply decision
• Marginal-cost curve– Determines the quantity of the good the firm
is willing to supply at any price– Is the supply curve
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Profit Maximization& Competitive Firm’s Supply Curve
• Shutdown– Short-run decision not to produce anything
• During a specific period of time• Because of current market conditions
– Firm still has to pay fixed costs• Exit
– Long-run decision to leave the market– Firm doesn’t have to pay any costs
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Profit Maximization& Competitive Firm’s Supply Curve
• Spilt milk and other sunk costs• Sunk cost
– Has already been committed– Cannot be recovered– Ignore them when making decisions
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• Restaurant – stay open for lunch?– Fixed costs
• Not relevant• Are sunk costs in short run
– Variable costs – relevant– Shut down if revenue from lunch < variable costs– Stay open if revenue from lunch > variable costs
• Operator of a miniature-golf course– Ignore fixed costs– Stay open if revenue > variable costs
Near-empty restaurants and off-season miniature golf
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Profit Maximization& Competitive Firm’s Supply Curve
• Firm’s long-run decision to exit/enter a market • Competitive firm’s long-run supply curve
– The portion of its marginal-cost curve– That lies above average total cost
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Supply Curve in a Competitive Market
• Long run: market supply with entry and exit• Long run – firms can enter and exit the market
– If P > ATC – firms make positive profit– New firms enter the market
– If P < ATC – firms make negative profit– Firms exit the market
– Process of entry and exit ends when
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Supply Curve in a Competitive Market
• Why do competitive firms stay in business if they make zero profit? – Profit = total revenue – total cost– Total cost – includes all opportunity costs– Zero-profit equilibrium
• Economic profit is zero• Accounting profit is positive
13
Monopoly
Why Monopolies Arise
• Monopoly– Firm that is the sole seller of a product
without close substitutes– Price maker– Barriers to entry
• Monopoly resources• Government regulation• The production process
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Why Monopolies Arise
• Monopoly resources– A key resource required for production is
owned by a single firm– Higher price
• Government regulation– Government gives a single firm the exclusive
right to produce some good or service– Government-created monopolies
• Patent and copyright laws• Higher prices; Higher profits
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Why Monopolies Arise
• The production process– A single firm can produce output at a lower
cost than can a larger number of producers• Natural monopoly
– Arises because a single firm can supply a good or service to an entire market• At a smaller cost than could two or more firms
– Economies of scale over the relevant range of output
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How Monopolies Make Production& Pricing Decisions
• Monopoly versus competition– Monopoly
• Price maker• Sole producer• Downward sloping demand
– Market demand curve
– Competitive firm• Price taker• One producer of many• Demand – horizontal line (Price)
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The Welfare Cost of Monopolies
• The deadweight loss• Monopoly
– Produce quantity where• MC = MR
– Produces less than the socially efficient quantity of output
– Charge P>MC– Deadweight loss
• Triangle between: demand curve and MC curve
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