principles of microeconomics: econ102. 2 of 21 ……………meets the conditions of: many buyers...
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Principles of MicroEconomics:
Econ102
2
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21
……………meets the conditions of:
Many buyers and sellers: all participants are small relative to the market.
All firms selling identical products
No barriers to new firms entering the market.
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21
Price taker: A buyer or seller that is unable to affect the market price.
A Perfectly Competitive Firm Faces a Horizontal Demand
Curve
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21
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Profit: Total revenue minus total cost.Profit = TR – TC
where,
Total Revenue (TR): Price multiplied by quantity, units or output produced.
TR=P x Q
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21
Average revenue (AR): Total revenue divided by the number of units sold.
Q
TRAR
or ,quantityin Change
revenue in total Change Revenue Marginal
Q
TRMR
PQ
QP
Q
TRAR
so,
Marginal revenue (MR): Change in total revenue from selling one more unit.
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NUMBER OF BUSHELS
(Q)
MARKET PRICE
(PER BUSHEL)
(P)
TOTAL REVENUE
(TR)
AVERAGE REVENUE
(AR)
MARGINAL REVENUE
(MR)
0
1
2
3
4
5
6
7
8
9
10
$4
4
4
4
4
4
4
4
4
4
4
$0
4
8
12
16
20
24
28
32
36
40
-
$4
4
4
4
4
4
4
4
4
4
-
$4
4
4
4
4
4
4
4
4
4
For a firm in a perfectly competitive market, price is equal to both AR and MR.
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QUANTITY(BUSHELS)
(Q)
TOTALREVENUE
(TR)
TOTALCOSTS
(TC)
PROFIT
(TR-TC)
MARGINAL REVENUE
(MR)
MARGINAL COST
(MC)
0
1
2
3
4
5
6
7
8
9
10
$0.00
4.00
8.00
12.00
16.00
20.00
24.00
28.00
32.00
36.00
40.00
$1.00
4.00
6.00
7.50
9.50
12.00
15.00
19.50
25.50
32.50
40.50
-$1.00
0.00
2.00
4.50
6.50
8.00
9.00
8.50
6.50
3.50
-0.50
$4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
$3.00
2.00
1.50
2.00
2.50
3.00
4.50
6.00
7.00
8.00
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Conclusions:
The PMLO is where the difference between total revenue and total cost is the greatest.
The PMLO is also where the marginal revenue equals marginal cost, or MR=MC.
One more conclusion:
For a firm in a perfectly competitive industry, price is equal to marginal revenue, or P=MR. So, it logically follows that P=MC, because MR=MC
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Profit = (P x Q) TC
Q
QP )(
Q
ProfitQ
TC
,Profit
ATCPQ
Profit = (P ATC)Q
Or
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When P > ATC, the firm makes a profit
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When P = ATC, the firm breaks even (its total cost equals its total revenue)
When P < ATC, the firm experiences losses
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In the short-run a firm suffering losses has two choices:
Continue to produce: Only if TR is greater than its variable costs.
Stop production by shutting down temporarily
Sunk cost: A cost that has already been paid and that cannot be recovered.
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Shutdown point :The minimum point on a firm’s average variable cost curve; if the price falls below this point, the firm shuts down production in the short run.
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Long-run Competitive Equilibrium:The situation in which the entry and exit of firms have resulted in the typical firm just breaking even.
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Long-run Supply Curve:A curve showing the relationship in the long run between market price and the quantity supplied.
In the long-run, a perfectly competitive market will supply whatever amount of a good consumers demand at a price
determined by the minimum point on the typical firm’s average total cost curve.
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Allocative Efficiency:The situation where every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. For allocative efficiency to hold, firms must charge a price equal to marginal cost.
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Productive Efficiency:
The situation where every good or service is produced at the lowest possible cost. For productive efficiency to hold, firms must produce at the minimum point of average total cost.