From Competitive Firm to Competitive Market - PowerPoint PPT Presentation

1 / 18
About This Presentation
Title:

From Competitive Firm to Competitive Market

Description:

Economic profit attracts new entrants into the industry. Market supply ... In the long run, firms. Market supply. Price. Competitive Markets. and Efficiency ... – PowerPoint PPT presentation

Number of Views:55
Avg rating:3.0/5.0
Slides: 19
Provided by: neilts
Category:
Tags: competitive | firm | market | run | up

less

Transcript and Presenter's Notes

Title: From Competitive Firm to Competitive Market


1
From Competitive Firm to Competitive Market
  • ECO 105
  • Lecture 2.8
  • 28 February 2007

2
Profit Maximization for a Price-Searching Firm
  • Firm can alter price MR lt P
  • Set MR MC to determine Qmax

3
Demand and Marginal Revenue
Price
Demand AR
MR
Quantity
4
Profit Maximization
  • Set MR MC to determine Qmax
  • Choose the P on the demand curve that corresponds
    to Qmax
  • Profit equals (P- ATC)Qmax

5
Profit Maximization
Price
Marginal Cost
Profit
P
Average Total Cost
ATC0
Demand AR
MR MC
MR
Quantity
Qmax
6
Profit Maximization . . .
  • The logic of P and Q
  • Qmax maximizes firm profit (as always)
  • P is the highest price consumers will pay for
    Qmax

7
What should the firm do?
Economic Loss
MC
ATC
ATC0
D P MR
P
AVC0
AVC
Revenue helps defray fixed costs
Qmax
8
The Break-even Point
  • A firm breaks even and can remain in business
    indefinitely if P ATC.
  • This applies to both price-taking and
    price-searching firms!

9
The Shutdown Point
  • A firm shuts down if P lt AVC.
  • In the short run, a firm continues to operate if
    AVC lt P lt ATC.
  • In the short run, fixed costs are sunk costs
    they must be paid regardless of production.
  • If P gt AVC, producing more reduces overall losses.

10
Competitive Supply . . .
  • Market supply is the sum of individual supplies.
  • Market supply curve the horizontal summation of

11
Market Supply Curve
MC
MC1
MC2
Q
12
Dynamics of a Competitive Market
  • In the short run, P may generate an economic
    profit or
  • An economic profit means that a firm is earning
  • Economic profit attracts new entrants into the
    industry.
  • Market supply
  • Price - and

13
Dynamics . . .
  • An economic loss means that firms are not
  • In the long run, firms
  • Market supply
  • Price

14
Competitive Markets and Efficiency
  • Competition drives price-taking firms to their
  • Allocative efficiency ________________
    produced.
  • Productive efficiency
  • Market efficiency is greatest when firms

15
Profit Maximization for a Price-Searching Firm
16
Profits and Losses of Price-Searching Firms
  • Demand is less than perfectly elastic.
  • MR
  • Firm sets MR
  • Determines P from
  • Profit gt 0 if
  • Profit lt 0 (loss) if

17
Profit Maximization
Price
Marginal Cost
Pmon
Average Total Cost
ATC0
Demand AR
MR
Quantity
Qmax
18
Loss Minimization
Marginal Cost
Price
ATC0
P
Average Total Cost
Demand AR
MR
Quantity
Qmax
Write a Comment
User Comments (0)
About PowerShow.com