Perfect Competition - PowerPoint PPT Presentation

Loading...

PPT – Perfect Competition PowerPoint presentation | free to download - id: 4b8be0-MGIyY



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

Perfect Competition

Description:

... entry into the market Forms of competition among firms A firm s decisions about how ... at which a competitive firm will realize maximum profit or ... – PowerPoint PPT presentation

Number of Views:44
Avg rating:3.0/5.0
Slides: 23
Provided by: MariaC156
Learn more at: http://faculty.mdc.edu
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Perfect Competition


1
Perfect Competition
  • Chapter 9
  • ECO 2023
  • Fall 2007

2
Market Structure
  • Describes the important feature of a market such
    as
  • Number of suppliers
  • Products degree of uniformity
  • Ease of entry into the market
  • Forms of competition among firms
  • A firms decisions about how much to produce or
    what price to charge depend on the structure of
    the market

3
Market Models
  • Pure Competition
  • Pure Monopoly
  • Monopolistic Competition
  • Oligopoly

4
Perfect Competitive Market
  • A market structure with many fully informed
    buyers and sellers of a standardized product and
    no obstacles to entry or exit of firms in the
    long run

5
Characteristics
  • Many independent buyers and sellers
  • Buyers are small relative to the market
  • Standardized product homogeneous
  • Price takers individual firms exert no
    significant control over product price.
  • Free entry and exit into the industry

6
Perfectly Competitive Market
  • Demand under Perfect Competition
  • Firms demand is perfectly elastic therefore the
    demand curve is horizontal
  • PRICE TAKER
  • One and only price exists in the market and it is
    equilibrium price

P
D
Q
7
Average Revenue
  • The firms demand schedule is also its average
    revenue schedule
  • Price per unit to purchaser is also revenue per
    unit or average revenue

8
Total Revenue
  • P X Q
  • Since price is constant, increase in sales of one
    unit leads to increase in total revenue to
    price.
  • Each unit sold adds exactly its constant price to
    total revenue

9
Marginal Revenue
  • Is the change in total revenue that results from
    selling 1 more unit of output
  • This is the selling price since it is constant
  • Therefore MR AR Price

10
Short Run Profit Maximization
  • Each firms tries to maximize economic profit
  • Short run it has a fixed plant
  • Therefore output is changed through changes in
    variable inputs.
  • It adjusts its variable resources to achieve the
    output level that maximizes its profit.
  • Two ways to determine level of output at which a
    competitive firm will realize maximum profit or
    minimum loss
  • Compare total revenue to total cost
  • Compare marginal revenue to marginal cost
  • Both apply to all firms
  • Firms that ignore this strategy do not survive

11
Example
Bushels per day Total Fixed Costs Total Variable costs Total Cost Total Revenue Economic profit or loss
Q TFC TVC TC TR P X Q where P 131 TR-TC
0 100 0 100 0 -100
1 100 90 190 131 -59
2 100 170 270 262 -8
3 100 240 340 393 53
4 100 300 400 524 124
5 100 370 470 655 185
6 100 450 550 786 236
7 100 540 640 917 277
8 100 650 750 1048 298
9 100 780 880 1179 299
10 100 930 1030 1310 280
12
Graphically
Total Revenue
Maximum Economic Profit
Total Revenue Total Cost
Total Cost
Quantity Demanded
9
13
Marginal Revenue Equals Marginal Cost
  • Marginal revenue
  • The change in total revenue from selling an
    additional unit
  • In perfect competition, marginal revenue is equal
    to the market price
  • The firm will increase production as long as each
    additional units adds more to total revenue than
    to cost
  • As long as marginal revenue exceeds marginal cost

14
Graphically
Total Product Average Fixed Costs Average Variable Costs Average Total Costs Marginal Costs Marginal Revenue Economic Profit
Q AFC TFC/Q AVC ATC MC MR P  
0 100.00   100.00     (100.00)
        90.00    
1 100.00 90.00 190.00   131.00 (59.00)
        80.00    
2 50.00 85.00 135.00   131.00 (8.00)
        70.00    
3 33.33 80.00 113.33   131.00 53.00
        60.00    
4 25.00 75.00 100.00   131.00 124.00
        70.00    
5 20.00 74.00 94.00   131.00 185.00
        80.00    
6 16.67 75.00 91.67   131.00 236.00
        90.00    
7 14.29 77.14 91.43   131.00 277.00
        110.00    
8 12.50 81.25 93.75   131.00 298.00
        130.00    
9 11.11 86.67 97.78   131.00 299.00
        150.00 131.00  
10 10.00 93.00 103.00     280.00
15
Golden Rule of Profit Maximization
  • MR MC

16
Perfectly Competitive Market
  • Short run economic profit

Profit
17
Perfectly Competitive Market
  • Minimizing Short-Run Losses
  • An individual firm in perfect competition has no
    control over the market price
  • Price may be so low that a firm loses money no
    matter how much it produces
  • Can either produce at a loss
  • Temporarily shut down
  • Short run
  • A period too short to allow existing firms to
    leave the industry

18
Perfectly Competitive Market
  • Decision in the short run
  • Continue to produce
  • A firm will produce if
  • TOTAL REVENUE gt VARIABLE COST
  • Shut down
  • A firm will shut down
  • TOTAL REVENUE lt VARIABLE COST

19
Perfectly Competitive Market
  • Short run Losses

Loss
20
Perfectly Competitive Market
  • Perfect Competition in the Long Run
  • If short run has ECONOMIC PROFIT
  • Firms enter the industry
  • Increase in supply
  • Price drops
  • Continues until NO ECONOMIC PROFIT in the long
    run
  • Price Marginal Cost Average Total Cost

21
Perfectly Competitive Market
  • Perfect Competition in the Long Run
  • If short run has ECONOMIC Loss
  • Firms leavethe industry
  • Decrease in supply
  • Price rises
  • Continues until NO ECONOMIC PROFIT in the long
    run
  • Price Marginal Cost Average Total Cost

22
Perfectly Competitive Market
  • Productive efficiency
  • The condition that exists when market output is
    produced using the least cost combination of
    inputs
  • Minimum average cost in the long run
  • Allocative efficiency
  • The condition that exists when firms produce the
    output most preferred by consumers
  • Marginal benefits marginal cost
About PowerShow.com