Tài liệu Microeconomics for MBAs 37 docx

Chapter 11 Firm Production under Idealized Competitive Conditions cost curve) than it receives in additional revenue (as indicated by the demand curve, which beyond q 2 is below the MC curve). At q 2 (and anywhere else), the firm’s profit equals total revenue minus total cost (TR – TC). To find total revenue, we multiply the price, P 1 (which also equals average revenue) by the quantity produced, q 2 (TR = P 1q2 ). Graphically, total revenue is equal to the area of the rectangle bounded by the price and quantity, or 0P 1aq2 . Similarly, total cost can be found by multiplying the average total cost of production (ATC) by the quantity produced. The ATC curve shows us that the average total cost of producing q2 computer chips is ATC 1 . Therefore total cost is ATC 1q2 , or the rectangular area bounded by 0ATC 1 bq 2 . The profits of the company are therefore P 1q2 – ATC 1 q 2 , which is the same, mathematically, as q 2 (P 1 – ATC 1 ). This quantity corresponds to the area representing total revenue, OP 1 aq 2 , minus the area representing total cost, 0ATC 1 bq 2 . Profit is the shaded rectangle bounded by ATC 1 P 1 ab. FIGURE 11.5 The Profit-Maximizing Perfect Competitor The perfect competitor’s demand curve is established by the market-clearing price [part (a)]. The profit-maximizing perfect competitor will extend production up to the point where marginal cost equals marginal revenue (price), or point a in part (b). At that output level—q2—the firm will earn a short-run economic profit equal to the shaded area ATC 1 P 1ab . If the perfect competitor were to minimize average total cost, it would produce only q 1 , losing profits equal to the darker shaded area dca in the process. The perfect competitor does not seek to produce the quantity that results in the lowest average total cost. That quantity, q 1 , is defined by the intersection of the marginal cost curve and the average total cost curve. If it produced only q 1 , the firm would lose out on some of its profits, shown by the darker shaded area dca. (Suppose the firm is producing at q 1 . If it expands production to q 2 , it will generate P 1 times q 2 – q 1 in extra revenue (price times the additional units sold), an amount represented graphically by the area q 1 daq 2 .) Chapter 11 Firm Production under Idealized Competitive Conditions Naturally, profit-maximizing firms will attempt to minimize their costs of production. That does not mean they will produce at the point of minimum average total cost. Instead, the will try to employ the most efficient technology available and to minimize their payments for resources. That is they will attempt to keep their cost curves as low as possible. But given those curves, the firm will produce where MC = MR, not where ATC is at its lowest level. Managers who cannot distinguish between those two objectives will probably operate their businesses on a less profitable basis than they might—and will risk being run out of business. Minimizing Short-Run Losses In the foregoing analysis the market-determined price was higher than the firm’s average total cost, allowing it to make a profit. Perfect competitors are not guaranteed profits, however. The market price may not be high enough for the firm to make a profit. Suppose, for example, that the market price is P 1 , below the firm’s average total cost curve [see Figure 11.6). Should the firm still produce where marginal cost equals marginal revenue (price)? The answer, for the short run, is yes. As long as the firm can cover its variable cost, it should produce q 1 computer chips. FIGURE 11.6 The Loss-Minimizing Perfect Competitor The market-clearing price [part (a)] establishes the perfect competitor’s demand curve [part (b)]. Because the price is below the average total cost curve, this firm is losing money. As long as the price is above the low point of the average variable cost curve, however, the firm should minimize its short-run losses by continuing to produce where marginal cost equals marginal revenue [price or point b in part (b)]. This perfect competitor should produce q 1 units, incurring losses equal to the shaded area P 1 ATC 1 ab. (The alternative would be to shut down, in which case the firm would lose all its fixed costs.) It is true that the firm will lose money. Its total revenues are only P 1q1 , or the area bounded y 0P 1 bq 1 , whereas its total costs are ATC 1 q 1 , or the area 0ATC 1 aq 1 , whereas its total Chapter 11 Firm Production under Idealized Competitive Conditions costs are ATC 1 q 1 , or the area 0ATC 1 aq 1 . On the graph its total losses equal the difference between those two rectangular areas, the shaded area bounded by P 1 ATC 1 ab. Whether the firm incurs losses is not the relevant question, however. The real issue is whether the firm loses more money by shutting down or by operating and producing q 1 chips. In the short run, the firm will continue to incur fixed costs even if it shuts down. If it is not earning any revenues, its losses will equal its total fixed costs. In the last chapter we saw that the average fixed cost of production is the vertical distance between the average variable cost and average total cost. In short, as long as the price is higher than average variable cost—if the price more than covers the cost associated directly with production—the firm minimizes its short-run losses by producing where marginal cost equals marginal revenue. Only if the price dips below the low point of the average variable cost curve—where the marginal and average variable cost curves intersect—will the firm add to its losses by operating. The firm will shut down when price is at or below that point, P s in Figure 11.6. At prices above that point, the firm simply follows its marginal cost curve to determine its production level. Above the average variable cost curve, then, the marginal cost curve is in effect the firm’s supply curve. Therefore, if a perfect competitor produces at all, it produces in a range of increasing marginal cost—and diminishing marginal returns. Our analysis has shown why, in the short run, fixed costs should be ignored. The relevant question is whether a given productive activity will add more to the firm’s revenues than to its costs. Understanding this principle, businesses may undertake activities that superficially appear to be quite unprofitable. Some grocery stores stay open all night, even though the owners known they will attract few customers. If all costs, including fixed costs, are considered, the decision to operate in the early morning hours may seem misguided. The only relevant question facing the store manager is whether the additional sales generated are greater than the additional cost of light, goods sold, and labor. Similarly, many businesses that are obviously failing continue to operate, for by staying open they can at least cover a portion of their fixed costs—such as rent—that would still be due if they shut down. They stay open until their leases expire or until they can sell out. Producing Over the Long Run In the long run businesses have an opportunity to change their total fixed costs. If the market price remains too low to permit profitable operation, a firm can eliminate its fixed costs, sell its plant and equipment, or terminate its contracts for insurance and office space. If the market price is above average total cost, new firms can enter the market, and existing firms can expand their scale of operation. Such long-run adjustments in turn affect market supply, which affects price and short-run production decisions. Chapter 11 Firm Production under Idealized Competitive Conditions The Long-Run Effect of Short-Run Profits and Losses When profits encourage new firms to enter an industry and existing firms to expand, the result is an increase in market supply, a decrease in market price, and a decrease in the profitability of individual firms. For example, in Figure 11.7(a), the existence of economic profits in the computer chip market means that investors can earn more in that industry than in some others. Some investors will move their resources to the computer chip industry. Because the number of producers increases, the supply curve shifts outward, expanding total production from Q 1 to Q 2 and depressing the market price from P 2 to P 1 . The expansion of industry supply and the resulting reduction in market price make the computer chip business less profitable for individual firms. The lower market price is reflected in a downward shift of the firm’s horizontal demand curve, from d 1 to d 2 [see Figure 11.7(b)]. The individual firm reduces it output from q 2 to q 1 , the intersection of the new marginal revenue (price/demand) curve with the marginal cost curve. Note that q 1 is also the low point of the average total cost curve. Here price equals average total cost, meaning that economic profit is zero. The firm is making just enough to cover its opportunity and risk costs, but no more. Losses have the opposite effect on long-run industry supply. In the long run, firms that are losing money will move out of the industry, because their resources can be employed more profitably elsewhere. When firms drop out of the industry, supply contracts and total FIGURE 11.7 The Long-Run Effects of Short-Run Profits If perfect competitors are making short-run profits, other producers will enter the market, increasing the market supply from S 1 to S 2 and lowering the market price, from P 2 to P 1 part (a). The individual firm’s demand curve, which is determined by market price will shift down, from d 1 to d 2 [part (b)]. The firm will reduce its output from q 2 to q 1 , the new intersection of marginal revenue (price) and marginal cost. Long-run equilibrium will be achieved when the price falls to the low point of the firm’s average total cost curve, eliminating economic profit [price P 1 in (b)]. Chapter 11 Firm Production under Idealized Competitive Conditions production falls, from Q 2 to Q 1 in Figure 11.8(a). As a result, the price of the product rises, permitting some firms to break even and stay in the business. Long-run equilibrium occurs when the price reaches P 2 , where the individual firm’s demand curve is tangent to the low point of the average total cost curve [Figure 11.8(b)]. The output of each remaining individual firm expands (from q 1 to q 2 ) to take up the slack left by the firms that have withdrawn. Again price and average total cost are equal, and economic profit is zero. FIGURE 11.8 The Long-Run Effects of Short-Run Losses If perfect competitors are suffering short-run losses, some firms will leave the industry causing the market supply to shift back from S 1 to S 2 and the price to rise, from P 1 to P 2 part (a). The individual firm’s demand curve will shift up with price, from d 1 to d 2 [part (b)]. The firm will expand from q 1 to q 2 , and equilibrium will be reached when price equals the low point of average total cost P 2 , eliminating the firm’s short-run losses. The Effect of Economies of Scale In the long run, competition forces firms to take advantage of economies of scale, if they exist. If expanding the use of resources reduces costs, the perfect competitor must expand. Otherwise, other firms will expand their scale of operation, increasing market supply and forcing the market price down. Any firm that does not expand its scale will be caught with a cost structure that is higher than the market price. In addition to mere self-preservation, the firm also has a profit incentive for expansion. If it expands before other firms, its lower average total cost will allow it to make greater profits for a short period of time. Consider Figure 11.9, for instance. Initially the market is in short-run equilibrium at a price of P 2 [part (a)]. The individual firm is on cost scale ATC 1 , producing q 1 chips and breaking even [part (b)]. If the firm expands its scale of operation and produces where its demand curve d 1 intersects the long-run marginal cost curve, it will make a profit equal graphically to the shaded area ATC 1 P 2 ab. That is the firm’s incentive for expansion. Chapter 11 Firm Production under Idealized Competitive Conditions FIGURE 11.9 The Long-Run Effects of Economies of Scale If the market is in equilibrium at price P 1 in part (a). and the individual firm is producing q 1 units on short-run average total cost curve ATC 1 [part (b)], firms will be just breaking even. Because of the profit potential represented by the shaded area ATC 1 P 2 ab, firms can be expected to expand production to q 3 , where the long-run marginal cost curve intersects the demand curve (d 1 ). As they expand production to take advantage of economies of scale, however, supply will expand from S 1 to S 2 in part (a), pushing the market price down toward P 1 , the low point of the long-run average total cost curve (LRAC). Economic profit will fall to zero. Because of rising diseconomies of scale, firms will not expand further. If the firm does not expand and take advantage of these economies, some other firm surely will. Then any firm still producing on scale ATC 1 will lose money. For when the market supply expands the price will tumble toward P 1 , the point at which the long-run average total cost curve (and the short-run curve ATC m ) are at a minimum, and both industry and firm profits are zero. Because of rising diseconomies of scale, firms will not be able to expand further. Any firm that tries to produce on a smaller or larger scale—for example, ATC 2 or ATC 3 will occur average total costs higher than the market price and will lose money. Ultimately it will be driven out of the market or forced to expand or contract its scale. The Efficiency of Perfect Competition: A Critique Our discussion of perfect competition has been highly theoretical. In real life, the competitive market system is not as efficient as the analysis may suggest. Several aspects of the competitive market deserve further comment from this perspective. The Tendency Toward Equilibrium Market forces are stabilizing: they tend to push the market toward one central point of equilibrium. To that extent the market is predictable, and to that extent it contributes to economic and social stability. In the real world price does not always move as smoothly toward equilibrium as it appears to do in supply and demand models. The smooth, direct Chapter 11 Firm Production under Idealized Competitive Conditions move to equilibrium may happen in markets where all participants, both buyers and sellers, know exactly what everyone else is doing. Often, however, market participants have only imperfect knowledge of what others are going to do, for one function of the market is to generate the pricing and output information people need to interact with one another. In a world of imperfect information, then, prices may not and probably will not move directly toward equilibrium. Those who compete in the market will continually grope for the “best” price, from their own individual perspectives. At times sellers will produce too little and reap unusually high profits. This process of groping toward equilibrium can be represented graphically by a supply and demand “cobweb” [see Figure 11.10). Most producers must plan their production at least several months ahead on the basis of prices received today or during the past production period. Farmers, for instance, may plant for summer harvest on the basis of the previous summer’s prices. Suppose farmers got price P 1 for a bushel of wheat last year. Their planning supply curve, S, will encourage them to work for a harvest of only Q 1 bushels this year. Given that limited output and the rather high demand at price P 1 , however, the price farmers actually receive is P 4 . The price of P 4 in turn induces farmers to plan for a much larger production level, Q 3 , the following year. The market will not clear for Q 3 bushels, however, until the price falls to P 2 . The next year farmers plan for a price of P 2 and reduce their production to Q 2 —which causes the price to rise to P 3 . As you can see from the graph, instead of moving in a straight line, the market moves toward the intersection of supply and demand in a web-like pattern. ______________________________________ FIGURE 11.10 Supply and Demand Cobweb Markets do not always move smoothly toward equilibrium. If current production decisions are based on past prices, price may adjust to supply in the cobweb pattern shown here. Having received price P 1 in the past, farmers will plan to supply only Q 1 bushels of wheat. That amount will not meet market demand, so the price will rise to P 4 —inducing farmers to plan for a harvest of Q 3 bushels. At price P 4 , however, Q 3 bushels will not clear the market. The price will fall to P 2 , encouraging farmers to cut production back to Q 2 . Only after several tries many farmers find the equilibrium price- quantity combination. Surpluses and Shortages Some critics complain that the market system creates wasteful surpluses and shortages. Although all resources are limited in quantity, a true market shortage can exist only if the going price is below equilibrium. Thus shortages can be eliminated by a price increase. Chapter 11 Firm Production under Idealized Competitive Conditions How much of an increase, theory alone cannot say. We do know, however, that market forces, if allowed free play, will work to boost the price and eliminate the shortage. That means, if course, that people of limited financial resources will be eliminated from the market—an enduring concern that motivates many government efforts to legislate market conditions. Similarly, all surpluses exist because the going price is above equilibrium. Competition will reduce the price, eliminating the surplus. In the process, of course, some firms will be driver out of the market and into other, more productive activities. Others will be unable to keep their employees working full-time. A frequent criticism of the market system is that when this happens, workers have difficulty finding employment in other lines of production. Part of the problem, however, is that labor contracts, community custom, or minimum wage laws prevent wages from adjusting downward. If government controls prices—that is, if prices are not permitted to respond to market conditions-—surpluses and shortages will persist. Marginal Benefit Versus Marginal Cost Time lags, surpluses, and shortages notwithstanding, the competitive market can produce efficient results in one important sense. That is that the marginal benefit of the last unit produced equals its marginal cost (MB = MC). In Figure 11.11(a), for every computer chip up to Q 1 , consumers are willing to pay a price (as indicated by the demand curve, D) greater than its marginal cost (as indicated by the industry supply curve, S). The difference between the price consumers are willing to pay—an objective indication of the product’s marginal benefits—and the marginal cost of production is a kind of surplus, or net gain received from the production of each unit. The net gain is composed of two surpluses, consumer surplus and producer surplus. Consumer surplus is the difference between the total willingness of consumers to pay for a good and the total amount actually spent. In Figure 11.11(a) consumer surplus is the triangular area below the demand curve and above the dotted price line, P 1 . Producer surplus is the difference between the minimum total revenue necessary to induce producers to supply Q 1 units of output and the actual total revenue received from selling that output. In Figure 11.11(a), producer surplus is the triangular area above the supply curve and below the dotted price line, P 1 . By producing Q 1 units, the industry exploits all potential gains from production, shown graphically by the shaded triangular area in the figure. That net gain is brought about by the price that is charged, P 1 —a price that induces individual firms to produce where the marginal cost of production equals the price, which is also equal to consumers’ marginal benefit. The marginal cost of production for each individual firm is also P 1 , a fact that results in the production of Q 1 units at the minimum total cost. Parts (b) and (c) show the cost curves of two firms, X and Y. In competitive equilibrium, firm X produces q x , units. Suppose that the market output were distributed between the firms differently. Suppose, for example, that firm X produced one computer chip less than q x . To maintain a constant market output of Q 1 , firm Y (or some other firm) would then have to expand production by one unit. The additional chip would force firm Y up its marginal cost curve. To Y, the marginal cost of the additional chip is greater than P 1 , greater than X’s marginal cost to produce it. Competition Chapter 11 Firm Production under Idealized Competitive Conditions forces firms to produce at a cost-effective output level and therefore minimizes the cost of producing at any given level of output. Perfectly competitive markets are attractive for another reason. In the long run, competition forces each firm to produce at the low point of its average total cost curve. Firms must either produce at that point, achieving whatever economies of scale are available, or get out of the market, leaving production to some other firm that will minimize average total cost. _____________________________________________ FIGURE 11.11 The Efficiency of the Competitive Market Perfectly competitive markets are efficient in the sense that they equate marginal benefit [shown by the demand curve in part (a)] with marginal cost (shown by the supply curve). At the market output level, Q 1 , the marginal benefit of the last unit produced equals the marginal cost of production. The gains generated by the production of Q 1 units—that is , the difference between cost and benefits—are shown by the shaded are in part (a). The perfectly competitive market is also efficient in the sense that the marginal cost of production, P 1 , is the same for all firms [parts (b) and (c)]. If firm X were to produce fewer than its efficient number of units, q x , firm Y would have to produce more than its efficient number, q y , to meet market demand. Firm Y would be pushed up its marginal cost curve, to the point where the cost of the last unit exceeds its benefits. But competition forces the two firms to produce to exactly the point where marginal cost equals marginal benefit, thus minimizing the cost of production. Chapter 11 Firm Production under Idealized Competitive Conditions Critics stress, however, that supply is based only on the costs firms bear privately. External costs like air, noise, and water pollution are not counted as part of the cost of production. If the external costs of pollution were counted, the firm’s supply curve would be lower, S 2 instead of S 1 in Figure 11.12. If producers and consumers had to pay all the costs of production, only Q 1 units would be bought. In this sense, competition leads to overproduction of Q 2 – Q 1 units. The cost of producing these Q 2 – Q 1 chips is the area under the supply curve between Q 1 and Q 2 , Q 1 abQ 2 . The benefit to consumers is the area under the demand curve, or the area Q 1 acQ 2 . The extent to which the cost of overproduction exceeds the benefits to consumers is shown by the shaded triangular area abc. _____________________________________________ FIGURE 11.12 Inefficiency Caused by External Costs If external costs equal to the vertical distance bc are not counted as costs of production, supply will be artificially high at S 1 , and firms will overproduce by Q2 – Q 1 units. The inefficiency, or welfare loss, form such overproduction is shown by the shaded area abc, the amount by which the total cost of producing Q 2 – Q 1 units (shown by curve S 2 ) exceeds their total benefits (shown by the demand curve). Critics of the market system stress also that its cost efficiencies are achieved within a specific distribution of resources of wealth, one that depends on the existing distribution of property rights. The distribution of economic power inherent in these property rights, they argue, has no particular ethical or moral significance. Finally, critics of the market system argue that most real-world markets are not perfectly competitive. Actual markets are not inhabited by numerous firms producing standard commodities that can be easily duplicated by anyone who would like to enter the market. Indeed, many markets are inhabited by a few large, powerful firms that do not take price as a given. Many firms either are monopolies or possess a high degree of monopoly power. Demanders and suppliers are rarely as well informed as the model suggests. The model of perfect competition was never meant to represent all or even most markets. It is merely one of several means economists use to think about markets and the consequences of changes in market conditions and government policy. Critics of the market system stress also that its cost efficiencies are achieved within a specific distribution of resources or wealth, one that depends on the existing distribution of property rights. The distribution of economic power inherent in these property rights, they argue, has no particular ethical or moral significance. . profit incentive for expansion. If it expands before other firms, its lower average total cost will allow it to make greater profits for a short period. period. Farmers, for instance, may plant for summer harvest on the basis of the previous summer’s prices. Suppose farmers got price P 1 for a bushel of