Bài giảng topic 5 perfect competition

Perfect Competition Topic Characteristics Pure Competition • large number of sellers & buyers • homogenous (identical) products • low barriers to entry (free entry and exit from the industry) Perfect Competition • large number of sellers & buyers • homogenous (identical) products • low barriers to entry Lead to • perfect market knowledge faster adjustment • perfect mobility of FoP’s Price takers & Price makers Demand curve for a Price taker Demand curve for a Price maker Demand curve for a Price taker • The demand curve facing a perfectly competitive firm is perfectly elastic, meaning that the firm can sell as many units as it wants at the market price, but cannot sell any quantity if it charges more than the market price. • The firm has no market power, no pricing power at all. It is just a small player in a large market… It is a price taker. Demand curve for a Price maker • Downward sloping. • It is just matter of how steep the curve is. • The more market power a firm has, the steeper is the demand curve. • The characteristic of a downward sloping demand curve is that, normally, if a firm raises the price of its product, it needs not lose all its customers, and if it wants to sell more, it has to cut price. Demand curve for Individual firm under PC Market D curve Firm’s D curve P = AR = MR Revenue Concepts under PC • Total revenue (TR): Total number of dollars (or dong) received by a firm from the sale of a product. • TR = P x Q • Average revenue (AR): Total revenue per unit of a product sold • AR = TR/Q = (P x Q) / Q = P • Marginal Revenue (MR): Additional revenue received resulting from the sale of an extra unit of output P. ΔQ ΔTR • MR = = =P ΔQ ΔQ Product Price (Average Revenue) $131 131 131 131 131 131 131 131 131 131 131 Quantity Demanded (Sold) 10 Total Revenue $ 131 262 393 524 655 786 917 1048 1179 1310 ] ] ] ] ] ] ] ] ] ] Marginal Revenue $131 131 131 131 131 131 131 131 131 131 Price, average and marginal revenue, total revenue (dollars) P TR 917 786 655 524 393 262 P = AR = MR D = MR 131 Quantity demanded (sold) 10 Profit Maximisation in the Short Run Two approaches to profit maximisation: • Total Revenue minus Total Cost Approach • Marginal Revenue, Marginal Cost Approach Long run Equilibrium • Key characteristics of PC: – large number of sellers & buyers – identical products – freedom of entry & exit • Implication (or conclusion) – Firms in PC cannot earn economic profits in the long run Efficiency Allocative efficiency: • Resources are allocated among firms and industries to obtain a mix of products most desired by society (consumers) Productive efficiency: • The least costly methods of production are used (ie. goods are produced at the lowest possible costs) Efficiency and Perfect Competition • Price of product X = the relative worth of product X to the society (or the marginal benefit/satisfaction the society gets from an additional unit of X) . • Marginal Cost of product X is the cost of producing an additional unit of X (MC measures the sacrifice of other goods in using resources to produce more of X) Efficiency and Perfect Competition • Allocative efficiency:  P > MC : resources are under allocated  P < MC : resources are over allocated  P = MC : resources are best allocated/utilised • Productive efficiency:  P = ATC (For more details, read Jackson pp. 276 – 77) Assessment of Perfect Competition Pros • Productive efficiency: AC (ie. firms produce at the least-cost output) • Allocative efficiency: P = MC • Consumer gains from low prices (ie. maximum consumer surplus) • Speed of resource reallocation • No power groups Cons • Less scope for R&D • Almost no product variety Short-Run Supply Curve • For the individual firm: the SR supply curve is the MC curve above the AVC curve • For the entire industry: horizontal sum of firms’ MC curves above AVC P = MC: Short-Run Supply Curve Costs and revenues (dollars) P ATC MC AVC At every price, the MR = MC point changes the quantity being exchanged . Q P = MC: Short-Run Supply Curve Costs and revenues (dollars) P ATC MC AVC P3 Record the quantity being supplied for each price Q3 Q MR3 P = MC: Short-Run Supply Curve Costs and revenues (dollars) P ATC MC AVC MR P3 P2 MR2 At a lower price a lower quantity will be supplied Q2 Q3 Q P = MC: Short-Run Supply Curve Costs and revenues (dollars) P ATC Break-even (normal profit) point MC MR4 AVC MR MR2 P4 P3 P2 At a higher price a greater quantity will be supplied Q2 Q3 Q4 Q P = MC: Short-Run Supply Curve Costs and revenues (dollars) P ATC Break-even (normal profit) point P5 P4 P3 P2 MC MR5 MR4 AVC MR MR2 Q2 Q3 Q4 Q5 Q P = MC: Short-Run Supply Curve Costs and revenues (dollars) P P5 P4 P3 P2 P1 ATC Break-even (normal profit) point MC MR5 MR4 AVC MR MR2 MR1 Firm should not produce unless revenue is at least able to meet AVC Q2 Q3 Q4 Q5 Q P = MC: Short-Run Supply Curve Costs and revenues (dollars) P P5 P4 P3 P2 P1 ATC Break-even (normal profit) point MC MR5 MR4 AVC MR MR2 MR1 The Marginal Cost Curve at points above AVC represents the short-run supply curve Q2 Q3 Q4 Q5 Q P = MC: Short-Run Supply Curve Costs and revenues (dollars) P ATC Short-run supply curve (red) P5 P4 P3 P2 P1 MC MR5 MR4 AVC MR MR2 MR1 Q2 Q3 Q4 Q5 Q P = MC: Short-Run Supply Curve P If costs increase . the supply curve effectively shifts to the left MC2 MC1 AVC2 AVC1 Q P = MC: Short-Run Supply Curve P If costs decrease . the supply curve effectively shifts to the right MC1 MC2 AVC1 AVC2 Q [...]... Cost 0 1 2 3 4 5 6 7 8 9 10 $ 0 131 262 393 52 4 655 786 917 1048 1179 1310 $ 100 100 100 100 100 100 100 100 100 100 100 Total Variable Cost $ 0 90 170 240 300 370 450 54 0 650 780 930 Total Cost $ 100 190 270 340 400 470 55 0 640 750 880 1030 Profit – $100 – 59 –8 + 53 + 124 + 1 85 + 236 + 277 + 298 + 299 + 280 Profit Maximisation: MR, MC Approach Total Total Fixed Product Cost 0 1 2 3 4 5 6 7 8 9 10 100... Cost 0 90 170 240 300 370 450 54 0 650 780 930 Total Cost 100 ] 190 ] 270 ] 340 ] 400 ] 470 ] 55 0 ] 640 ] 750 ] 880 ] 1030 Price = Total MarginalMarginal Economic Cost Revenue Prof./Loss 90 80 70 60 70 80 90 110 13 0 15 0 $ 131 131 131 131 131 131 131 131 131 131 – $100 – 59 –8 + 53 + 124 + 1 85 + 236 + 277 + 298 + 299 + 280 Short-run equilibrium of industry and firm under Perfect Competition P $ MC S D... maximisation under Perfect Competition P $ MC S D = AR = MR AR AC Pe ATC D O O Qe Q (thousands) Q (millions) (a) Industry fig (b) Firm Copyright 2001 Pearson Education SR Profit maximisation under Perfect Competition P $ MC S D = AR = MR AR AC Pe ATC D O O Qe Q (thousands) Q (millions) (a) Industry fig (b) Firm Copyright 2001 Pearson Education SR Loss minimisation under Perfect Competition P $ S AVC... costs) Efficiency and Perfect Competition • Price of product X = the relative worth of product X to the society (or the marginal benefit/satisfaction the society gets from an additional unit of X) • Marginal Cost of product X is the cost of producing an additional unit of X (MC measures the sacrifice of other goods in using resources to produce more of X) Efficiency and Perfect Competition • Allocative... allocated  P < MC : resources are over allocated  P = MC : resources are best allocated/utilised • Productive efficiency:  P = min ATC (For more details, read Jackson pp 276 – 77) Assessment of Perfect Competition Pros • Productive efficiency: min AC (ie firms produce at the least-cost output) • Allocative efficiency: P = MC • Consumer gains from low prices (ie maximum consumer surplus) • Speed of . 100 190 270 340 400 470 55 0 640 750 880 1030 $ 0 131 262 393 52 4 655 786 917 1048 1179 1310 – $100 – 59 – 8 + 53 + 124 + 1 85 + 236 + 277 + 298 + 299 + 280 0 1 2 3 4 5 6 7 8 9 10 100 100 100 100 100 100 100 100 100 100 100 . 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 $ 0 $ 0 131 131 262 262 393 393 52 4 52 4 655 655 786 786 917 917 1048 1048 1179 1179 1310 1310 ] $131 $131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 ] ] ] ] ] ] ] ] ] Product Product Price Price . marginal revenue, total revenue (dollars) P P Quantity demanded (sold) 1 2 3 4 5 6 7 8 9 10 917 917 786 786 655 655 52 4 52 4 393 393 262 262 131 131 0 0 D = MR P = AR = MR Profit Maximisation