Competitive market (KINH tế VI mô SLIDE)

Microeconomics Chapter Competitive Market Topics to be Discussed  Perfectly Competitive Markets  Profit Maximization  Competitive Firm  Short-run Supply Curve  Long-run Supply Curve  Competitive Market Supply Curve  Producer Surplus Perfectly Competitive Markets Basic assumptions of Perfectly Competitive Markets Price taking Product homogeneity Free entry and exit Perfectly Competitive Markets Price Taking  The individual firm sells a very small share of the total market output and, therefore, cannot influence market price  Each firm takes market price as given – price taker  The individual consumer buys too small a share of industry output to have any impact on market price Perfectly Competitive Markets Product Homogeneity  The products of all firms are perfect substitutes  Product quality is relatively similar as well as other product characteristics  Agricultural products, oil, copper, iron, lumber  Heterogeneous products, such as brand names, can charge higher prices because they are perceived as better Perfectly Competitive Markets Free Entry and Exit  When there are no special costs that make it difficult for a firm to enter (or exit) an industry  Buyers can easily switch from one supplier to another  Suppliers can easily enter or exit a market  Pharmaceutical companies not perfectly competitive because of the large costs of R&D required Profit Maximization  We can study profit maximizing output for any firm whether perfectly competitive or not  Profit () = Total Revenue - Total Cost  Total revenue (TR) = R (q) = P x q  Total Cost (TC) = C (q)  Profit for the firm, , is difference between revenue and costs  ( q ) R ( q )  C ( q ) 7 Profit Maximization  Revenue is curved showing that a firm can only sell more if it lowers its price  Slope in revenue curve is the marginal revenue (MR)  Change in revenue resulting from a one-unit increase in output  MR= △TR/△q  Slope of total cost curve is marginal cost  Additional cost of producing an additional unit of output  MC = △TC/ △q Profit Maximization Cost, Revenue, Profit ($s per year) Profits are maximized where MR (slope at A) and MC (slope at B) are equal C(q) A R(q) Profits are maximized where R(q) – C(q) is maximized B q0 q* Output (q) Profit Maximization  Profit is negative to begin with since revenue is not large enough to cover fixed and variable costs  As output rises, revenue rises faster than costs increasing profit  Profit increases until it is maxed at q*  Profit is maximized where MR = MC or where slopes of the R(q) and C(q) curves are equal 10 Competitive Market Supply Curve  Long run: market supply with entry and exit  Long run – firms can enter and exit the market  If P > ATC – firms make positive profit  New firms enter the market  If P < ATC – firms make negative profit  Firms exit the market  Process of entry and exit ends when  Because MC = ATC: Efficient scale  Firms still in market: zero economic profit or (P = ATC)  Long run supply curve – perfectly elastic  Horizontal at minimum ATC 30 Long-run market supply (a) Firm’s Zero-Profit Condition Price (b) Market supply Price MC ATC P= minimum ATC Supply Quantity (firm) Quantity (market) In the long run, firms will enter or exit the market until profit is driven to zero As a result, price equals the minimum of average total cost, as shown in panel (a) The number of firms adjusts to ensure that all demand is satisfied at this price The long-run market supply curve is 31 horizontal at this price, as shown in panel (b) Competitive Market Supply Curve  Why competitive firms stay in business if they make zero profit?  Profit = total revenue – total cost  Total cost – includes all opportunity costs  Zero-profit equilibrium  Economic profit is zero  Accounting profit is positive 32 Competitive Market Supply Curve  A shift in demand in the short run & long run  Market – in long run equilibrium  P = minimum ATC  Zero economic profit 33 An increase in demand in short run and long run (a) (a) Initial Condition Market Price Firm A market begins in long-run equilibrium… Short-run supply, S A P1 Long-run supply Price …with the firm earning zero profit MC ATC P1 Demand, D1 Q1 Quantity (market) Quantity (firm) The market starts in a long-run equilibrium, shown as point A in panel (a) In this equilibrium, 34 each firm makes zero profit, and the price equals the minimum average total cost Competitive Market Supply Curve  Increase in demand  Demand curve – shifts outward  Short run  Higher quantity  Higher price: P > ATC – positive economic profit  Because: positive economic profit in short run 35 An increase in demand in short run and long run (b) (b) Short-Run Response Market Price Firm Price But then an increase in demand raises the price… …leading to short-run profits S1 ATC B P2 P1 A Long-run supply D1 Q1 Q2 MC P2 P1 D2 Quantity Quantity (firm) (market) Panel (b) shows what happens in the short run when demand rises from D1 to D2 The equilibrium goes from point A to point B, price rises from P1 to P2, and the quantity sold in the market rises from Q1 to Q2 Because price now exceeds average total cost, firms make 36 profits, which over time encourage new firms to enter the market Competitive Market Supply Curve  Long run – firms enter the market  Short run supply curve – shifts right (S2)  Price – decreases back to minimum ATC  Quantity – increases  Because there are more firms in the market  Efficient scale 37 An increase in demand in short run and long run (c) (c) Long-Run Response Market Price Firm When profits induce entry, supply increases and the price falls,… S1 B P2 P1 A C Q1 Q2 Q3 …restoring longrun equilibrium MC S2 Long-run supply D1 Price ATC P1 D2 Quantity (market) Quantity (firm) This entry shifts the short-run supply curve to the right from S1 to S2, as shown in panel (c) In the new long-run equilibrium, point C, price has returned to P1 but the quantity sold has increased to 38has Q3 Profits are again zero, price is back to the minimum of average total cost, but the market more firms to satisfy the greater demand Competitive Market Supply Curve  Why the long-run supply curve might slope upward  Some resource used in production may be available only in limited quantities  Increase in quantity supplied – increase in costs – increase in price  Firms may have different costs and some firms earn profit even in the long run  Long-run supply curve: More elastic than short-run supply curve 39 Producer Surplus  In the short-run:  Price is greater than MC on all but the last unit of output  Therefore, surplus is earned on all but the last unit  The producer surplus is the sum over all units produced of the difference between the market price of the good and the marginal cost of production  Area above supply to the market price 40 Producer Surplus for a Firm Price ($ per unit of output) MC Producer Surplus AVC B A P At q* MC = MR Between and q , MR > MC for all units Producer surplus is area above MC to the price q* Output 41 The Short-Run Market Supply Curve  Sum of MC from to q*, it is the sum o the total variable cost of producing q*  Producer Surplus can be defined as difference between the firm’s revenue and it total variable cost  We can show this graphically by the rectangle ABCD  Revenue (0ABq*) minus variable cost (0DCq*) 42 Producer Surplus for a Firm Price ($ per unit of output) MC Producer Surplus AVC B A D P C q* Producer surplus is also ABCD = Revenue minus variable costs Output 43 Producer Surplus for a Market Price ($ per unit of output) S Market producer surplus is the difference between P* and S from to Q* P* Producer Surplus D Q* Output 44 ... Perfectly Competitive Markets  Profit Maximization  Competitive Firm  Short-run Supply Curve  Long-run Supply Curve  Competitive Market Supply Curve  Producer Surplus Perfectly Competitive Markets... Perfectly Competitive Markets Price taking Product homogeneity Free entry and exit Perfectly Competitive Markets Price Taking  The individual firm sells a very small share of the total market output... influence market price  Each firm takes market price as given – price taker  The individual consumer buys too small a share of industry output to have any impact on market price Perfectly Competitive