2 WHAT IS A COMPETITIVE MARKET? A competitive market has many buyers and sellers trading identical products so that each buyer and seller is a price taker. Buyers and sellers must accept the price determined by the market.
3 The Meaning of Competition A perfectly competitive market has the following characteristics: There are many buyers and sellers in the market. The goods offered by the various sellers are largely the same. Firms can freely enter or exit the market.
4 The Meaning of Competition As a result of its characteristics, the perfectly competitive market has the following outcomes: The actions of any single buyer or seller in the market have a negligible impact on the market price. Each buyer and seller takes the market price as given.
5 The Revenue of a Competitive Firm Total revenue for a firm is the selling price times the quantity sold. TR = (P Q) Total revenue is proportional to the amount of output.
6 The Revenue of a Competitive Firm Average revenue tells us how much revenue a firm receives for the typical unit sold. Average revenue is total revenue divided by the quantity sold.
7 The Revenue of a Competitive Firm In perfect competition, average revenue equals the price of the good. Average Revenue = Total revenue Quantity = = Price Quantity Quantity Price
8 The Revenue of a Competitive Firm Marginal revenue is the change in total revenue from an additional unit sold. MR =ΔTR/ΔQ For competitive firms, marginal revenue equals the price of the good.
9 Table 1 Total, Average, and Marginal Revenue for a Competitive Firm 2007 Thomson South-Western
10 PROFIT MAXIMIZATION AND THE COMPETITIVE FIRM S SUPPLY CURVE The goal of a competitive firm is to maximize profit. This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost.
11 Table 2 Profit Maximization: A Numerical Example 2007 Thomson South-Western
12 The Marginal Cost-Curve and the Firm s Supply Decision Profit maximization occurs at the quantity where marginal revenue equals marginal cost. WhenMR > MC, increase Q WhenMR < MC, decrease Q WhenMR = MC, profit is maximized.
13 Figure 1 Profit Maximization for a Competitive Firm Costs and Revenue MC 2 P = MR 1 = MR 2 The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue. Suppose the market price is P. MC If the firm produces Q 2, marginal cost is MC 2. ATC P = AR = MR AVC MC 1 If the firm produces Q 1, marginal cost is MC 1. 0 Q 1 Q MAX Q 2 Quantity 2007 Thomson South-Western
14 Figure 2 Marginal Cost as the Competitive Firm s Supply Curve Price P 2 So, this section of the firm s MC curve is also the firm s supply curve. As P increases, the firm will select its level of output along the MC curve. MC ATC P 1 AVC 0 Q 1 Q 2 Quantity 2007 Thomson South-Western
15 The Firm s Short-Run Decision to Shut Down A shutdown refers to a short-run decision not to produce anything during a specific period of time because of current market conditions. Exit refers to a long-run decision to leave the market.
16 The Firm s Short-Run Decision to Shut Down The firm shuts down if the revenue it gets from producing is less than the variable cost of production. Shut down if TR < VC Shut down if TR/Q < VC/Q Shut down if P < AVC
17 Figure 3 The Competitive Firm s Short-Run Supply Curve Costs If P > ATC, the firm will continue to produce at a profit. Firm s short-run supply curve MC ATC If P > AVC, firm will continue to produce in the short run. AVC Firm shuts down if P< AVC 0 Quantity 2007 Thomson South-Western
18 Spilt Milk and Other Sunk Costs The firm considers its sunk costs when deciding to exit, but ignores them when deciding whether to shut down. Sunk costs are costs that have already been committed and cannot be recovered.
19 The Firm s Short-Run Decision to Shut Down The portion of the marginal-cost curve that lies above average variable cost is the competitive firm s short-run supply curve.
20 The Firm s Long-Run Decision to Exit or Enter a Market In the long run, the firm exits if the revenue it would get from producing is less than its total cost. Exit if TR < TC Exit if TR/Q < TC/Q Exit if P < ATC
21 The Firm s Long-Run Decision to Exit or Enter a Market A firm will enter the industry if such an action would be profitable. Enter if TR > TC Enter if TR/Q > TC/Q Enter if P > ATC
22 Figure 4 The Competitive Firm s Long-Run Supply Curve Costs Firm s long-run supply curve MC = long-run S Firm enters if P > ATC ATC Firm exits if P < ATC 0 Quantity 2007 Thomson South-Western
23 Measuring Profit in Our Graph for the Competitive Firm Profit = TR TC Profit = (TR/Q TC/Q) x Q Profit = (P ATC) x Q
24 Figure 5 Profit as the Area between Price and Average Total Cost (a) A Firm with Profits Price Profit MC ATC P ATC P = AR = MR 0 Q (profit-maximizing quantity) Quantity 2007 Thomson South-Western
25 Figure 5 Profit as the Area between Price and Average Total Cost (b) A Firm with Losses Price MC ATC ATC P P = AR = MR Loss 0 Q (loss-minimizing quantity) Quantity 2007 Thomson South-Western
26 THE SUPPLY CURVE IN A COMPETITIVE MARKET The competitive firm s long-run supply curve is the portion of its marginal-cost curve that lies above average total cost.
27 THE SUPPLY CURVE IN A COMPETITIVE MARKET Short-Run Supply Curve The portion of its marginal cost curve that lies above average variable cost. Long-Run Supply Curve The marginal cost curve above the minimum point of its average total cost curve.
28 THE SUPPLY CURVE IN A COMPETITIVE MARKET Market supply equals the sum of the quantities supplied by the individual firms in the market.
29 The Short Run: Market Supply with a Fixed Number of Firms For any given price, each firm supplies a quantity of output so that its marginal cost equals price. The market supply curve reflects the individual firms marginal cost curves.
30 Figure 6 Short-Run Market Supply (a) Individual Firm Supply (b) Market Supply Price Price MC Supply $2.00 $ Quantity (firm) 0 100, ,000 Quantity (market) If the industry has 1000 identical firms, then at each market price, industry output will be 1000 times larger than the representative firm s output Thomson South-Western
31 The Long Run: Market Supply with Entry and Exit Firms will enter or exit the market until profit is driven to zero. In the long run, price equals the minimum of average total cost. The long-run market supply curve is horizontal at this price.
33 The Long Run: Market Supply with Entry and Exit At the end of the process of entry and exit, firms that remain must be making zero economic profit. The process of entry and exit ends only when price and average total cost are driven to equality. Long-run equilibrium must have firms operating at their efficient scale.
34 Why Do Competitive Firms Stay in Business If They Make Zero Profit? Profit equals total revenue minus total cost. Total cost includes all the opportunity costs of the firm. In the zero-profit equilibrium, the firm s revenue compensates the owners for the time and money they expend to keep the business going.
35 A Shift in Demand in the Short Run and Long Run An increase in demand raises price and quantity in the short run. Firms earn profits because price now exceeds average total cost.
36 Figure 8 An Increase in Demand in the Short Run and Long Run Market (a) Initial Condition Firm Price Price P 1 A Short-run supply, S 1 Long-run supply P 1 MC ATC Demand, D1 0 Q 1 Quantity (market) 0 Quantity (firm) A market begins in long run equilibrium. And firms earn zero profit Thomson South-Western
37 Figure 8 An Increase in Demand in the Short Run and Long Run An increase in market demand raises price and output. The higher P encourages firms to produce more and generates short-run profit. (b) Short-Run Response Market Firm Price Price P 2 P 1 A B S 1 P 2 Long-run supply D 2 D 1 P 1 MC ATC 0 Q 1 Q 2 Quantity (market) 0 Quantity (firm) 2007 Thomson South-Western
38 Figure 8 An Increase in Demand in the Short Run and Long Run Profits induce entry and market supply increases. Firm (c) Long-Run Response Market Price Price P 2 P 1 A B S 1 C S 2 Long-run supply P 1 MC ATC D 2 D1 0 Q 1 Q 2 Q 3 Quantity (firm) 0 Quantity (market) The increase in supply lowers market price. In the long run market price is restored, but market supply is greater Thomson South-Western
39 Why the Long-Run Supply Curve Might Slope Upward Some resources used in production may be available only in limited quantities. Firms may have different costs. Marginal Firm The marginal firm is the firm that would exit the market if the price were any lower.
40 Summary Because a competitive firm is a price taker, its revenue is proportional to the amount of output it produces. The price of the good equals both the firm s average revenue and its marginal revenue.
41 Summary To maximize profit, a firm chooses the quantity of output such that marginal revenue equals marginal cost. This is also the quantity at which price equals marginal cost. Therefore, the firm s marginal cost curve is its supply curve.
42 Summary In the short run, when a firm cannot recover its fixed costs, the firm will choose to shut down temporarily if the price of the good is less than average variable cost. In the long run, when the firm can recover both fixed and variable costs, it will choose to exit if the price is less than average total cost.
43 Summary In a market with free entry and exit, profits are driven to zero in the long run and all firms produce at the efficient scale. Changes in demand have different effects over different time horizons. In the long run, the number of firms adjusts to drive the market back to the zero-profit equilibrium.
s in Competitive Markets WHAT IS A COMPETITIVE MARKET? A perfectly competitive market has the following characteristics: There are many buyers and sellers in the market. The goods offered by the various
Chapter 13 Perfect Competition 214 by McGraw-Hill Education 1 What will you learn in this chapter? What the characteristics of a perfectly competitive market are. How to calculate average, marginal, and
23 Perfect Competition Learning Objectives After you have studied this chapter, you should be able to 1. define price taker, total revenues, marginal revenue, short-run shutdown price, short-run breakeven
C H A T E R 14 Firms in Competitive Markets R I N C I L E S O F Microeonomics N. Gregory Mankiw remium oweroint Slides by Ron Cronovich 2009 South-Western, a part of Cengage Learning, all rights reserved
While a competitive firm is a price taker, a monopoly firm is a price maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. The
CHAPTER 11 Firms in Perfectly Competitive Markets Chapter Summary and Learning Objectives 11.1 Perfectly Competitive Markets (pages 369 371) Explain what a perfectly competitive market is and why a perfect
Principles of Microeconomics Module 5.1 Understanding Profit 180 Production Choices of Firms All firms have one goal in mind: MAX PROFITS PROFITS = TOTAL REVENUE TOTAL COST Two ways to reach this goal:
Perfect Competition In this section of work and the next one we derive the equilibrium positions of firms in order to determine whether or not it is profitable for a firm to produce and, if so, what quantities
Perfect Competition Michael J. Murray Slides and Images, Worth Publishers Inc. 8-1 Market Structure Analysis By observing a few industry characteristics, we can predict pricing and output behavior of the
Chapter 8 Competitive Firms and Markets Topics Perfect Competition. Profit Maximization. Competition in the Short Run. Competition in the Long Run. 8-2 Copyright 2012 Pearson Addison-Wesley. All rights
MICROECONOMICS CHAPTER 10A/23 PERFECT COMPETITION Professor Charles Fusi Learning Objectives Identify the characteristics of a perfectly competitive market structure Discuss the process by which a perfectly
ECON 101 Introduction to Economics1 Session 12 Market Structures(Monopoly) Lecturer: Mrs. Hellen A. Seshie-Nasser, Department of Economics Contact Information: firstname.lastname@example.org College of Education School
Supply in a Competitive Market 8 Introduction 8 Chapter Outline 8.1 Market Structures and Perfect Competition in the Short Run 8.2 Profit Maximization in a Perfectly Competitive Market 8.3 Perfect Competition
Perfectly Competitive Supply Chapter 6 McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives 1.Explain how opportunity cost is related to the supply
Semester-I Course: 01 (Introductory Microeconomics) Unit IV - The Firm and Perfect Market Structure Lesson: Short-Run Costs and Output Decisions Lesson Developer: Jasmin Jawaharlal Nehru University Institute
www.liontutors.com ECON 102 Kagundu Final Exam (New Material) Practice Exam Solutions 1. A A large number of firms will be able to operate in the industry because you only need to produce a small amount
Characteristics: Fragmented: Many small firms, none of which have market power Undifferentiated Products: Products that consumers perceive as being identical. Perfect Pricing Information: Consumers have
Exam 3 Practice Questions 1. The price elasticity of demand is a measure of: a) how quickly a particular market reaches equilibrium. b) the change in supply associated with lower prices. c) the percent
ECON 260 (2,3) Practice Exam #4 Spring 2007 Dan Mallela Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. Profit is defined as a. net revenue
CHAPTER 8 Competitive Firms and Markets CHAPTER OUTLINE 8.1 Competition Price Taking Why the Firm s Demand Curve Is Horizontal Why We Study Competition 8.2 Profit Maximization Profit Two Steps to Maximizing
I. Learning Objectives In this chapter students should learn: A. How the long run differs from the short run in pure competition. B. Why profits encourage entry into a purely competitive industry and losses
15 Monopoly PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 Market power Why Monopolies Arise Alters the relationship between a firm s costs and the selling price Monopoly
Economics 4020 Dr. Rupp Test #1 Fri. Sept 23 rd, 2011 20 Multiple Choice questions (2.5 points each) Pledge (sign) I did not copy another student s answers 1. The profit maximization rule for a firm is
Chapter 15: Monopoly (Lecture Outline) -------------------------------------------------------------------------------------------------------------------------- Monopolies have no close competitors and,
Teaching about Market Structures Felix B. Kwan, Ph.D. Professor of Econ/Finance, Maryville University AP Econ Conference - FRB St. Louis June 17-19, 2015 Profits Foundational Concepts Some basic terms/concepts
Chapter 5 The Behavior of Firms This chapter focuses on how producers make decisions regarding supply. Individuals demand goods and services. Firms supply goods and services. An important assumption is
Perfect Competition Chapter 8 A Perfectly Competitive Market A perfectly competitive market is one in which economic forces operate unimpeded. A Perfectly Competitive Market For a market to be perfectly
8 Perfect Competition CHAPTER 8 PERFECT COMPETITION 167 Figure 8.1 Depending upon the competition and prices offered, a wheat farmer may choose to grow a different crop. (Credit: modification of work by
L08 Chapter 11 Firms in Perfectly Competitive Markets Def: Produced without using most conventional pesticides; fertilizers made with synthetic ingredients or sewage sludge; bioengineering; or ionizing
1. What is the main goal of a firm? A) To be as big as possible. B) To hire as many people as possible. C) To make as much profit as possible. D) All of the above answers are correct. Practice Exam 3 Questions
Micro - HW 4 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In central Florida during the spring, strawberry growers are price takers. The reason
The s of Production Chapter 13 Copyright 2001 by Harcourt, Inc. The s of Production The Law of Supply: Firms are willing to produce and sell a greater quantity of a good when the price of the good is high.
Lecture 2 Perfectly competitive markets Kosmas Marinakis, Ph.. Important notes 1. Homework 1 will is due on Monday 2. Practice problem set 2 is online microeconomics II first module 2013-18 Kosmas Marinakis,
I. From Seminar Slides: 3, 4, 5, 6. 3. For each of the following characteristics, say whether it describes a perfectly competitive firm (PC), a monopolistically competitive firm (MC), both, or neither.
PART II The Market System: Choices Made by Households and Firms PRINCIPLES OF MICROECONOMICS E L E V E N T H E D I T I O N CASE FAIR OSTER PEARSON 2012 Pearson Education, Inc. Publishing as Prentice Hall
The Firm, Profit, and the Costs of Production 1. Explicit vs. implicit costs 2. Short-run vs. long-run decisions 3. Fixed inputs vs. variable inputs 4. Short-run production measures: be able to calculate/graph
Chapter 13 Perfect Competition 13.1 A Firm's Profit-Maximizing Choices 1) Is the number of sellers in the market the only thing that is different in each of the four market types economists study? Answer:
Microeconomics, Module 7: Competition in the Short Run (Chapter 7) Additional Illustrative Test Questions (The attached PDF file has better formatting.) Updated: June 9, 2005 Question 7.1: Pricing in a
CHAPTER 12 Production and Cost Analysis I Production is not the application of tools to materials, but logic to work. Peter Drucker McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All
Monopolistic Competition Chapter 17 The Four Types of Market Structure Number of Firms? Many firms One firm Few firms Differentiated products Type of Products? Identical products Monopoly Oligopoly Monopolistic
OBJECTIVES Explain how managers should set price and output when they have market power With monopoly power, the firm s demand curve is the market demand curve. A monopolist is the only seller of a product
Micro Problem Set III WCC Fall 2014 A=True / B=False 15 Points 1) If MC is greater than AVC, AVC must be rising. 2) All combinations of capital and labor along a given isoquant cost the same amount. 3)
ECON 202-501 Fall 2008 Xiaoyong Cao Final Exam Form A Instructions: The exam consists of 2 parts. Part I has 35 multiple choice problems. You need to fill the answers in the table given in Part II of the
Name: Date: 1. Compared to perfect competition: A) monopoly produces more at a lower price. B) monopoly produces where MR > MC, and a perfectly competitively firm produces where P = MC. C) monopoly may
Monopoly and How It Arises A monopoly is a market: That produces a good or service for which no close substitute exists In which there is one supplier that is protected from competition by a barrier preventing
ECON 21 Principles of Microeconomics (Summer 216) Monopoly Relevant readings from the textbook: Mankiw, Ch. 15 Monopoly Suggested problems from the textbook: Chapter 15 Questions for Review (Page 323):
Practice Test for Midterm 2 Econ 2010-200 Fall 2009 Instructor: Soojae Moon Please read carefully and choose the choice that best completes the statement or answers the question. Table 7-2 This table refers
Sample Test 3 Ch 10-13 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A cost incurred in the production of a good or service and for which
Chapter 13. The Costs of Production The Market Forces of Supply and Demand Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies
1 Chapter 1 1.1. Scarcity, Choice, Opportunity Cost Definition of Economics: Resources versus Wants Wants: more and better unlimited Versus Needs: essential limited Versus Demand: ability to pay + want
CHAPTER 15 Monopoly Goals in this chapter you will Learn why some markets have only one seller Analyze how a monopoly determines the quantity to produce and the price to charge See how the monopoly s decisions
Econ 101 Summer 2015 Answers to Second Mid-term Date: June 15, 2015 Student Name Version 1 READ THESE INSTRUCTIONS CAREFULLY. DO NOT BEGIN WORKING UNTIL THE PROCTOR TELLS YOU TO DO SO You have 75 minutes
MICROECONOMICS: UNIT III COST OF PRODUCTION & THEORY OF THE FIRM One of the concepts mentioned in both Units I and II was and its components, total cost and total revenue. In this unit, costs and revenue
W ni ng 9 ar Perfect Competition Le Jennifer Mackenzie/Alamy chapter By market structure, we mean all the characteristics of a market that influence the behavior of buyers and sellers when they come together
Monopolistic Markets Causes of Monopolies The causes of monopolization Monoplositic resources Only one firm owns a resource which is crucial for production (e.g. diamond monopol of DeBeers). Monopols created
PRICES, PROFITS, AND INDUSTRY PERFORMANCE P A R T 5 Perfect Competition CHAPTER13 CHAPTER CHECKLIST When you have completed your study of this chapter, you will be able to 1 Explain a perfectly competitive
Firm Behavior and the Costs of Production WHAT ARE COSTS? The Firm s Objective The economic goal of the firm is to maximize profits. Total Revenue, Total Cost, and Profit Total Revenue, Total Cost, and
Monopoly Monopoly occurs when there is a single seller of a good or service. Despite this simple definition that is usually given in textbooks, we must criticize it a bit. Monopoly occurs when there is
Amherst College epartment of Economics Economics 54 Fall 2005 Thursday, October 13: Short and Long Run Equilibria Equilibrium in the Short Run The equilibrium price and quantity are determined by the market
Perfect Competition & Welfare Outline Derive aggregate supply function Short and Long run euilibrium Practice problem Consumer and Producer Surplus Dead weight loss Practice problem Focus on profit maximizing
MICRO EXAM REVIEW SHEET 1. Firm in Perfect Competition (Long-Run Equilibrium) 2. Monopoly Industry with comparison of price & output of a Perfectly Competitive Industry 3. Natural Monopoly with Fair-Return
Answers to the Problems Chapter 11 1. a. Lin is operating in a perfectly competitive market. b. The equilibrium price is determined by the equilibrium between the market demand and the market supply. c.
Agenda 1. Profit Maximization by a Monopolist 2. Marginal Revenue 3. Profit Maximization Exercise 4. Effect of Elasticities on Monopoly Price 5. Comparative Statics of Monopoly 6. Monopolist with Multiple
ECON 251 Practice Exam 2 Questions from Exams Gordon spends all his income on spatulas and mixing bowls. Spatulas cost $4 and mixing bowls cost $12. Gordon has $60 of income and considers both spatulas
Roger LeRoy Miller Economics Today Twelfth Edition Chapter 24 Monopoly Introduction The cement market in Mexico is dominated by a single company that accounts for more than 70 percent of all sales. Why
Advanced Microeconomics Ivan Etzo University of Cagliari email@example.com Dottorato in Scienze Economiche e Aziendali, XXXIII ciclo Ivan Etzo (UNICA) Lecture 5: Supply 1 / 32 Overview 1 Market Environments
Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is correct? A) Consumers have the ability to buy everything
A Model of Monopoly Monopoly Profit Maximization How much should the monopolistic firm choose to produce if it wants to maximize profit? Chapter 15-3 The Monopolist s and The first thing to remember is
Market structure 1: Perfect Competition The perfectly competitive firm is a price taker: it cannot influence the price that is paid for its product. This arises due to consumers indifference between the
ECON 251 Exam 2 Pink Use the table below to answer the following four questions The table below shows Harry s total utility from consuming beer and wine. The price of beer is $2 per bottle. The price of
1. Fill in the missing blanks ( XXXXXXXXXXX means that there is nothing to fill in this spot): Quantity Total utility Marginal utility 0 0 XXXXXXXXXXX XXXXXXXXXXX XXXXXXXXXXX 200 0 = 200 1 200 XXXXXXXXXXX
In this session we will look at monopolies, where there is only one firm in the market with no close substitutes. For example, Microsoft first designed the operating system Windows. As a result of this
Midterm #2 Exam Study uestions: (A subset of these questions/concepts will be on the exam) Chapter 5 - Elasticity Define rice elasticity of demand. What does it mean to say demand is highly elastic? What
Economics 101 Lec 3 Elizabeth Kelly Fall 2000 Midterm #3 / Version #1 December 4, 2000 VERSION 1 TF+MC roblem Total Student Name: ID Number: Section Number: TA Name: NOTE: This information and the similar
These notes provided by Laura Lamb are intended to complement class lectures. The notes are based on chapter 12 of Microeconomics and Behaviour 2 nd Canadian Edition by Frank and Parker (2004). Chapter
Final Exam Practice Multiple Choice Questions - ANSWER KEY Which of the following statements is not correct? a. Monopolistic competition is similar to monopoly because in each market structure the firm
Instructions: Econ 001: Midterm 2 (Dr. Stein) Answer Key Nov 13, 2007 This is a 60-minute examination. Write all answers in the blue books provided. Show all work. Use diagrams where appropriate and label
CHAPTER 13 Monopolistic Competition: The Competitive Model in a More Realistic Setting Chapter Summary and Learning Objectives 13.1 Demand and Marginal Revenue for a Firm in a Monopolistically Competitive