Perfect Competition. Discussion Sections next week! Other Exam-Related Information. Exam Locations 7:15pm October 29. Tuesday, October 27th:

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1 erfect Competition Exam Locations 7:15pm October 29 2 Lecture 9 outline Read chapter 10 and the readings. The characteristics of perfectly competitive industries How a price-taking producer determines its profit-maximizing level of output. rofits and why an unprofitable producer may continue to operate in the short run. The short run and long run behavior of firms in perfectly competitive markets The industry supply curve in the short and long run. Exam Locations (75 minute exam!) 7:15pm Thursday Night, October 29 Bascom 165: Matthew Friedman (Sections 331, 332, 347) Evangelos Stravelas (Sections 330, 333, 334, 342) Michael istone (Sections 337 and 338) Ingraham 19: Yuan Yuan (Sections 336, 339, 340, and 346) 132 Noland: Irina Merkurieva (Sections 335, 341, 343, 345) B130 VanVleck: Jiao Shi (Sections 302, 316) William Nicholson (Sections , 318) 125 Ag Hall: Georgy Loginov (Sections 305, 306, 309, 313) Fumihiko Suga (Sections 301, 304, 311, 312) Carly Urban (Sections 310, 315, 317, 319) 3 Other Exam-Related Information My review session will be Wednesday, October 28, 5-7pm, 125 Ag Hall. There will be no class the day of the exam, Thursday, October 29. ractice exams are posted (Thursday morning). There will be no regular TA sessions on Wednesday and Friday next week! Instead, attend sessions given on the next slide 4 Discussion Sections next week! Tuesday, October 27th: Evangelos Stravelas: 6M-8M: 6240 SS Irina Merkurieva: 4M-6M, 5231 SS Matthew Friedman: 6M-8M, 6203 SS Fumihiko Suga: 6M-8M, 6102 SS Michael istone: 7M-9M, 5106 SS Wednesday, October 28th: Carly Urban: 8:30AM-10:30AM, 121 sych Jiao Shi: 1M-3M, 6203 SS Georgy Loginov: 2:30-4:30M, 222 Ingraham Yuan Yuan: 7M-9M, 6203 SS William Nicholson: 7M-9M, 5106 SS 1

2 5 Two Necessary Conditions for erfect Competition 6 erfect Competition: rice Takers, not rice Makers #1: There are many producers, none of whom have a large market share. #2: An industry can be perfectly competitive only if the product is standardized: that is, consumers regard the products of all producers as equivalent. Advertising and perceptions (or actual) differences would violate the perfect competition assumption. Also, perfectly competitive industries are normally characterized by free entry and exit. There are no regulations or special inputs that keep people from entering the industry, or no special costs associated with leaving. A price-taking producer has no effect on the market price of the good it sells. Like the market for wheat. A price-taking consumer has no effect on the market price of the good that t he or she buys. Like consuming pizzas in Madison. All market participants in a perfectly competitive market are price-takers. All producers are price-takers in a perfectly competitive industry. 7 Determining the rofit-maximizing Level of Output rofits (in all businesses) are maximized by producing the quantity of output where marginal cost is equal to marginal revenue. The marginal revenue curve shows how marginal revenue varies as output varies. Change in total revenue ΔTR MR = = Change in output Δ Q In a perfectly competitive market, marginal revenue equals price! erfectly competitive firms are price takers. 8, cost rofit-maximization for the rice- Taking Firm The profit-maximizing point is where MR=: why? =MR 2

3 above break even results in profit Equating MR and is Not Enough: Thinking About rofit Break Even =MR 10 An Example with rofits =MR rofit below break-even will result in losses Firms recover opportunity costs when making 0 profit! rofit = TR-TC = *Q *Q An Example with Losses An Example 11 Loss = TR-TC = *Q *Q Loss =MR 12 Consider a perfectly competitive industry. Market demand is =1000-2Q, supply is =400+Q. Total costs are TC= q+4q 2 and =200+8q. What is market and Q? How many firms are in the industry? Do firms make profits or losses? How large are the profits or losses? What is equilibrium price in the long run? What is equilibrium profit? How many firms will there be in the long run? 3

4 13 The Short-Run roduction (Shut-Down) Decision 14 Summary of the Competitive Firm s rofitability and roduction Conditions Shut-down prices Short-run individual supply curve Minimum AVC AVC & AVC, not, determine SR shut down. Can cover some FC The Short-Run Market Equilibrium The industry supply curve shows the relationship between and total industry Q 15 A market is in long-run market equilibrium when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur. Zero LR profit will be earned. 16 Long-Run Market Equilibrium, C Firm, C Market S S S D There is a short-run market equilibrium when the quantity supplied equals the quantity demanded, taking the number of producers as given. Q Q Q Q As firms enter, market Q rises 4

5 Effects of a Demand Increase in the SR & LR Comparing the Short-Run and Long-Run Industry Supply Curves 17 Existing firm initial response SR & LR market response S LR Supply Existing firm response to new entrants S D D If LR costs are constant with Q, the LR Supply curve will be horizontal. It will be upward sloping if costs are increasing. Decreasing cost industries won t be perfectly competitive. D non-zero profits entry S back to zero profit (on LRS curve) The long-run industry supply curve is always flatter more elastic than the short-run industry supply curve. This is because of entry and exit: 19 erfectly Competitive Markets Are Efficient in Equilibrium In a perfectly competitive industry in equilibrium, = for all firms. The is the same for each firm. With free entry and exit, each firm will have zero economic profit in LR equilibrium. Q will be produced at min(lrac) The LR equilibrium is efficient. No mutually beneficial transactions go unexploited. 5