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1、,Principles of Economics,Session 6,Topics To Be Covered,Market Structure Characteristics of Perfectly Competitive Market Profit Maximization for a Competitive Firm Zero-Profit Point and Shut-Down Point Short-Run Supply Curve Long-Run Supply Curve Producer Surplus Pricing Information,Market Structure
2、,Perfect Competition Monopoly Oligopoly Monopolistic Competition,Characteristics of Perfectly Competitive Market,Many buyers and sellers Product homogeneity Free entry and exit Price taking,Product Homogeneity,The products of all firms are perfect substitutes. Examples: Agricultural products, oil, c
3、opper, iron, lumber,Free Entry and Exit,Buyers can easily switch from one supplier to another. Suppliers can easily enter or exit a market.,Price Taking,The individual firm sells a very small share of the total market output and, therefore, cannot influence market price. The individual consumer buys
4、 too small a share of industry output to have any impact on market price. Buyers and sellers in competitive markets are said to be price takers, for they must accept the price determined by the market.,Demand Faced by a Competitive Firm,Q,P,Firm,Industry,P,Q,Individual producer sells all units for $
5、4 regardless of the producers level of output, so price under $4 is irrational. If the producer tries to raise price, sales are zero. The price elasticity of demand for products of a single firm is,Price Elasticity of Demand,E=,Revenue of a Perfectly Competitive Firm,Total revenue for a firm is the
6、selling price times the quantity sold.,TR=PQ,Revenue of a Perfectly Competitive Firm,Average revenue tells us how much a firm receives for the typical unit sold.,Revenue of a Perfectly Competitive Firm,Marginal revenue is the change in total revenue from an additional unit sold.,Demand, Price, AR, a
7、nd MR,d=P=AR=MR,$4,Firm,P,Q,Profit Maximization for the Perfectly Competitive Firm,The goal of a competitive firm is to maximize profit. This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost.,MC,Profit Maximization for the Perfe
8、ctly Competitive Firm,Quantity,0,ATC,AVC,Profit Maximization for the Perfectly Competitive Firm,When MR MC, Q increase will increase profit When MR MC, Q decrease will increase profit When MR = MC, economic profit is maximized,Profit Maximization for the Perfectly Competitive Firm,0,Revenue ($s per
9、year),Output (units per year),0,Cost $ (per year),Output (units per year),Profit Maximization for the Perfectly Competitive Firm,0,Cost, Revenue, Profit ($s per year),Output (units per year),Profit Maximization for the Perfectly Competitive Firm,0,Cost, Revenue, Profit ($s per year),Output (units pe
10、r year),Profit Maximization for the Perfectly Competitive Firm,q1,Profits are maximized when MC = MR.,The Marginal Principle,The marginal principle is the fundamental notion that people will maximize their income or profits when the marginal costs and marginal benefits of their actions are equal. A
11、profit-maximizing firm will set its output at that level where marginal cost equals price (MC=P).,MC,Firms Making Profits,Quantity,0,ATC,AVC,MC,Firms Incurring Losses,Quantity,0,ATC,AVC,MC,Zero-Profit Point,Quantity,0,ATC,AVC,Zero-Profit Point,Total cost includes all the opportunity costs of the fir
12、m. In the zero-profit equilibrium, the firms revenue compensates the owners for the time and money they expend to keep the business going. Although the economic profit is zero, the firm has realized its normal profit.,MC,Shut-Down Point,Quantity,0,ATC,AVC,Shut-Down Point,Shut-Down Point,When AVCP AT
13、C, why does the firm continue production?,Shutdown vs. Exit,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.,Shutdown vs. Exit,The firm considers its sunk c
14、osts 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.,Summary of Production Decisions,Profit is maximized when MC = MR If P ATC the firm is making profits. If AVC P ATC the firm should produce a
15、t a loss. If P AVC ATC the firm should shut-down.,The Firms Short-Run Supply Curve,Quantity,0,MC,ATC,AVC,The portion of MC above AVC is the competitive firms short-run supply curve.,Production and Supply Curve,Quantity,ATC,AVC,0,Costs,The Response of a Firm to a Change in Product Price,When the pric
16、e of a firms product changes, the firm changes its output level, so that the marginal cost of production remains equal to the price.,Industry Supply in the Short Run,$ per unit,0,2,4,8,10,5,7,The short-run industry supply curve is the horizontal summation of the supply curves of the firms.,Quantity,MC,Output in the Long Run,Quantity,0,ATC=AVC,In the long run all costs are variable,The Firms Long-Run Decisio
