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1、1 of 38chapter: 132009 Worth PublishersPerfect Competition andThe Supply Curve2 of 38WHAT YOU WILL LEARN IN THIS CHAPTERWhat a perfectly competitive market is and the characteristics of a perfectly competitive industryHow a price-taking producer determines its profit-maximizing quantity of outputHow
2、 to assess whether or not a producer is profitable and why an unprofitable producer may continue to operate in the short runWhy industries behave differently in the short run and the long runWhat determines the industry supply curve in both the short run and the long run3 of 38Perfect CompetitionA p
3、rice-taking producer is a producer whose actions have no effect on the market price of the good it sells.A price-taking consumer is a consumer whose actions have no effect on the market price of the good he or she buys.A perfectly competitive market is a market in which all market participants are p
4、rice-takers.A perfectly competitive industry is an industry in which producers are price-takers.4 of 38Two Necessary Conditions for Perfect Competition1)For an industry to be perfectly competitive, it must contain many producers, none of whom have a large market share.A producers market share is the
5、 fraction of the total industry output accounted for by that producers output.2)An industry can be perfectly competitive only if consumers regard the products of all producers as equivalent.A good is a standardized product, also known as a commodity, when consumers regard the products of different p
6、roducers as the same good.5 of 38FOR INQUIRING MINDSWhats a Standardized Product?A perfectly competitive industry must produce a standardized product. People must think that these products are the same.Producers often go to great lengths to convince consumers that they have a distinctive, or differe
7、ntiated, product even when they dont.So is an industry perfectly competitive if it sells products that are indistinguishable except in name but that consumers dont think are standardized? No. When it comes to defining the nature of competition, the consumer is always right.6 of 38ECONOMICS IN ACTION
8、The Pain of CompetitionSometimes it is possible to see an industry become perfectly competitive.In the case of pharmaceuticals, the conditions for perfect competition are often met as soon as the patent on a popular drug expires.The field is then open for other companies to sell their own versions o
9、f the drugmarketed as “generics” and sold under the medical name of the drug. Generics are standardized products, much like aspirin, and are often sold by many producers.The shift to perfect competition is accompanied by a sharp fall in market price.7 of 38Free Entry and ExitThere is free entry and
10、exit into and from an industry when new producers can easily enter into or leave that industry.Free entry and exit ensure:that the number of producers in an industry can adjust to changing market conditions, and,that producers in an industry cannot artificially keep other firms out.8 of 38Production
11、 and Profits89 of 38Using Marginal Analysis to Choose the Profit-Maximizing Quantity of OutputMarginal revenue is the change in total revenue generated by an additional unit of output.MR = TR/Q10 of 38The Optimal Output RuleThe optimal output rule says that profit is maximized by producing the quant
12、ity of output at which the marginal cost of the last unit produced is equal to its marginal revenue.11 of 38Short-Run Costs for Jennifer and Jasons Farm12 of 38PITFALLSWhat if Marginal Revenue and Marginal Cost Arent Exactly Equal?The optimal output rule says that to maximize profit, you should prod
13、uce the quantity at which marginal revenue is equal to marginal cost.But what do you do if theres no output level at which marginal revenue equals marginal cost? In that case, you produce the largest quantity for which marginal revenue exceeds marginal cost.When production involves large numbers, ma
14、rginal cost, comes in small increments and there is always a level of output at which marginal cost almost exactly equals marginal revenue.13 of 38Marginal Analysis Leads to Profit-Maximizing Quantity of OutputThe price-taking firms optimal output rule says that a price-taking firms profit is maximi
15、zed by producing the quantity of output at which the marginal cost of the last unit produced is equal to the market price.The marginal revenue curve shows how marginal revenue varies as output varies.14 of 38The Price-Taking Firms Profit-Maximizing Quantity of OutputThe profit-maximizing point is wh
16、ere MC crosses MR curve (horizontal line at the market price): at an output of 5 bushels of tomatoes (the output quantity at point E).76543210$242018161286Price, cost of bushelQuantity of tomatoes (bushels)MCMR = PEProfit-maximizing quantityOptimal pointMarket price15 of 38When Is Production Profita
17、ble?If TR TC, the firm is profitable.If TR = TC, the firm breaks even.If TR TC, the firm incurs a loss.16 of 38Short-Run Average Costs17 of 38Costs and Production in the Short Run 76543210$301814MCATCMR = PCBreak even priceMinimum-cost outputPrice, cost of bushelQuantity of tomatoes (bushels)Minimum
18、 average total costAt point C (the minimum average total cost), the market price is $14 and output is 4 bushels of tomatoes (the minimum-cost output).This is where MC cuts the ATC curve at its minimum. Minimum average total cost is equal to the firms break-even price.18 of 38Profitability and the Ma
19、rket Price The farm is profitable because price exceeds minimum average total cost, the break-even price, $14. The farms optimal output choice is (E) output of 5 bushels. The average total cost of producing bushels is (Z on the ATC curve) $14.40The vertical distance between E and Z:farms per unit pr
20、ofit, $18.00 $14.40 = $3.60Total profit:5 $3.60 = $18.0076543210MCProfitATCMR= PCZEMarket Price = $181414.40$18Price, cost of bushelQuantity of tomatoes (bushels)Minimum average total costBreak even price19 of 38Profitability and the Market Price The farm is unprofitable because the price falls belo
21、w the minimum average total cost, $14.The farms optimal output choice is (A) output of 3 bushels. The average total cost of producing bushels is (Y on the ATC curve) $14.67The vertical distance between A and Y:farms per unit loss, $14.67 $10.00 = $4.67Total profit:3 $4.67 = approx. $14.0076543210MCL
22、ossATCMR = PCAYMarket Price = $101410$14.67Price, cost of bushelQuantity of tomatoes (bushels)Minimum average total costBreak even price20 of 38Profit, Break-Even or LossThe break-even price of a price-taking firm is the market price at which it earns zero profits.Whenever market price exceeds minim
23、um average total cost, the producer is profitable.Whenever the market price equals minimum average total cost, the producer breaks even.Whenever market price is less than minimum average total cost, the producer is unprofitable.21 of 38PITFALLSEconomic Profit, AgainSome readers may wonder why firms
24、would enter an industry when they will do little more than break even. Wouldnt people prefer to go into other businesses that yield a better profit?The answer is that here, as always, when we calculate cost, we mean opportunity costthe cost that includes the return a business owner could get by usin
25、g his or her resources elsewhere.And so the profit that we calculate is economic profit; if the market price is above the break-even level, potential business owners can earn more in this industry than they could elsewhere.22 of 38The Short-Run Individual Supply CurveThe short-run individual supply
26、curve shows how an individual producers optimal output quantity depends on the market price, taking fixed cost as given.A firm will cease production in the short run if the market price falls below the shut-down price, which is equal to minimum average variable cost.765433.5210$1816141210MCATCAVCCBA
27、EMinimum average variable costShort-run individual supply curveShut-down pricePrice, cost of bushelQuantity of tomatoes (bushels)23 of 38Summary of the Competitive Firms Profitability and Production Conditions24 of 38ECONOMICS IN ACTIONPrices Are Up But So Are CostsIn 2005, Congress passed the Energ
28、y Policy Act, that by the year 2012, 7.5 billion gallons of alternative oilmostly corn-based ethanolbe added to the American fuel supply with the goal of reducing gasoline consumption.One farmer increased his corn acreage by 40% after demand for corn increased which drove corn prices up. Even though
29、 the price of corn increased, so did the raw materials needed to grow the corn.Farmers will increase their corn acreage until the marginal cost of producing corn is approximately equal to the market price of cornwhich shouldnt come as a surprise because corn production satisfies all the requirements
30、 of a perfectly competitive industry.25 of 38Industry Supply CurveThe industry supply curve shows the relationship between the price of a good and the total output of the industry as a whole.The short-run industry supply curve shows how the quantity supplied by an industry depends on the market pric
31、e given a fixed number of producers.There is a short-run market equilibrium when the quantity supplied equals the quantity demanded, taking the number of producers as given.26 of 38The Long-Run Industry Supply CurveA market is in long-run market equilibrium when the quantity supplied equals the quan
32、tity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur.27 of 38The Short-Run Market EquilibriumThe short-run industry supply curve shows how the quantity supplied by an industry depends on the market price given a fixed number of producers.There is a
33、 short-run market equilibrium when the quantity supplied equals the quantity demanded, taking the number of producers as given.7006005004003002000$2622181410DShort-run industry supply curve, SEMKTShut-down pricePrice, cost of bushelQuantity of tomatoes (bushels)Market price28 of 38The Long-Run Marke
34、t EquilibriumA 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.Quantity of tomatoes (bushels)6544.530$1816141,0007505000$181614DECDYZMCATCAB(a) Market(b) Indivi
35、dual Firm14.40EDCMKTS1S3S2Price, cost of bushelQuantity of tomatoes (bushels)Price, cost of bushelBreak-even priceMKTMKT29 of 38The Effect of an Increase in Demandin the Short Run and the Long RunThe LRS shows how the quantity supplied responds to the price once producers have had time to enter or e
36、xit the industry.D P non-zero profits entry S P back to zero profit (on LRS curve)MCATCXY000$1814QuantityMCATCZYPriceS1D1D2S2YMKTXMKTZMKT LRSQXQYQZ(a) Existing Firm Response to Increase in Demand(b) Short-Run and Long-Run Market Response to Increase in Demand(a) Existing Firm Response to New Entrant
37、sPrice, costPrice, costIncrease in output from new entrantsAn increase in demand raises price and profit.Long-run industry supply curve,Higher industry output from new entrants drive price and profit back down.QuantityQuantity30 of 38Comparing the Short-Run and Long-Run Industry Supply CurvesThe lon
38、g-run industry supply curve is always flatter more elastic than the short-run industry supply curve.Short-run industry supply curve, SLong-run industry supply curve, LRSPriceQuantityLRS may slope upward, but it is always flattermore elasticthan the short-run industry supply curve. This is because of
39、 entry and exit: a higher price attracts new entrants in the long run, resulting in a rise in industry output and lower price; a fall in price induces existing producer to exit in the long run, generating a fall in industry output and a rise in price.31 of 38ConclusionsThree conclusions about the co
40、st of production and efficiency in the long-run equilibrium of a perfectly competitive industry: In a perfectly competitive industry in equilibrium, the value of marginal cost is the same for all firms.In a perfectly competitive industry with free entry and exit, each firm will have zero economic pr
41、ofits in long-run equilibrium.The long-run market equilibrium of a perfectly competitive industry is efficient: no mutually beneficial transactions go unexploited.32 of 38ECONOMICS IN ACTIONA Crushing ReversalStarting in the mid-1990s, Americans began drinking a lot more wine. Part of this increase
42、in demand may have reflected a booming economy, but the surge in wine consumption continued even after the economy stumbled in 2001.At first, the increase in wine demand led to sharply higher prices; between 1993 and 2000, the price of red wine rose approximately 50%, and California grape growers ea
43、rned high profits.As a result, there was a rapid expansion of the industry. Between 1994 and 2002, production of red wine grapes almost doubled.The result was predictable: the price of grapes fell as the supply curve shifted out. As demand growth slowed in 2002, prices plunged by 17%. The effect was
44、 to end the California wine industrys expansion.33 of 38SUMMARY1.In a perfectly competitive market all producers are price-taking producers and all consumers are price-taking consumersno ones actions can influence the market price. 2.There are two necessary conditions for a perfectly competitive ind
45、ustry: there are many producers, none of whom have a large market share, and the industry produces a standardized product or commoditygoods that consumers regard as equivalent. A third condition is often satisfied as well: free entry and exit into and from the industry.34 of 38SUMMARY3.A producer ch
46、ooses output according to the optimal output rule: produce the quantity at which marginal revenue equals marginal cost. For a price-taking firm, marginal revenue is equal to price and its marginal revenue curve is a horizontal line at the market price. It chooses output according to the price-taking
47、 firms optimal output rule: produce the quantity at which price equals marginal cost. 4.A firm is profitable if total revenue exceeds total cost or, equivalently, if the market price exceeds its break-even priceminimum average total cost. If market price exceeds the break-even price, the firm is pro
48、fitable; if it is less, the firm is unprofitable; if it is equal, the firm breaks even. When profitable, the firms per-unit profit is P ATC; when unprofitable, its per-unit loss is ATC P.35 of 38SUMMARY5.Fixed cost is irrelevant to the firms optimal short-run production decision, which depends on it
49、s shut-down priceits minimum average variable costand the market price. When the market price is equal to or exceeds the shut-down price, the firm produces the output quantity where marginal cost equals the market price. When the market price falls below the shut-down price, the firm ceases producti
50、on in the short run. This generates the firms short-run individual supply curve.6.Fixed cost matters over time. If the market price is below minimum average total cost for an extended period of time, firms will exit the industry in the long run. If above, existing firms are profitable and new firms
51、will enter the industry in the long run.36 of 38SUMMARY7.The industry supply curve depends on the time period. The short-run industry supply curve is the industry supply curve given that the number of firms is fixed. The short-run market equilibrium is given by the intersection of the short-run indu
52、stry supply curve and the demand curve.8.The long-run industry supply curve is the industry supply curve given sufficient time for entry into and exit from the industry. In the long-run market equilibriumgiven by the intersection of the long-run industry supply curve and the demand curveno producer
53、has an incentive to enter or exit. The long-run industry supply curve is often horizontal. It may slope upward if there is limited supply of an input. It is always more elastic than the short-run industry supply curve.37 of 38SUMMARY9.In the long-run market equilibrium of a competitive industry, pro
54、fit maximization leads each firm to produce at the same marginal cost, which is equal to market price. Free entry and exit means that each firm earns zero economic profitproducing the output corresponding to its minimum average total cost. So the total cost of production of an industrys output is minimized. The outcome is efficient because every consumer with a willingness to pay greater than or equal to marginal cost gets the good.38 of 38The End of Chapter 13Coming attraction:Chapter 14: Monopoly
