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Chapter 12

ECON 1000 Chapter 12: ECON 1000 Chapter 12

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ECON 1000
Andrea Podhorsky

Perfect Competition What is Perfect Competition? Perfect Competition is a market in which: • Many firms sell identical products to many buyers • There are no restrictions on entry into the market • Established firms have no advantage over new ones • Sellers and buyers are well informed about prices Examples: • Farming • Fishing • Wood pulping and paper milling • Paper cups • Shopping bags • Grocery and fresh flower retailing • Photo finishing • Lawn services • Plumbing • Painting • Dry cleaning and laundry services Perfect competition arises when if the minimum efficient scale of a single producer is relatively small to the market demand for the good or service. Each firm produces a good that has no unique characteristics Price takers – A firm that cannot influence the market price because its production is an insignificant part of the total market • Each firm is a price taker in a perfectly competitive market Demand curve for each individual firm is horizontal; products in this market are perfectly elastic; demand curve also equals marginal revenue curve A firm must decide: 1. How to produce at minimum cost 2. What quantity to produce 3. Whether to enter or exit a market A Firm’s Output Decision From a firm’s cost and revenue curves, we can find the output that maximizes the firm’s economic profit Economic Profit = Total Revenue – Total Cost Break-even point is where the economic profit equals zero Marginal Analysis and Supply Decision • Another way of finding the profit maximizing point is though marginal analysis. o Comparing MC and MR • If MR > MC, output must be increased in order to reach PMP • If MR < MC, output must be decreased in order to reach PMP • If MR = MC, output is at PMP • Other things remaining the same, the higher the market price of a good, the greater is the quantity supplied of that good Temporary Shutdown Decision • When the firm incurs an economic loss, it must decide if it should keep producing or shut down o If the loss is permanent, then the firm will shut down o If the loss is temporary, then the firm can either keep producing or shut down temporarily o Economic Loss = TFC + Q (AFC – P) o If P < AVC, Shutdown assuming all fixed costs are sunk costs o If P = Min. AVC, Indifferent o If P > Min. AVC, Continue Production o If P = AVC and all fixed costs are non-sunk, Shutdown o If Economic Loss is less than TFC, keep producing, if greater, shutdown The Firm’s Supply Curve • Supply Curve = MC o When P > Min. AVC, PMP is when MC = P o When P < AVC, temporary shut down Output, Price, and Profit in the Short Run Short-Run Market Supply Curve – The quantity supplied by all the firms in the market at each price when each firm’s plant and the number of firms remain the same • Market supply curve is derived from the individual supply curves • Change in demand curve o If ri
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