economics 200 principles of microeconomics
DESCRIPTION
ECONOMICS 200 PRINCIPLES OF MICROECONOMICS. Professor Lucia F. Dunn Department of Economics. Market Structure. • Refers to the degree of competitiveness in the market for any commodity. • The concept “market” is defined by a particular kind of product or service. - PowerPoint PPT PresentationTRANSCRIPT
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ECONOMICS 200PRINCIPLES OF MICROECONOMICS
Professor Lucia F. Dunn
Department of Economics
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Market Structure
• Refers to the degree of competitiveness in the market for any commodity.
• The concept “market” is defined by a particular kind of product or service.
— is interchangeable with the word “industry”.
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Perfect Competition
A. CharacteristicsA. Characteristics
1. Homogeneous Products
2. Customer Information
3. Output of firm at minimum of LRAC is small relative to the industry.
4. Price Taker (or Quantity Searcher)
5. Free Entry and Exit
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Perfect Competition
— Firm feels it must always sell at the going market price.
So demand curve is horizontal Perfectly Elastic
B. If firm is a price taker, its actions have no noticeable impact on prices.
D
0
p
Q1 Q2 Q3
p
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Perfect Competition
C. Aggregate over all small competitive firms gives the
“industry” or “total market” demand curve.
Total Market Demand
0
p
Competitive Industry Demand CurveCompetitive Industry Demand Curve
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Perfect Competition
D. How is the going market price determined?
D
0
p
Industry
S
D
p
p
p
Individual Competitive Firm
0
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Revenue Concepts
1. Total Revenue (or Total Expenditure)
2. Average Revenue
3. Marginal Revenue
QPTR
PQ
QP
Q
TRAR
MR = Change in revenue that comes from MR = Change in revenue that comes from selling an extra unitselling an extra unit
Q
TRMR
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Perfect Competition
D = AR = MR
p
p
0
Demand = Price = AR = MRDemand = Price = AR = MRFor Competitive Firm:
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Rule for Profit-Maximization
I. Should I. Should shut downshut down if if:
TVC > TRTVC > TR or AVC > AR = PAVC > AR = P
So if AVC > P Shut Down.
II. Firm should expand productionexpand production up to the point where:
MC = MRMC = MR
(All Type of Firms)
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Rule for Profit-Maximization (2)
(All Type of Firms)
MR=AR=P=D
p
0
MC
QQ**Q1 Q2
Loss
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Profit-Maximization for Competitive Firm
D=P=MR=AR
p
0
MC
QQEE
AVC
1. P > AVC1. P > AVC
2. MC = MR or MC = P since MR = P2. MC = MR or MC = P since MR = P
QQEE is an equilibrium point.
– Market forces will automatically keep the firm at that point.
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Profit-Maximization for Competitive Firm
p
0
MC
QQ11
AVC
op Do = MR0
1p D1 = MR1
2p D2 = MR2
QQ22
3p D3 = MR3
QQ33
4p D4 = MR4
QQ44
1
2
3
4
Supply for competitive firm is same as its MC curve above AVC.
– with Po , firm will shut down.
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Profit-Maximization for Competitive Firm
p
0
SS
QQ11
1p
2p
QQ22
3p
QQ33
4p
QQ44
1
2
3
4
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Profit-Maximization for Competitive Firm
Result: The Supply Curve of a perfectly competitive firm is identical to its Marginal Cost curve in the range above the average variable cost.
Wow!! MC and Supply
Curve!!
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Profit Short-Run Equilibrium of Competitive Firm
D1 = MR1
p
0
MC
QQ11
ATC
= TR – TC
TC =ATC Q
So: = OP1BQ1 – OACQ1
= AP1BC (Shaded Area)
1p
A
B
C
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Reaching Long-Run Equilibrium of Competitive Firm
D
p
Q
1S
1p
2p
2S11
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With positive , new firms enter industry and price will fall as supply shifts right.
Price will fall.Price will fall.
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Reaching Long-Run Equilibrium of Competitive Firm
So for individual firm :
p
0
MC
QQ33
SRATC
3p
2p
1p
AA
• Price and demand will continue to shift downward until = 0.
At Q3 : TR = OPTR = OP33AQAQ33
TC = OPTC = OP33AQAQ33
So: = 0 = 0
* For competitive firm there is zero economic profit in the long-run equilibrium.
D1 = MR1
D2 = MR2
D3 = MR3
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Short-Run Equilibrium of Competitive Firm with Losses
p
0
MC
QQ11
SRATC
1pD1=MR
AA
BBCC
= TR – TC
= OP1AQ1 – OBCQ1
= P1BCA (Shaded Area is loss)
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Reaching Long-Run Equilibrium of Competitive Firm
D
p
Q
1S
1p
2p
2S
11
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When loss occurs, firms will exit industry.
Supply will shift left.
Price will rise.Price will rise.
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Reaching Long-Run Equilibrium of Competitive Firm
p
0
MC SRATC
1p
2p
3p
QQ33
So price and demand will rise until the loss is eliminated.
Things settle down and reach long-run equilibrium at Q3 with P3 and = 0.
D1 = MR1
D2 = MR2
D3 = MR3
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Profit-Maximization for Competitive Firm
NOTE: In the long run, the demand curve is just tangent to SRATC curve.
It will be tangent at the minimum point of SRATC.
(It is geometric fact that when a U-shaped curve is tangent to a horizontal line, it is tangent at its minimum point).
$ (Costs)$ (Costs)
Q (Output)Q (Output)0
LRATC
QQMINMIN
SR
AT
C1
SR
AT
C2
SR
AT
C3
MC
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Profit-Maximization for Competitive Firm
• So in the long run equilibrium in competitive industries, firm produce at the minimum point of both the short-run and long-run ATC curve.
Very Efficient
Long-Run Long-Run EquilibriumEquilibriumIs Efficient!Is Efficient!
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