perfect competition in the market for organic apples
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Perfect Competition in the Market for Organic Apples. Learning Objectives. The process of competition is at the heart of the market system and is the focus of this chapter. Firms in Perfectly Competitive Markets. Table 11-1. The Four Market Structures. Learning Objective 11.1. - PowerPoint PPT PresentationTRANSCRIPT
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter
11
Firms in Perfectly Competitive Markets
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 2 of 48
Perfect Competition in the Market for Organic Apples
11.1 Define a perfectly competitive market and explain why a perfect competitor faces a horizontal demand curve.
11.2 Explain how a firm maximizes profits in a perfectly competitive market.
11.3 Use graphs to show a firm’s profit or loss.
11.4 Explain why firms may shut down temporarily.
11.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run.
11.6 Explain how perfect competition leads to economic efficiency.
Learning Objectives
The process of competition is at the heart of the market system and is the focus of this chapter.
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Firms in Perfectly Competitive Markets
MARKET STRUCTURE
CHARACTERISTICPERFECT COMPETITION
MONOPOLISTIC COMPETITION OLIGOPOLY MONOPOLY
Number of firms
Type of product
Ease of entry
Examples of industries
Many
Identical
High
• Wheat• Apples
Many
Differentiated
High
• Selling DVDs• Restaurants
Few
Identical or differentiated
Low
• Manufacturing computers• Manufacturing automobiles
One
Unique
Entry blocked
• First-class mail delivery• Tap water
Table 11-1
The Four Market Structures
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Learning Objective 11.1
Perfectly competitive market A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
Price taker A buyer or seller that is unable to affect the market price.
A Perfectly Competitive Firm Cannot Affect the Market Price
Perfectly Competitive Markets
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Learning Objective 11.1
FIGURE 11-1
A Perfectly Competitive Firm Faces a Horizontal Demand Curve
Perfectly Competitive MarketsThe Demand Curve for the Outputof a Perfectly Competitive Firm
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Learning Objective 11.1
FIGURE 11-2The Market Demand for Wheat versus the Demand for One Farmer’s Wheat
Don’t Let This Happen to YOU!Don’t Confuse the Demand Curve for Farmer Parker’s Wheat with the Market Demand Curve for Wheat
Perfectly Competitive MarketsThe Demand Curve for the Outputof a Perfectly Competitive Firm
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How a Firm Maximizes Profit in a Perfectly Competitive Market
Learning Objective 11.2
Profit Total revenue minus total cost.
Profit = TR – TC
Revenue for a Firm in a Perfectly Competitive Market
Average revenue (AR) Total revenue divided by the quantity of the product sold.
Marginal revenue (MR) Change in total revenue from selling one more unit of a product.
or ,quantityin Change
revenue in total Change Revenue Marginal
Q
TRMR
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How a Firm Maximizes Profit in a Perfectly Competitive Market
Learning Objective 11.2
Table 11-2
Farmer Parker’s Revenue from Wheat Farming
NUMBER OF BUSHELS
(Q)
MARKET PRICE(PER BUSHEL)
(P)
TOTAL REVENUE
(TR)
AVERAGE REVENUE
(AR)
MARGINAL REVENUE
(MR)
0
1
2
3
4
5
6
7
8
9
10
$4
4
4
4
4
4
4
4
4
4
4
$0
4
8
12
16
20
24
28
32
36
40
-
$4
4
4
4
4
4
4
4
4
4
-
$4
4
4
4
4
4
4
4
4
4
Revenue for a Firm in a Perfectly Competitive Market
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How a Firm Maximizes Profit in a Perfectly Competitive Market
Learning Objective 11.2
Determining the Profit-Maximizing Level of Output
Table 11-3
Farmer Parker’s Profits from Wheat Farming
QUANTITY(BUSHELS)
(Q)
TOTALREVENUE
(TR)
TOTALCOSTS
(TC)
PROFIT
(TR-TC)
MARGINAL REVENUE
(MR)
MARGINAL COST
(MC)
0
1
2
3
4
5
6
7
8
9
10
$0.00
4.00
8.00
12.00
16.00
20.00
24.00
28.00
32.00
36.00
40.00
$1.00
4.00
6.00
7.50
9.50
12.00
15.00
19.50
25.50
32.50
40.50
–$1.00
0.00
2.00
4.50
6.50
8.00
9.00
8.50
6.50
3.50
–0.50
— $4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
—
$3.00
2.00
1.50
2.00
2.50
3.00
4.50
6.00
7.00
8.00
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How a Firm Maximizes Profit in a Perfectly Competitive Market
Learning Objective 11.2
Determining the Profit-Maximizing Level of Output
FIGURE 11-3
The Profit-Maximizing Level of Output
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How a Firm Maximizes Profit in a Perfectly Competitive Market
Learning Objective 11.2
Determining the Profit-Maximizing Level of Output
1 The profit-maximizing level of output is where the difference between total revenue and total cost is the greatest.
2 The profit-maximizing level of output is also where marginal revenue equals marginal cost, or MR = MC.
From the information in Table 11-3 and Figure 11-3, we can draw the following conclusions:
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Illustrating Profit or Loss on the Cost Curve Graph
Learning Objective 11.3
Profit = (P x Q) TC
Q
QP )(
Q
ProfitQ
TC
P ATCQ
Profit
Profit = (P ATC)Q
or
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Learning Objective 11.3
Showing a Profit on the Graph
FIGURE 11-4
The Area of Maximum Profit
Illustrating Profit or Loss on the Cost Curve Graph
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Solved Problem 11-3Determining Profit-Maximizing Price and Quantity
Learning Objective 11.3
OUTPUT PER DAY
TOTAL COST
MARGINAL COST
0 $10.00 ―
1 15.00 $5.00
2 17.50 2.50
3 22.50 5.00
4 30.00 7.50
5 40.00 10.00
6 52.50 12.50
7 67.50 15.00
8 85.00 17.50
9 105.00 20.00
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Learning Objective 11.3
Illustrating Profit or Loss on the Cost Curve Graph
Don’t Let This Happen to YOU!Remember That Firms Maximize Total Profit, Not Profit per Unit
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Learning Objective 11.3
1 P > ATC, which means the firm makes a profit.
2 P = ATC, which means the firm breaks even (its total cost equals its total revenue).
3 P < ATC, which means the firm experiences losses.
Illustrating When a Firm Is Breaking Evenor Operating at a Loss
Illustrating Profit or Loss on the Cost Curve Graph
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Learning Objective 11.3
FIGURE 11-5
A Firm Breaking Even and a Firm Experiencing Losses
Illustrating When a Firm Is Breaking Evenor Operating at a Loss
Illustrating Profit or Loss on the Cost Curve Graph
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Learning Objective 11.3
Losing Money in the Medical Screening Industry
Makingthe
Connection
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Deciding Whether to Produceor to Shut Down in the Short Run
Learning Objective 11.4
1 Continue to produce
2 Stop production by shutting down temporarily
Sunk cost A cost that has already been paid and that cannot be recovered.
In the short run, a firm suffering losses has two choices:
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Learning Objective 11.3
When to Close a LaundryMaking
the
Connection
Keeping a business open even when suffering losses can sometimes be the best decision for an entrepreneur in the short run.
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Deciding Whether to Produce or to Shut Down in the Short Run
Learning Objective 11.4
Shutdown point The minimum point on a firm’s average variable cost curve; if the price falls below this point, the firm shuts down production in the short run.
The Supply Curve of a Firm in the Short Run
Total revenue < Variable cost,
P × Q < VC
P < AVC
or, in symbols:
If we divide both sides by Q, we have the result that the firm will shut down if:
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Learning Objective 11.4
FIGURE 11-6
The Firm’s Short-Run Supply Curve
Deciding Whether to Produce or to Shut Down in the Short Run
The Supply Curve of a Firm in the Short Run
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Learning Objective 11.4
FIGURE 11-7
Firm Supply and Market Supply
Deciding Whether to Produce or to Shut Down in the Short Run
The Market Supply Curve in a Perfectly Competitive Industry
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“If Everyone Can Do It, You Can’t Make Money at It”: The Entry and Exit of Firms in the Long Run
Learning Objective 11.5
Economic Profit and the Entry or Exit Decision
Table 11- 4
Farmer Moreno’s Costs per Year
EXPLICIT COSTS
Water
Wages
Organic fertilizer
Electricity
Payment on bank loan
$10,000
$15,000
$10,000
$5,000
$45,000
IMPLICIT COSTS
Foregone salary
Opportunity cost of the $100,000 she has invested in her farm
Total Cost
$30,000
$10,000
$125,000
Economic profit A firm’s revenues minus all its costs, implicit and explicit.
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Learning Objective 11.5
Economic Profit Leads to Entry of New Firms
FIGURE 11-8
The Effect of Entry on Economic Profits
“If Everyone Can Do It, You Can’t Make Money at It”: The Entry and Exit of Firms in the Long Run
Economic Profit and the Entry or Exit Decision
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Learning Objective 11.5
FIGURE 11-9
The Effect of Exit on Economic Losses
Economic Losses Lead to Exit of Firms
“If Everyone Can Do It, You Can’t Make Money at It”: The Entry and Exit of Firms in the Long Run
Economic Profit and the Entry or Exit Decision
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Learning Objective 11.5
FIGURE 11-9
The Effect of Exit on Economic Losses (continued)
Economic Losses Lead to Exit of Firms
“If Everyone Can Do It, You Can’t Make Money at It”: The Entry and Exit of Firms in the Long Run
Economic Profit and the Entry or Exit Decision
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Learning Objective 11.5
Economic loss The situation in which a firm’s total revenue is less than its total cost, including all implicit costs.
Long-Run Equilibrium in a Perfectly Competitive Market
Long-run competitive equilibrium The situation in which the entry and exit of firms has resulted in the typical firm breaking even.
Economic Losses Lead to Exit of Firms
“If Everyone Can Do It, You Can’t Make Money at It”: The Entry and Exit of Firms in the Long Run
Economic Profit and the Entry or Exit Decision
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Learning Objective 11.5
FIGURE 11-10
The Long-Run Supply Curve in a Perfectly Competitive Industry
“If Everyone Can Do It, You Can’t Make Money at It”: The Entry and Exit of Firms in the Long Run
The Long-Run Supply Curve in a Perfectly Competitive Market
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Learning Objective 11.5
Long-run supply curve A curve that shows the relationship in the long run between market price and the quantity supplied.
Increasing-Cost and Decreasing-Cost Industries
Industries with upward-sloping long run supply curves are called increasing-cost industries.
Industries with downward-sloping long-run supply curves are called decreasing-cost industries.
“If Everyone Can Do It, You Can’t Make Money at It”: The Entry and Exit of Firms in the Long Run
The Long-Run Supply Curve in a Perfectly Competitive Market
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Learning Objective 11.6
The Decline of Apple Production in New York State
Makingthe
Connection
When apple growers in New York State stopped breaking even, many sold their land to housing developers.
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Perfect Competition and Efficiency
Learning Objective 11.6
Productive efficiency The situation in which a good or service is produced at the lowest possible cost.
Productive Efficiency
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Solved Problem 11-6How Productive Efficiency Benefits Consumers
Learning Objective 11.6
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Perfect Competition and Efficiency
Learning Objective 11.6
1 The price of a good represents the marginal benefit consumers receive from consuming the last unit of the good sold.
2 Perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of producing the last unit.
3 Therefore, firms produce up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.
Allocative Efficiency
Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them.
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Perfect Competition and Efficiency
Learning Objective 11.6
Allocative efficiency A state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.
Allocative Efficiency
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An Inside LOOK Why Are Organic Farmers Worried about Wal-Mart?
Wal-Mart’s Organic Offensive
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Allocative efficiency
Average revenue (AR)
Economic loss
Economic profit
Long-run competitive equilibrium
Long-run supply curve
Marginal revenue (MR)
K e y T e r m s
Perfectly competitive market
Price taker
Productive efficiency
Profit
Shutdown point
Sunk cost