Microeconomic Essay

2967 words - 12 pages

BB107
Pure Competition in the Short Run and Long Run

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Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Outcomes
• List the conditions required for purely competitive markets. • Convey how purely competitive firm maximize profits or minimize losses.

• Explain why the marginal cost curve and supply curve are identical.
• Explain how the long run differs from the short run in pure competition. • Explain the differences between constant-cost, increasing-cost, and decreasing-cost industries. • Show how long run equilibrium in pure competition produces an efficient allocation of resources.
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Four Market Models 1) Pure competition

2) ...view middle of the document...

Each firm is a price taker. The firm does not make pricing decisions. The firm faces a perfectly elastic demand for its output.
6
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Pop Quiz A purely competitive seller is:

A. both a price maker and a price taker. B. neither a price maker nor a price taker. C. a price taker. D. a price maker.
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Pop Quiz
Which of the following is not a basic characteristic of pure competition? A. considerable non price competition

B. no barriers to the entry or exit of firms
C. a standardized or homogeneous product D. a large number of buyers and sellers
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Average, Total, and Marginal Revenue
Total Revenue • TR = P X Q Average Revenue or Revenue per unit • AR = TR/Q = P Marginal Revenue • Extra revenue from 1 more unit • MR = ΔTR/ΔQ
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Average, Total, and Marginal Revenue
Firm’s Demand Schedule (Average Revenue) Firm’s Revenue Data

QD
0 1 2 3 4 5 6 7 8 9 10
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P

TR
$0 131 262 393 524 655 786 917 1048 1179 1310
] ] ] ] ] ] ] ] ] ]

MR

AR
$131 131 131 131 131 131 131 131 131 131 131

$131 131 131 131 131 131 131 131 131 131 131

$131 131 131 131 131 131 131 131 131 131

Average, Total, and Marginal Revenue
TR

D = MR = AR = P

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Pop Quiz For a purely competitive seller, price equals: A. Average revenue. B. Marginal revenue. C. Total revenue divided by output. D. All of these.

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Pop Quiz
For a purely competitive firm total revenue: A. is price times quantity sold. B. increases by a constant absolute amount as output expands. C. graphs as a straight up sloping line from the origin. D. has all of these characteristics.
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Profit Maximization
The goal of a competitive firm is to maximize profit. What output to produce in order to maximize profits or minimize losses? Profit maximization can be shown in two ways: (a) Total Approach

(b) Marginal Approach
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Profit Maximization: Total Approach
Assume Price = $131
(1) Total Product (Output) (Q) (2) Total Fixed Cost (TFC) (3) Total Variable Costs (TVC) (4) Total Cost (TC) (5) Total Revenue (TR) (6) Profit (+) or Loss (-)

0 1 2

$100 100 100

$0 90 170

$100 190 270

$0 131 262

$-100 -59 -8

3
4 5

100
100 100

240
300 370

340
400 470

393
524 655

+53
+124 +185

6
7 8

100
100 100

450
540 650

550
640 750

786
917 1048

+236
+277 +298

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10
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100
100

780
930

880
1030

1179
1310

+299
+280 15

Profit Maximization: Total Approach
Total Revenue and Total Cost
$1800 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 0 $500 400 300 200 100 0

Break-Even Point (Normal Profit) Total Revenue, (TR) Maximum Economic Profit $299 Total Cost, (TC)

Break-Even Point (Normal Profit)
1 2 3 4 5 6 7 8 9 10 11 12 13 14

Profit is maximized when the difference between TR and TC is at the largest!
Quantity Demanded (Sold)

Total Economic Profit

Total Economic Profit
1 2 3 4 5 6 7 8

$299

9 10 11 12 13 14

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