Perfect Competition 1. Many buyers and sellers. 2. All the products are identical (homogeneous). 3. All firms are price takers. 4. There are NO barriers to entry. 5. There is perfect information.

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P P S P D Q Q Q Are there any questions? Because if there are, then we’re in trouble. The industry/market graph is simple supply and demand. The price charged in the market and the quantity produced are where supply and demand meet.

P P S P D Q Q Q The industry/market P and Q are printed with capital letters “P” and “Q” The individual firm’s graph is going to be a little more difficult.

Are there any questions about the individual firm? dollars P S MC ATC P mr A p d (P = MR) B C D mc MR>MC q q2 Q Q q1 Rate of output Are there any questions about the individual firm? You are a farmer in this market. How many units or bushels of corn should you produce? Small q1? Small q? or Small q2?

MR = MC P S P p D Q Q And the answer is-- Small “q” Why? dollars P S MC ATC P mr A p d (P = MR) B C D mc MR>MC Q Q q q2 q1 Rate of output And the answer is-- Small “q” Why? MR = MC Because that’s the “q” where

Let’s look at each line individually so that you dollars P S MC ATC P mr A p d (P = MR) B C D mc MR>MC Q Q q q2 q1 Rate of output Let’s look at each line individually so that you understand more about how individual firms make decisions. Individual firms are price takers and will take the market price.

Notice that P = MR = D and they are also equal to AR. dollars P S MC ATC P mr A p d (P = MR) B C D mc MR>MC Q Q q q2 q1 Rate of output Notice that P = MR = D and they are also equal to AR. The questions is— Why are they all equal to each other? P -- Price MR – Marginal Revenue D -- Demand AR – Average Revenue

Since the firm is a price taker, it must take the market price. dollars P S $2 P $2 p d (P = MR) D Q Q Rate of output Since the firm is a price taker, it must take the market price. Say that the market price for a bushel of corn is $2 per bushel.

TR $2 The Farmer!! P S $2 P $2 p D 1 2 3 4 Q Q For how much does dollars P S $2 P $2 p d (P = MR) D 1 2 3 4 Q Q Rate of output For how much does each firm sell each unit (bushel)? q x P = TR 1 x $2 2 $2 2 x $2 4 What do you get when you multiply P x q? 3 x $2 6 4 x $2 8 TR The Farmer!! Who do we appreciate?

P S P = MR $2 P $2 p D Q Q Anyway, back to what we were talking about. dollars P S P = MR $2 P $2 p D Q Q Rate of output Anyway, back to what we were talking about. q x P = TR MR 1 x $2 2 What is the formula for MR? > $2 2 x $2 4 > $2 3 x $2 6 MR is the change in total revenue / the change in q. > $2 4 x $2 8 P = MR

P S $2 P $2 p D Q Q q x P = TR 1 x $2 2 2 x $2 4 3 x $2 6 4 x $2 8 d dollars P S $2 P $2 p d (P = MR) D Q Q Rate of output q x P = TR 1 x $2 2 2 x $2 4 3 x $2 6 4 x $2 8

At a price of $2 the demand is infinitely elastic. dollars P D = P = MR S $2 P $2 p D 1 Q Q At a price of $2 the demand is infinitely elastic. Buyers can buy one unit (bushel) to an infinite amount of units (bushels) for $2 per bushel. So, now D = P = MR.

P S D = P = MR = AR $2 P $2 p D Q Q How would you figure dollars P S D = P = MR = AR $2 P $2 p D Rate of output Q Q How would you figure out average revenue? q x P = TR AR MR 1 x $2 2 2 2 AR = TR / q 2 x $2 4 2 2 3 x $2 6 2 2 4 x $2 8 2 P = AR = MR

Are there any questions on why D = P = MR = AR? dollars MR DARP P S MR = D = AR = P D = P = MR = AR $2 P $2 p D Rate of output Q Q Are there any questions on why D = P = MR = AR? When I grew up on the farm, we just so happened to live next to another farmer who everyone called, “Mr. Darp.” I never realized until I started teaching economics that people in the community called him that because he knew so much about perfect competition.

When labeling the demand curve for the individual dollars P S MC P p MR=D=AR=P D q Q Q Rate of output When labeling the demand curve for the individual firm, make sure it is labeled—MR=D=AR=P All firms maximize profits by producing where MR = MC.

Now we add the ATC curve to the graph to dollars P S MC ATC p MR=D=AR=P D Q Q q Rate of output Note: MC touches ATC at its lowest point. Now we add the ATC curve to the graph to determine if this firm is earning an economic profit, an economic loss, or breaking even.

Whenever the P is above ATC at the profit- dollars P S MC ATC p MR=D=AR=P ATC D Q Q q Rate of output Whenever the P is above ATC at the profit- maximizing quantity (q), then the firm is earning a profit. In this situation the P is above ATC at profit- maximizing quantity (q).

dollars P S Economic profit MC ATC A p A p MR=D=AR=P B C D x Q Q q q Rate of output Since the P is above ATC at the profit-maximizing output q, the firm is earning an economic profit. What is the formula for total revenue? P x q Then P x q will give you the total revenue of: TR = 0, P, A, q

ATC x q P S p D Q Q x q What is the formula for total costs? dollars P S Economic profit MC ATC A p MR=D=AR=P B B C C D Q Q x q q Rate of output ATC x q What is the formula for total costs? Then P x ATC will give you the total costs of: TC = 0, B, C, q The TR (0, P, A, q) is larger than the TC (0, B, C, q). Since TR > TC, the firm is earning economic profit. Economic Profit = B, P, A, C

In the LONG RUN, when individuals see that dollars P S MC ATC P S1 A p Economic profit P1 B C MR1=D1=AR1=P1 D q Q Q1 q1 Q Rate of output In the LONG RUN, when individuals see that the firms are earning economic profits (above normal rates of return), more firms will ENTER the market causing the industry/market supply curve to shift to the right. Industry P goes down; Industry Q goes up; Firms’ quantities go down.

Corn Farming

On your graph, show the original quantity that http://www.apsnet.org/online/feature/BtCorn/Images/healthy%20ear.JPG MC ATC S A B P P0 = MR P0 AVC P1 P1 C P2 D P3 D1 q1 Q1 Q On your graph, show the original quantity that the individual firm should produce.

Since the individual firm is a price taker, it will MC ATC S A B P P0 = MR P0 AVC P1 P1 C P2 D P3 D1 q1 Q1 Q Since the individual firm is a price taker, it will take the market price.

The firm will maximize profits where MR = MC. http://www.apsnet.org/online/feature/BtCorn/Images/healthy%20ear.JPG MC ATC S A B P P0 = MR P0 AVC P1 P1 C P2 D P3 D1 q1 Q1 Q The firm will maximize profits where MR = MC.

The individual firm will produce q0 units. http://www.apsnet.org/online/feature/BtCorn/Images/healthy%20ear.JPG MC ATC S A B P P0 = MR P0 AVC P1 P1 C P2 D P3 D1 q1 q0 Q1 Q The individual firm will produce q0 units.

As you well know, not all things are held constant (ceteris paribus). Research finds that eating corn causes …

What do you think is going to happen to the market for corn if it causes gas?

IT DEPENDS!

There could be National Gas Passing Contests. There could be best selling books written about the advantages of farting, such as--

Let’s say that gas is bad for the corn market. MC S ATC S A B P P0 = MR P0 AVC P1 P1 C P2 D P3 D1 D1 q1 q0 Q1 Q causing the price to go down and the quantity to go down. Demand will decrease in the market,

Since the firm is a price taker, it will take the new market price. MC ATC S A B P P0 = MR P0 AVC P1 P1 C P2 D P3 D1 D1 q1 q0 Q1 Q Since the firm is a price taker, it will take the new market price. It will produce where the new MR = MC and produce q1 units.

New research finds that corn causes irreparable Intestinal damage:

As corn causes damage, what happens to the market for corn? MC ATC S A B P P0 = MR P0 AVC P1 P1 C P2 D P3 D1 q1 q0 Q1 Q As corn causes damage, what happens to the market for corn?

Demand decreases in the market causing the http://www.proctolog.ru/images/hemorrhoids.jpg MC ATC S A B P P0 = MR P0 AVC P1 P1 C P2 P2 D P3 D1 D2 q1 q0 Q2 Q1 Q Demand decreases in the market causing the market price to go down and the quantity to go down.

Since the individual firm is a price taker, it will MC ATC S A B P P0 = MR P0 AVC P1 P1 C P2 P2 = MR2 P2 D P3 D1 D2 q1 q0 Q2 Q1 Q Since the individual firm is a price taker, it will take the market price.

The firm will produce where MR2 = MC and produce quantity q2. ATC S A B P P0 = MR P0 AVC P1 P1 C P2 P2 = MR2 P2 D P3 D1 D2 q2 q1 q0 Q2 Q1 Q The firm will produce where MR2 = MC and produce quantity q2.

Newer research shows that corn-- Rots your teeth

MC S P P P1 P1 P2 P2 D P3 P3 D1 D2 q D3 ATC AVC E F C B A D q2 q1 Q3 MR = D P P1 D P1 P2 G P2 D P3 P3 D1 D2 D3 q2 q q1 Q3 Q2 Q1 Q

1996 Microeconomics Question 3

3. Assume that in a perfectly competitive market, a firm’s costs and revenues are Marginal cost = average variable cost at $20 Marginal cost = average total cost at $30 Marginal cost = average revenue at $25 (a) How will this firm determine the profit maximizing level of output? (b) What price will this firm charge? Explain how the firm determined this price. (c ) Should this firm produce in the short run? Why or why not? (d) Will this firm earn a profit or incur a loss? Why?

Marginal cost = average variable cost at $20 Marginal cost = average total cost at $30 Marginal cost = average revenue at $25 ATC MC $30 MR=D=AR=P $25 AVC $20

(a) How will this firm determine the profit maximizing level of output? ATC MC $30 MR=D=AR=P $25 AVC $20 q This firm will produce where MR = MC.

(b) What price will this firm charge? Explain how the firm determined this price. ATC MC $30 MR=D=AR=P $25 AVC $20 q The price charge = $25. The firm will charge this price because it is a price taker and will take the market price.

(c ) Should this firm produce in the short run? Why or why not? ATC MC $30 MR=D=AR=P $25 AVC $20 q Yes, this firm should continue to produce in the short run because the P > AVC or because the TR > TVC.

(d) Will this firm earn a profit or incur a loss? Why? ATC MC $30 MR=D=AR=P $25 AVC $20 q This firm will incur a loss because the P < ATC at the profit maximizing q or TC > TR.

Funny Answers

This firm should pack it all in and go home. It’s what the book says. Please grade this fairly—I love you, man! Since the AVC = $20 and the ATC = $30 And the AFC = $10, the firm will charge $25. The firm will determine the profit maximizing level of output by hours of research. They will go on a field trip asking consumers what price they would pay.

If they don’t produce in the short run, there won’t be a long run. It will make negative economic profits and that just wouldn’t be peachy. To find the price of MR = MC, the operator should move their finger up to the MR = MC. Please give me credit—Please! I am really nice. Graphs not drawn to scale.

The firm will incur a loss. Too much money is brought in. Profit is a natural cost of doing business. Add AR = $25 plus TC = $30 plus VC = $20 for a total of $75 and divide by 3 = $25. See Mr. Darp run, run Darp, run. Run in the short run; run in the long run. This firm will incur a loss because I said so. In other words, the firm is doomed.

Like a good economics teacher, he just confused the hell out of us. I plead the 5th. It shouldn’t shut down due to the fact that its average revenue at $25 equals its ATC at $30. 4-page letter—driving, smoking pot, drinking, getting pulled over by the police, getting in a car accident, dating three girls at once.

MY ALL-TIME FAVORITE! Go to page 11. Go to page 4. Go to page 8. On page 8 it says, “You idiot! Do you always do everything some punk kid tells you to do”?