Chapter 8 Competitive Firms and Markets

© 2004 Pearson Addison-Wesley. All rights reserved8-2 Figure 8.1 Residual Demand Curve q, Thousand metal chairs per year Q, Thousand metal chairs per year S o D (a) Firm(b) Market D r p, $ per metal chair

© 2004 Pearson Addison-Wesley. All rights reserved8-3 Figure 8.2 Maximizing Profit  π > 0  π < 0 q*Quantity,q, Units per day Profit 1 1 π* 0 π, Profit

© 2004 Pearson Addison-Wesley. All rights reserved8-4 Figure 8.3 How a Competitive Firm Maximizes Profit q, Thousand metric tons of li me per year 2,272 4, , – (a) 1 MR = 8 π* = $426,000 π* π(q) Cost,CRevenue e q, Thousand metric tons of lime per year (b) p =MR π* = $426,000 AC MC Cost, revenue, Thousand $ p, $ per ton

© 2004 Pearson Addison-Wesley. All rights reserved8-5 Page 240 Solved Problem 8.1 q 1 q 2 e 1 t t e 2 q, Units per year p p =MR AC 1 MC 1 2 = 1 + t AC 2 = 1 + t 2 (q 2 ) 1 (q 1 ) A B p, $ per unit

© 2004 Pearson Addison-Wesley. All rights reserved8-6 Figure 8.4 The Short-Run Shutdown Decision q, Thousand metric tons of lime per year AVC AC MC p a e b A = $62,000 B = $36,000 p, $ per ton

© 2004 Pearson Addison-Wesley. All rights reserved8-7 Figure 8.5 How the Profit-Maximizing Quantity Varies with Price q 3 = 215q 4 = 285q 1 = 50q 2 =140 e 1 e 2 e 3 e 4 p 2 p 1 p 3 p 4 0 q, Thousand metric tons of lime per year AVC MC AC S p, $ per ton

© 2004 Pearson Addison-Wesley. All rights reserved8-8 Figure 8.6 Effect of an Increase in the Cost of Materials on the Vegetable Oil Supply Curve e 1 e q, Hundred metric tons of oil per year AVC 1 MC 1 AVC 2 S 1 S 2 MC 2 p p, $ per ton

© 2004 Pearson Addison-Wesley. All rights reserved8-9 Figure 8.7 Short-Run Market Supply with Five Identical Lime Firms q, Thousand metric tons of lime per year AVC (a) Firm MC Q, Thousand metric tons of lime per year (b) Market S 3 S 4 S 5 S 2 S 1 S 1 p, $ per ton

© 2004 Pearson Addison-Wesley. All rights reserved8-10 Figure 8.8 Short-Run Market Supply with Two Different Lime Firms S 2 S S 1 0 q,Q, Thousand metric tons of lime per year p, $ per ton

© 2004 Pearson Addison-Wesley. All rights reserved8-11 Figure 8.9 Short-Run Competitive Equilibrium in the Lime Market q 1 = 215q 2 = 50Q 1 = 1,075Q 2 = 2500 q, Thousand metric tons of lime per year Q, Thousand metric tons of lime per year e 2 e 1 E 2 S E 1 (a) Firm(b) Market AVC AC D 2 S 1 D 1 A C B p, $ per ton

© 2004 Pearson Addison-Wesley. All rights reserved8-12 Figure 8.10 Short-Run Effect of a Specific Tax in the Lime Market t t e 1 e 2 p 2 p 1 q 2 q 1 q, Units per yearQ 2 = nq 2 Q 1 = 1 q, Units per year AVC AVC + t MC + t S 1 + t S + t S 1 S D p 1 + t (a) Firm E 1 E 2 (b) Market t t p, $ per unit

© 2004 Pearson Addison-Wesley. All rights reserved8-13 Figure 8.11 The Short-Run and Long-Run Supply Curves 50110q, Units per year p SRAC LRMC LRAC SRMC SRAVC B A S SR S LR p, $ per unit

© 2004 Pearson Addison-Wesley. All rights reserved8-14 Table 8.1 Entry and Exit Rates in Selected U.S. Industries,

© 2004 Pearson Addison-Wesley. All rights reserved8-15 Figure 8.12 Long-Run Firm and Market Supply with Identical Vegetable Oil Firms 150 LRAC LRMC (a) Firm q, Hundred metric tons of oil per year 10 S 1 (b) Market Q, Hundred metric tons of oil per year Long-run market supply p, $ per unit

© 2004 Pearson Addison-Wesley. All rights reserved8-16 Figure 8.12a Long-Run Firm and Market Supply with Identical Vegetable Oil Firms 150 LRAC LRMC (a) Firm q, Hundred metric tons of oil per year 10 S 1 0 p, $ per unit

© 2004 Pearson Addison-Wesley. All rights reserved8-17 Figure 8.12b Long-Run Firm and Market Supply with Identical Vegetable Oil Firms (b) Market Q, Hundred metric tons of oil per year Long-run market supply 10 0 p, $ per unit

© 2004 Pearson Addison-Wesley. All rights reserved8-18 Application (Page 257) Upward-Sloping Long-Run Supply Curve for Cotton Iran United States Nicaragua, Turkey Brazil Australia Argentina Pakistan Cotton, billion kg per year S Price, $ per kg

© 2004 Pearson Addison-Wesley. All rights reserved8-19 Figure 8.13 Long-Run Market Supply in an Increasing-Cost Market q 1 q 2 Q 1 =n 1 q 1 Q 2 =n 2 q 2 q, Units per yearQ p 1 p 2 e 2 e 1 E 2 S E 1 (a) Firm(b) Market AC 2 MC 2 1 AC 1 p, $ per unit

© 2004 Pearson Addison-Wesley. All rights reserved8-20 Figure 8.14 Long-Run Market Supply in a Decreasing-Cost Market q 1 q 2 Q 1 =n 1 q 1 Q 2 =n 2 q 2 q, Units per yearQ p 1 p 2 e 2 e 1 E 2 S E 1 (a) Firm(b) Market AC 2 MC 2 1 AC 1 p, $ per unit

© 2004 Pearson Addison-Wesley. All rights reserved8-21 Figure 8.15 The Short-Run and Long-Run Equilibria for Vegetable Oil e f 1 f q, Hundred metric tons of oil per year MC AVC (a) Firm AC F 1 E 1 F 2 E 2 1,50002,0003,3003,600 Q, Hundred metric tons of oil per year (b) Market D 1 S SR S LR D 2 p, $ per ton

© 2004 Pearson Addison-Wesley. All rights reserved8-22 Page 263 Solved Problem 8.3 q 1 q 2 Q 1 =n 1 q 1 Q 2 =n 2 q 2 q, Units per yearQ p 1 p 2 p 1 p 2 e 2 e 1 E 2 S 2 S 1 D E 1 (a) Firm (b) Market MC AC 1 2 = 1 ++ /q p, $ per unit

© 2004 Pearson Addison-Wesley. All rights reserved8-23 Figure 8.16 Rent q* π*= Rent q, Bushels of tomatoes per year AC (including rent) AC (excluding rent) MC p* p, $ per bushel