Chapter Eight Competitive Firms and Markets

© 2007 Pearson Addison-Wesley. All rights reserved.8–2 Application (Page 223) Breaking Even on Christmas Trees

© 2007 Pearson Addison-Wesley. All rights reserved.8–3 Figure 8.1 Maximizing Profit  π > 0  π < 0 q* Quantity,q, Units per day Profit 1 1 π* 0 π, Profit

© 2007 Pearson Addison-Wesley. All rights reserved.8–4 Figure 8.2 How a Competitive Firm Maximizes Profit q, Thousand metric tons of lime per year 2,272 4, , – (a) 1 MR = 8 π* = $426,000 π* π( q ) Cost, C Revenue e q, Thousand metric tons of lime per year (b) p = MR π* = $426,000 AC MC

© 2007 Pearson Addison-Wesley. All rights reserved.8–5 Page 229 Solved Problem 8.1 q 1 q 2 e 1   e 2 q, Units per year p p = MR AC 1 MC 1 2 = 1 +  AC 2 = 1 +  2 ( q 2 ) 1 ( q 1 ) A B

© 2007 Pearson Addison-Wesley. All rights reserved.8–6 Figure 8.3 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

© 2007 Pearson Addison-Wesley. All rights reserved.8–7 Figure 8.4 How the Profit-Maximizing Quantity Varies with Price q 3 = 215 q 4 = 285 q 1 = 50 q 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

© 2007 Pearson Addison-Wesley. All rights reserved.8–8 Figure 8.5 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

© 2007 Pearson Addison-Wesley. All rights reserved.8–9 Figure 8.6 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

© 2007 Pearson Addison-Wesley. All rights reserved.8–10 Figure 8.7 Short-Run Market Supply with Two Different Lime Firms S 2 S S 1 0 q, Q, Thousand metric tons of lime per year

© 2007 Pearson Addison-Wesley. All rights reserved.8–11 Figure 8.8 Short-Run Competitive Equilibrium in the Lime Market q 1 = 215 q 2 = 50 Q 1 = 1,075 Q 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

© 2007 Pearson Addison-Wesley. All rights reserved.8–12 Page 238 Solved Problem 8.3   e 1 e 2 p 2 p 1 q 2 q 1 q, Units per year Q 2 = nq 2 Q 1 = 1 q, Units per year AVC AVC +  MC +  S 1 +  S +  S 1 S D p 1 +  (a) Firm E 1 E 2 (b) Market  

© 2007 Pearson Addison-Wesley. All rights reserved.8–13 Figure 8.9 The Short-Run and Long-Run Supply Curves q, Units per year p SRAC LRMC LRAC SRMC SRAVC B A S SR S LR

© 2007 Pearson Addison-Wesley. All rights reserved.8–14 Table 8.1 Average Annual Entry and Exit Rates in Selected U.S. Industries, 1989–1996

© 2007 Pearson Addison-Wesley. All rights reserved.8–15 Figure 8.10 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 LRAC LRMC (a) Firm q, Hundred metric tons of oil per year 10 S 1 0

© 2007 Pearson Addison-Wesley. All rights reserved.8–16 Application (Page 246) Upward-Sloping Long-Run Supply Curve for Cotton Iran United States Nicaragua, Turkey Brazil Australia Argentina Pakistan Cotton, billion kg per year S

© 2007 Pearson Addison-Wesley. All rights reserved.8–17 Figure 8.11 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 year Q p 1 p 2 e 2 e 1 E 2 S E 1 (a) Firm(b) Market AC 2 MC 2 1 AC 1

© 2007 Pearson Addison-Wesley. All rights reserved.8–18 Figure 8.12 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 year Q p 1 p 2 e 2 e 1 E 2 S E 1 (a) Firm(b) Market AC 2 MC 2 1 AC 1

© 2007 Pearson Addison-Wesley. All rights reserved.8–19 Figure 8.13 Excess or Residual Supply Curve Q,Million metric tons per year (b)World Supply and Rest ofWorld Demand S D o Q,Million metric tons per year (a) Japan’s Excess Supply Curve S r 048

© 2007 Pearson Addison-Wesley. All rights reserved.8–20 Page 252 Solved Problem 8.4 p 1 p 2 S Q,Billion gallons of gasoline per day (b) Special-Blend Gasoline D 1 D 3 D 2 p 1 S Q,Billion gallons of gasoline per day (a) Regular Gasoline D 1 D 2

© 2007 Pearson Addison-Wesley. All rights reserved.8–21 Figure 8.14 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

© 2007 Pearson Addison-Wesley. All rights reserved.8–22 Page 254 Solved Problem 8.5 q 1 q 2 Q 1 = n 1 q 1 Q 2 = n 2 q 2 q, Units per year Q 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

© 2007 Pearson Addison-Wesley. All rights reserved.8–23 Figure 8.15 Rent q * π*= Rent q, Bushels of tomatoes per year AC (including rent) AC (excluding rent) MC p *