Perfectly Competitive Markets Microeconomics

Put mod 57 stuff here  Consumer Surplus is ….  when a consumer pays of price LESS than their maximum willingness to pay.  Willingness to pay is …..  Maximum price a consumer would pay for a particular good or service.

Production and Profits  OptImal Output Rule is ….  Produce the amount where  MR = MC  PROFIT WILL BE MAXIMIZED

Production and Profits  Melanie’s Melons  Produce watermelons in a perfectly competitive market  P = $8  P = TR = $8 because  Perfectly competitive firms are price-takers  Each time a melon is sold – TR rises by $8

Melanie’s Melons Revenue and Short Run Costs QP = MRTR = P*QTVCTCMC 0$8$0 $ $

Production and Profits  Two Things About P = MR Line  1. Average Revenue (AR) = TR/Q  2. P = MR = AR = D curve A horizontal demand curve has what type of elasticity? Perfectly elastic

When is Production Profitable? Economic Profit () = TR - TC TR > TC means TT > 0 TR < TC means TT < 0 TR = TC means TT = 0

Melanie’s Melons Revenue and Short Run Costs QP = MRTR = P*QTVCTCMC 0$8$0 $ $

When is Production Profitable? Economic Profit () = TR – TC Profit on a Per Unit Level TT/Q = TR/Q – TC/Q Revenue per unit = AR = P Cost per unit = ATC SOOOOOOO TT/Q = P – ATC TT = (P – ATC)*Q P > ATC means TT > 0 P < ATC means TT < 0 P = ATC means TT = 0

Melanie’s Melons Revenue and Short Run Costs QP = MRATC 0$ $

Interpreting Perfectly Competitive Market Graphs  TT = (P – ATC)*Q  Profit is a rectangle – A = L*W  Length - MR = MC (output)  Width – P – (difference between MR P and ATC P)  Profit – P > ATC  Loss – P < ATC  Breakeven – P = MR = MC = ATC

Short-Run Production Decisions  Shut Down Decision  Q = 0  TR < TVC or P < AVC  TT = (TR – TVC) – TFC  When Q = 0: TR = 0 and TVC = 0 SOOO  TT = (0 – 0) – TFC = -TFC  LOSSES = TFC

Short-Run Production Decisions  Shut Down Decision  Coffee Shop  P = $2  TFC = $10  P = MR = MC = $2 at Q = 8; TVC = $18  TT = (TR – TVC) – TFC  TT = ($2 * 8 - $18) - $10 = $-12  She should shut down when: TT = (0 – 0) - $10 = $-10

Short-Run Production Decisions  Shut Down Decision  TR < TVC  P < AVC  Refer to Shut Down Graph  P > point A – produce where P = MC  P < point A – supply nothing  ABOVE POINT A - MC is the S curve

Short-Run Industry Supply Curve  In Perfect Competition  Many small firms producing an identical product  Assume each firms cost curves are identical  MC curve = short-run S curve  Output level where P = MR = MC  P Output along MC curve

Short-Run Industry Supply Curve  In Perfect Competition  The OUTPUT supplied in the market is ….  THE SUMMATION OF EACH FIRMS OUPUT Q Supplied for One Firm PSupplied $ Q Supplied for the Market PSupplied $ identical firms in the market

Long-Run Industry Supply Curve  Long-run Adjustment  Profits for firms exist in the short run.  New firms enter the market.  More producers shifts the SR market S curve to the right.  P falls in the market.  Each firm produces less along the MC curve.  Profits for each firm fall.  Entry into the market stops when P = break-even point.

Long-Run Industry Supply Curve  Cost Industry Variations  Constant Cost Industry  New firms entering DOESN’T affect the input costs.  LRS is (horizontal)  Increasing Cost Industry  New firms entering INCREASES the input costs.  LRS is (rising)  Decreasing Cost Industry  New firms entering DECREASES the input costs.  LRS is (falling)