Perfect Competition Econ 10 Holmes Road Map Costs Graphs Definition Tables.

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Presentation transcript:

Perfect Competition Econ 10 Holmes

Road Map Costs Graphs Definition Tables

Definition Perfect Competition is the Industry Structure characterized by many, many firms each firm has no independent effect on the market price (price taker) homogeneous goods perfectly elastic demand (for a particular firm’s good) Common examples: produce stand

The demand for a particular firm’s good Market (Tomatoes) S D d Firm (Farmer Joe’s Tomatoes) Qq P $

Road Map Costs Graphs Definition Tables

Perfect Competition: Generic Cost Curves Q $ AVC ATC MC

Perfect Competition: Condition I: P>ATC Q $ AVC ATC MC D Where does P=MC?

Perfect Competition: Condition I: P>ATC Q $ AVC ATC MC D

Perfect Competition: Condition I: P>ATC Q $ AVC ATC MC D TR TC PROFIT P>ATC==> Profit P>AVC==> Stay Open

Perfect Competition: Condition II: AVC< P < ATC Q $ AVC ATC MC D Where does P=MC?

Perfect Competition: Condition II: AVC< P < ATC Q $ AVC ATC MC D

Perfect Competition: Condition II: AVC< P < ATC Q $ AVC ATC MC D LOSS TVC TFC TC P Loss P>AVC==> Stay Open

Perfect Competition: Condition III: P<AVC Q $ AVC ATC MC D Where does P=MC?

Perfect Competition: Condition III: P<AVC Q $ AVC ATC MC D Where does P=MC?

Perfect Competition: Condition III: P<AVC Q $ AVC ATC MC D TC TVC TFC LOSS if firm produces P Loss P Better to close

Two ways to figure “I should shut down” Continue to operate if….

Road Map Costs Graphs Definition Tables

Remember when we did all those cost tables? W=$12, TFC=$15 Now, in order to determine where the firm should operate, need to know... P=$4 Where does P=MC? A: Q=17 Profit = TR- TC = $4 * = = 5 Firm should (obviously) not shut down.

Tables Condition I W=$12, TFC=$15, P=$4 Note that (indeed, just as we claimed) profit is maximized at P=MC. Why is here better than here? Answer: normal profit/opp cost

Perfect Competition: Condition I: P>ATC Q $ AVC ATC MC D TR TC PROFIT P>ATC==> Profit P>AVC==> Stay Open

Tables Condition II W=$12, TFC=$15, P = $3 Profit is maximized at the largest Q where P=MC. Compare here and here (P=MC at both) Suppose P = $3 P=MC at Q=14==> profit = = -9 (loss of 9) but stay open (9<15)

Perfect Competition: Condition II: AVC< P < ATC Q $ AVC ATC MC D TC TR LOSS P Loss P>AVC==> Stay Open

Tables Condition III W=$12, TFC=$15, P = $2 Suppose P = $2 P=MC at Q=10==> profit = = -19 (loss of 19) Now should close (19>15) Note that 1. Loss at Q>0 where P=MC > TFC 2. TR<TVC

Perfect Competition: Condition III: P<AVC Q $ AVC ATC MC D TC TR LOSS P Loss P Better to close

Road Map Costs Graphs Definition Tables

Your Turn Wage = $24, TFC = $60, P =$12 What is best Q>0? Profit/loss at this Q? Should firm shut down? Sketch the graph. Wage = $30, TFC=$60, P=$3 What if TFC = $110? What does this do to the best Q>0 and the shutdown decision?