Pure Competition P = MC CHAPTER TWENTY-THREE Copyright McGraw-Hill, Inc. 1999

Market Structure Continuum PureCompetition PureMonopoly MonopolisticCompetition Oligopoly Copyright McGraw-Hill, Inc Four Market Models Pure Competition:

Market Structure Continuum PureCompetition PureMonopoly MonopolisticCompetition Oligopoly Very Large Numbers Very Large Numbers Copyright McGraw-Hill, Inc Four Market Models Pure Competition:

Market Structure Continuum PureCompetition PureMonopoly MonopolisticCompetition Oligopoly Very Large Numbers Very Large Numbers Standardized Product Standardized Product Copyright McGraw-Hill, Inc Four Market Models Pure Competition:

Market Structure Continuum PureCompetition PureMonopoly MonopolisticCompetition Oligopoly Very Large Numbers Very Large Numbers Standardized Product Standardized Product “Price Taker” “Price Taker” Copyright McGraw-Hill, Inc Four Market Models Pure Competition:

Four Market Models Market Structure Continuum PureCompetition PureMonopoly MonopolisticCompetition Oligopoly Pure Competition: Very Large Numbers Very Large Numbers Standardized Product Standardized Product “Price Taker” “Price Taker” Free Entry and Exit Free Entry and Exit Copyright McGraw-Hill, Inc. 1999

Demand to a Competitive Seller Perfectly Elastic Demand Copyright McGraw-Hill, Inc In a perfectly competitive market, each individual firm does not have enough power to limit supply in order to raise price. If they charge a higher price no one will buy it from them.

Demand to a Competitive Seller Perfectly Elastic Demand Price Taker Role Copyright McGraw-Hill, Inc. 1999

Demand to a Competitive Seller Perfectly Elastic Demand Price Taker Role Total Revenue Copyright McGraw-Hill, Inc. 1999

Demand to a Competitive Seller Perfectly Elastic Demand Price Taker Role Total Revenue Average Revenue Copyright McGraw-Hill, Inc. 1999

Demand to a Competitive Seller Perfectly Elastic Demand Price Taker Role Total Revenue Average Revenue Marginal Revenue Graphically... Copyright McGraw-Hill, Inc Both of these equal demand which equals price – MR. DARP

ProductPrice(AverageRevenue) TotalRevenueMarginalRevenue $131 0 $ 0 ]QuantityDemanded(Sold) Copyright McGraw-Hill, Inc. 1999

$ $ $131 ] Copyright McGraw-Hill, Inc ProductPrice(AverageRevenue) TotalRevenueMarginalRevenue QuantityDemanded(Sold)

$ $ ]$ ] Copyright McGraw-Hill, Inc ProductPrice(AverageRevenue) TotalRevenueMarginalRevenue QuantityDemanded(Sold)

$ $ ]$ ] ] Copyright McGraw-Hill, Inc ProductPrice(AverageRevenue) TotalRevenueMarginalRevenue QuantityDemanded(Sold)

$ $ ]$ ] ] ] Copyright McGraw-Hill, Inc ProductPrice(AverageRevenue) TotalRevenueMarginalRevenue QuantityDemanded(Sold)

$ $ ]$ ] ] ] ] ] ] ] ] ] Copyright McGraw-Hill, Inc ProductPrice(AverageRevenue) TotalRevenueMarginalRevenue QuantityDemanded(Sold)

Perfect Competition Demand, Marginal Revenue, and Total Revenue Price, average and marginal revenue, total revenue (dollars) P Quantity Demanded (sold) Copyright McGraw-Hill, Inc. 1999

Perfect Competition Demand, Marginal Revenue, and Total Revenue D = MR P Copyright McGraw-Hill, Inc Price, average and marginal revenue, total revenue (dollars) Quantity Demanded (sold) This is not market demand but demand for the individual firm. Because there are so many producers of an identical product, the firm in a purely competitive industry must take the going market price.

Perfect Competition Demand, Marginal Revenue, and Total Revenue TR D = MR P Copyright McGraw-Hill, Inc Price, average and marginal revenue, total revenue (dollars) Quantity Demanded (sold)

Short Run Profit Maximization Two Approaches... Copyright McGraw-Hill, Inc. 1999

Short Run Profit Maximization Two Approaches... Total-Revenue-Total Cost Approach Copyright McGraw-Hill, Inc. 1999

Short Run Profit Maximization Two Approaches... Total-Revenue-Total Cost Approach Should the firm produce? Copyright McGraw-Hill, Inc. 1999

Short Run Profit Maximization Two Approaches... Total-Revenue-Total Cost Approach Should the firm produce? What quantity should be produced? Copyright McGraw-Hill, Inc. 1999

Short Run Profit Maximization Two Approaches... Total-Revenue-Total Cost Approach Should the firm produce? What quantity should be produced? What profit or loss will be realized? Copyright McGraw-Hill, Inc. 1999

Short Run Profit Maximization Two Approaches... Total-Revenue-Total Cost Approach Produce in the short-run if it can realize Should the firm produce? What quantity should be produced? What profit or loss will be realized? Copyright McGraw-Hill, Inc. 1999

Short Run Profit Maximization Two Approaches... Total-Revenue-Total Cost Approach Produce in the short-run if it can realize 1- A profit (or) Should the firm produce? What quantity should be produced? What profit or loss will be realized? Copyright McGraw-Hill, Inc. 1999

Short Run Profit Maximization Two Approaches... Total-Revenue-Total Cost Approach Produce in the short-run if it can realize 1- A profit (or) 2- A loss less than its fixed costs Should the firm produce? What quantity should be produced? What profit or loss will be realized? Copyright McGraw-Hill, Inc. 1999

TotalCostTotalProduct TotalFixedCostTotalVariableCost Total-Revenue-Total Cost Approach

Copyright McGraw-Hill, Inc TotalCostTotalProduct TotalFixedCostTotalVariableCost Total-Revenue-Total Cost Approach

$ 100 $ Copyright McGraw-Hill, Inc TotalCostTotalProduct TotalFixedCostTotalVariableCost Total-Revenue-Total Cost Approach

$ 100 $ $ Copyright McGraw-Hill, Inc TotalCostTotalProduct TotalFixedCostTotalVariableCost Total-Revenue-Total Cost Approach

$ 100 $ $ $ Copyright McGraw-Hill, Inc TotalCostTotalProduct TotalFixedCostTotalVariableCost Total-Revenue-Total Cost Approach

$ 100 $ $ $ Price: $71 Copyright McGraw-Hill, Inc TotalCostTotalProduct TotalFixedCostTotalVariableCost TotalRevenue Profit Total-Revenue-Total Cost Approach

$ $ 100 $ $ $ Price: $71 Copyright McGraw-Hill, Inc TotalCostTotalProduct TotalFixedCostTotalVariableCost TotalRevenue Profit Total-Revenue-Total Cost Approach

TotalCost TotalProduct TotalFixedCostTotalVariableCost TotalRevenue Profit $ 100 $ $ $ Price: $71 - $100 - $ Total-Revenue-Total Cost Approach $ Copyright McGraw-Hill, Inc. 1999

TotalCost TotalProduct TotalFixedCostTotalVariableCost TotalRevenue Profit $ 100 $ $ $ Price: $71 - $100 - $ Total-Revenue-Total Cost Approach $ Copyright McGraw-Hill, Inc No profit and the loss is greater than its fixed costs Shut Down!

TotalCost TotalProduct TotalFixedCostTotalVariableCost TotalRevenue Profit $ 100 $ $ $ Price: $71 - $100 - $ Total-Revenue-Total Cost Approach $ Copyright McGraw-Hill, Inc No profit and the loss is greater than its fixed costs Shut Down! How about a higher price?

$ $ 100 $ $ $ Price: $81 - $100 - $ Copyright McGraw-Hill, Inc TotalCostTotalProduct TotalFixedCostTotalVariableCost TotalRevenue Profit Total-Revenue-Total Cost Approach

$ $ 100 $ $ $ Price: $81 - $100 - $ Still no profit but losses are less than the firm’s fixed costs Copyright McGraw-Hill, Inc TotalCostTotalProduct TotalFixedCostTotalVariableCost TotalRevenue Profit Total-Revenue-Total Cost Approach

TotalCostTotalProduct TotalFixedCostTotalVariableCost TotalRevenue Profit $ $ 100 $ $ $ Price: $81 - $100 - $ Keep producing in the short-run: Look at a higher price Copyright McGraw-Hill, Inc Still no profit but losses are less than the firm’s fixed costs

TotalCostTotalProduct TotalFixedCostTotalVariableCost TotalRevenue Profit Total-Revenue-Total Cost Approach $ $ 100 $ $ $ Price: $131 - $100 - $ Can you see the profit maximization? Copyright McGraw-Hill, Inc. 1999

$ $ 100 $ $ $ Price: $131 - $100 - $ Copyright McGraw-Hill, Inc TotalCostTotalProduct TotalFixedCostTotalVariableCost TotalRevenue Profit Total-Revenue-Total Cost Approach

TotalCostTotalProduct TotalFixedCostTotalVariableCost TotalRevenue Profit $ $ 100 $ $ $ Price: $131 - $100 - $ Graphically... Copyright McGraw-Hill, Inc. 1999

Total-Revenue-Total Cost Approach 1,7001,6001,5001,4001,3001,2001,1001, P Total revenue and total costs (dollars) Copyright McGraw-Hill, Inc Q

Total-Revenue-Total Cost Approach 1,7001,6001,5001,4001,3001,2001,1001, P Total revenue and total costs (dollars) TotalRevenue Copyright McGraw-Hill, Inc Q

Total-Revenue-Total Cost Approach 1,7001,6001,5001,4001,3001,2001,1001, P Total revenue and total costs (dollars) TotalRevenue TotalCost Copyright McGraw-Hill, Inc Q

Total-Revenue-Total Cost Approach 1,7001,6001,5001,4001,3001,2001,1001, P Total revenue and total costs (dollars) TotalRevenue TotalCost { MaximumEconomicProfits$299 Break-Even Point (Normal Profit)TR(P=$131) Break-Even Point (Normal Profit) Copyright McGraw-Hill, Inc Q

Marginal Revenue - Marginal Cost Approach Copyright McGraw-Hill, Inc Short Run Profit Maximization Two Approaches... Total-Revenue-Total Cost Approach

Marginal Revenue - Marginal Cost Approach MR = MC Rule Features: Copyright McGraw-Hill, Inc Short Run Profit Maximization Two Approaches... Total-Revenue-Total Cost Approach

Marginal Revenue - Marginal Cost Approach MR = MC Rule Features: MR = MC profit maximization in all markets MR = MC profit maximization in all markets Copyright McGraw-Hill, Inc Short Run Profit Maximization Two Approaches... Total-Revenue-Total Cost Approach

Marginal Revenue - Marginal Cost Approach MR = MC Rule Features: MR = MC profit maximization in all markets MR = MC profit maximization in all markets Competitive markets maximize at P = MC Competitive markets maximize at P = MC Copyright McGraw-Hill, Inc Short Run Profit Maximization Two Approaches... Total-Revenue-Total Cost Approach

Marginal Revenue - Marginal Cost Approach MR = MC Rule Features: MR = MC profit maximization in all markets MR = MC profit maximization in all markets Competitive markets maximize at P = MC Competitive markets maximize at P = MC Firms should produce MR=MC provided Firms should produce MR=MC provided MR (P) > AVC, if not then shut down. Copyright McGraw-Hill, Inc Short Run Profit Maximization Two Approaches... Total-Revenue-Total Cost Approach

Marginal-Revenue-Marginal Cost Approach ] ] ] ] ] ] ] ] ] ] Copyright McGraw-Hill, Inc AverageTotalCost TotalProduct AverageFixedCostAverageVariableCost MarginalCost TotalEconomicProf./Loss Price = MarginalRevenue

Marginal-Revenue-Marginal Cost Approach ] ] ] ] ] ] ] ] ] ] Copyright McGraw-Hill, Inc AverageTotalCost TotalProduct AverageFixedCostAverageVariableCost MarginalCost TotalEconomicProf./Loss Price = MarginalRevenue

Marginal-Revenue-Marginal Cost Approach $ ] ] ] ] ] ] ] ] ] ] Copyright McGraw-Hill, Inc AverageTotalCost TotalProduct AverageFixedCostAverageVariableCost MarginalCost TotalEconomicProf./Loss Price = MarginalRevenue

$100 - $ Marginal-Revenue-Marginal Cost Approach $ ] ] ] ] ] ] ] ] ] ] Copyright McGraw-Hill, Inc AverageTotalCost TotalProduct AverageFixedCostAverageVariableCost MarginalCost TotalEconomicProf./Loss Price = MarginalRevenue

AverageTotalCost TotalProduct AverageFixedCostAverageVariableCost MarginalCost TotalEconomicProf./Loss MarginalRevenue $100 - $ Marginal-Revenue-Marginal Cost Approach $ ] ] ] ] ] ] ] ] ] ] The same profit maximizingresult! Copyright McGraw-Hill, Inc. 1999

AverageTotalCost TotalProduct AverageFixedCostAverageVariableCost MarginalCost TotalEconomicProf./Loss Price = MarginalRevenue $100 - $ Marginal-Revenue-Marginal Cost Approach $ ] ] ] ] ] ] ] ] ] ] Copyright McGraw-Hill, Inc The same profit maximizingresult! Graphically...Graphically...

Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach P Q Copyright McGraw-Hill, Inc. 1999

Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach P Q MR Copyright McGraw-Hill, Inc. 1999

Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach P Q MR AVC Copyright McGraw-Hill, Inc. 1999

Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach P Q MR AVC ATC Copyright McGraw-Hill, Inc. 1999

Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach P Q MC MR AVC ATC Copyright McGraw-Hill, Inc. 1999

Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach P Q MC MR AVC ATC Economic Profit Copyright McGraw-Hill, Inc. 1999

Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach P Q MC MR AVC ATC MR = MC OptimumSolution Copyright McGraw-Hill, Inc Economic Profit

Marginal Revenue - Marginal Cost Approach... to Short-run loss minimization Copyright McGraw-Hill, Inc. 1999

Marginal Revenue - Marginal Cost Approach... to Short-run loss minimization If the price is lowered from $131 to $81 Copyright McGraw-Hill, Inc. 1999

Marginal Revenue - Marginal Cost Approach... to Short-run loss minimization If the price is lowered from $131 to $81 The MR = MC point changes... Copyright McGraw-Hill, Inc. 1999

Marginal-Revenue-Marginal Cost Approach ] ] ] ] ] ] ] ] ] ] Copyright McGraw-Hill, Inc AverageTotalCost TotalProduct AverageFixedCostAverageVariableCost MarginalCost TotalEconomicProf./Loss Price = MarginalRevenue

Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach P Q MC AVC ATC Copyright McGraw-Hill, Inc. 1999

Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach P Q MC MR AVC ATC Copyright McGraw-Hill, Inc To minimize losses always look at the place where MR = MC in the increasing portion of the MC curve.

$ $ 100 $ $ $ Price: $81 - $100 - $ Copyright McGraw-Hill, Inc TotalCostTotalProduct TotalFixedCostTotalVariableCost TotalRevenue Profit Total-Revenue-Total Cost Approach

Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach P Q MC MR AVC ATC Economic Loss Copyright McGraw-Hill, Inc. 1999

Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach P Q MC MR AVC ATC Copyright McGraw-Hill, Inc Economic Loss With economic losses, at what point should the firm shut down operations?

Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach P Q MC MR AVC ATC Copyright McGraw-Hill, Inc When price is inadequate to meet minimum AVC, the firm should shut down Economic Loss

Marginal-Revenue-Marginal Cost Approach ] ] ] ] ] ] ] ] ] ] Copyright McGraw-Hill, Inc AverageTotalCost TotalProduct AverageFixedCostAverageVariableCost MarginalCost TotalEconomicProf./Loss Price = MarginalRevenue

Total revenue and total costs (dollars) Marginal-Revenue-Marginal Cost Approach P Q MC MR AVC ATC Copyright McGraw-Hill, Inc When price is inadequate to meet minimum AVC, the firm should shut down Economic Loss Another use of the marginal cost curve...

P = MC Short - run Supply Curve P Q MC AVC ATC At every price, the MR = MC point changes the quantity being exchanged... Costs and revenues (dollars) Copyright McGraw-Hill, Inc. 1999

P = MC Short - run Supply Curve P Q MC AVC ATC P3P3P3P3 MR 3 Q3Q3Q3Q3 Record the quantity being supplied for each price Costs and revenues (dollars) Copyright McGraw-Hill, Inc. 1999

Marginal-Revenue-Marginal Cost Approach P Q MC AVC ATC MR 2 MR 3 P2P2P2P2 P3P3P3P3 Q2Q2Q2Q2 Q3Q3Q3Q3 At a lower price a lower quantity will be supplied Costs and revenues (dollars) Copyright McGraw-Hill, Inc. 1999

Marginal-Revenue-Marginal Cost Approach P Q MC AVC ATC MR 2 MR 3 MR 4 P2P2P2P2 P3P3P3P3 P4P4P4P4 Q3Q3Q3Q3 Q4Q4Q4Q4 At a higher price a greater quantity will be supplied Q2Q2Q2Q2 Break-even (normal profit) point Costs and revenues (dollars) Copyright McGraw-Hill, Inc. 1999

Marginal-Revenue-Marginal Cost Approach P Q MC AVC ATC MR 2 MR 3 MR 4 MR 5 P2P2P2P2 P3P3P3P3 P4P4P4P4 P5P5P5P5 Q2Q2Q2Q2 Q3Q3Q3Q3 Q4Q4Q4Q4 Q5Q5Q5Q5 Break-even (normal profit) point Costs and revenues (dollars) Copyright McGraw-Hill, Inc. 1999

Q Marginal-Revenue-Marginal Cost Approach P P1P1P1P1 MC MR 1 AVC ATC MR 2 MR 3 MR 4 MR 5 P2P2P2P2 P3P3P3P3 P4P4P4P4 P5P5P5P5 Q2Q2Q2Q2 Q3Q3Q3Q3 Q4Q4Q4Q4 Q5Q5Q5Q5 Break-even (normal profit) point Costs and revenues (dollars) Copyright McGraw-Hill, Inc Firm should not produce unless revenue is at least able to meet AVC

Marginal-Revenue-Marginal Cost Approach P Q P1P1P1P1 MC MR 1 AVC ATC MR 2 MR 3 MR 4 MR 5 P2P2P2P2 P3P3P3P3 P4P4P4P4 P5P5P5P5 Q2Q2Q2Q2 Q3Q3Q3Q3 Q4Q4Q4Q4 Q5Q5Q5Q5 Break-even (normal profit) point Costs and revenues (dollars) Copyright McGraw-Hill, Inc The Marginal Cost Curve at points above AVC represent the short-run supply curve

Marginal-Revenue-Marginal Cost Approach P Q P1P1P1P1 MC MR 1 AVC ATC MR 2 MR 3 MR 4 MR 5 P2P2P2P2 P3P3P3P3 P4P4P4P4 P5P5P5P5 Q2Q2Q2Q2 Q3Q3Q3Q3 Q4Q4Q4Q4 Q5Q5Q5Q5 Short-run Supply Curve (blue) Costs and revenues (dollars) Copyright McGraw-Hill, Inc. 1999

Marginal-Revenue-Marginal Cost Approach P Q MC 1 AVC 1 If costs increase... the supply curve effectively shifts to the left Copyright McGraw-Hill, Inc. 1999

Marginal-Revenue-Marginal Cost Approach P Q MC 1 AVC 1 If costs increase... the supply curve effectively shifts to the left MC 2 AVC 2 Copyright McGraw-Hill, Inc. 1999

Marginal-Revenue-Marginal Cost Approach P Q MC 1 AVC 1 If costs decrease... the supply curve effectively shifts to the right MC 2 AVC 2 Copyright McGraw-Hill, Inc. 1999

Short-run Competitive Equilibrium P Q P Q D Industry Firm (price taker) TotalIndustryDemand Copyright McGraw-Hill, Inc. 1999

Short-run Competitive Equilibrium P Q P Q 8000 D S=  MC’s Industry Firm (price taker) $111 Include the firm’s costs MC Copyright McGraw-Hill, Inc. 1999

Short-run Competitive Equilibrium P Q MC AVC ATC P Q 8000 D S=  MC’s Industry Firm (price taker) The firm “takes” the Industry Price $111 Copyright McGraw-Hill, Inc. 1999

Short-run Competitive Equilibrium P Q MC AVC ATC 8 D P Q 8000 D S=  MC’s Industry Firm (price taker) $111 $111 Copyright McGraw-Hill, Inc. 1999

Short-run Competitive Equilibrium P Q MC AVC ATC 8 D P Q 8000 D S=  MC’s Industry Firm (price taker) EconomicProfit $111 $111 Copyright McGraw-Hill, Inc. 1999

Short-run Competitive Equilibrium P Q MC AVC ATC 8 D P Q 8000 D S=  MC’s Industry Firm (price taker) EconomicProfit $111 $111 Copyright McGraw-Hill, Inc How about the long-run?

Long-run Profit Maximization Assumptions... Copyright McGraw-Hill, Inc. 1999

Long-run Profit Maximization Assumptions... Entry and Exit Only Entry and Exit Only Copyright McGraw-Hill, Inc. 1999

Long-run Profit Maximization Assumptions... Entry and Exit Only Entry and Exit Only Identical Costs Identical Costs Copyright McGraw-Hill, Inc. 1999

Long-run Profit Maximization Assumptions... Entry and Exit Only Entry and Exit Only Identical Costs Identical Costs Constant-Cost Industry Constant-Cost Industry Copyright McGraw-Hill, Inc. 1999

Long-run Profit Maximization Assumptions... Entry and Exit Only Entry and Exit Only Identical Costs Identical Costs Constant-Cost Industry Constant-Cost Industry Goal... Copyright McGraw-Hill, Inc. 1999

Long-run Profit Maximization Assumptions... Entry and Exit Only Entry and Exit Only Identical Costs Identical Costs Constant-Cost Industry Constant-Cost Industry Goal... Price = Minimum ATC Copyright McGraw-Hill, Inc. 1999

Long-run Profit Maximization Assumptions... Entry and Exit Only Entry and Exit Only Identical Costs Identical Costs Constant-Cost Industry Constant-Cost Industry Goal... Price = Minimum ATC Zero Economic Profit Model... Copyright McGraw-Hill, Inc. 1999

P Q MC P Q D1D1D1D1 S1S1S1S1 Industry Firm (price taker) ATC MR $60$50$40 $100$90,000 $60$50$40 $100,000 What happens if demand decreases... Copyright McGraw-Hill, Inc Long-run Profit Maximization

P Q MC P Q D1D1D1D1 S1S1S1S1 Industry Firm (price taker) ATC MR $60$50$40 $100$90,000 D2D2D2D2 $60$50$40 $100,000 Short-run losses at lower prices... Copyright McGraw-Hill, Inc Long-run Profit Maximization

P Q MC P Q D1D1D1D1 S1S1S1S1 Industry Firm (price taker) ATC MR $60$50$40 $100$90,000 D2D2D2D2 S3S3S3S3 $100,000...cause a reduction in supply and... $60$50$40 Copyright McGraw-Hill, Inc Long-run Profit Maximization

P Q MC P Q D1D1D1D1 S1S1S1S1 Industry Firm (price taker) ATC MR $60$50$40 $100$90,000 D2D2D2D2 S3S3S3S3 $60$50$40 $100,000...returns to a new equilibrium Copyright McGraw-Hill, Inc Long-run Profit Maximization

Pure Competition and Efficiency Productive Efficiency Copyright McGraw-Hill, Inc. 1999

Pure Competition and Efficiency Productive Efficiency Price = Minimum ATC Copyright McGraw-Hill, Inc Goods produced in the least costly way. The firm is producing the greatest output consistent with its costs.

Pure Competition and Efficiency Productive Efficiency Price = Minimum ATC Allocative Efficiency Copyright McGraw-Hill, Inc Requires that goods be produced according to that which is most valued by society.

Pure Competition and Efficiency Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Copyright McGraw-Hill, Inc. 1999

Pure Competition and Efficiency Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Copyright McGraw-Hill, Inc. 1999

Pure Competition and Efficiency Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Price > MC Copyright McGraw-Hill, Inc Society values that product more and firms will enter.

Pure Competition and Efficiency Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Price > MC Overallocation Copyright McGraw-Hill, Inc Society values that product less and firms will leave.

Pure Competition and Efficiency Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Price > MC Overallocation Price < MC Copyright McGraw-Hill, Inc. 1999

P Q MC P Q D1D1D1D1 S1S1S1S1 Industry Firm (price taker) ATC MR $60$50$40 $100$90,000 $60$50$40 $100,000 What happens if demand decreases... Copyright McGraw-Hill, Inc Long-run Profit Maximization

Pure Competition and Efficiency Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Price > MC Overallocation Price < MC Copyright McGraw-Hill, Inc Resources are efficiently allocated under competition

u pure competition u pure monopoly u monopolistic competition u oligopoly u imperfect competition u price taker u average revenue u total revenue u marginal revenue u break-even point u MR = MC rule u short-run supply curve u long-run supply curve u constant-cost industry u increasing-cost industry u decreasing-cost industry u productive efficiency u allocative efficiency Copyright McGraw-Hill, Inc. 1999

Coming Next... Pure Monopoly Chapter 24 Copyright McGraw-Hill, Inc. 1999