Economics Winter 14 March 21 st, 2014 Lecture 25 Ch. 12: Perfect competition

12 Perfect Competition The concept of competition is used in two ways in economics. Competition as a process is a rivalry among firms. Competition as a market structure.

Oligopoly Market Structure Continuum PureCompetition PureMonopoly MonopolisticCompetition Four Market Structures Market structure involves the number of firms in the market and the barriers to entry.

Minimum Efficient Scale MESMES LRATC

Under Pure Competition: –The number of firms is large. –Both buyers and sellers are price takers. –The firms' products are identical (standardized or homogeneous). –There is free entry and exit, that is, there are no barriers to entry. –There is complete information. –Firms are profit maximizers.

Fully flexible exchange rates

Since both buyers and sellers are price takers, demand - as it is seen by the individual producer - is perfectly elastic D S D Qpindustry p1p1p1p1 A perfectly competitive firm’s demand is horizontal (perfectly elastic), even though the demand curve for the industry is downward sloping. pq D firm p1p1p1p1

Market (industry’s) case

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Profit Maximization in the Short Run Purely competitive firm can maximize its profit (minimize its loss) only by adjusting output Two Approaches: total revenue-total cost approach marginal revenue-marginal cost approach

Copyright © 2013 Pearson Canada Inc., Toronto, Ontario Total Revenue- Total Cost Approach Profit = TR - TC Profit is maximized where the vertical distance between TR & TC is maximized Break-even points where TR=TC

TCTRTR

QTFCTVCTCTR Profit or Loss 0$100$ 0$ 100$

QTFCTVCTCTR Profit or Loss 0$100$ 0$ 100$ 0$

MR-MC Approach Short run profit maximization occurs where MR=MC 1.guide to profit maximization for ALL firms 2.rule can be restated as P=MC for purely competitive firms, since MR=P

© 2010 Pearson Education Canada If MR > MC, economic profit increases if output increases. If MR < MC, economic profit decreases if output increases. If MR = MC, economic profit decreases if output changes in either direction, so economic profit is maximized. The Firm’s Output Decision: MR-MC Approach

QTFCTVCTC 0$100$ 0$

QTFCTVCTC 0$100$ 0$ MC $ ] ] ] ] ] ] ] ] ]

QTFCTVCTC 0$100$ 0$ MCMR $ 90$ ] ] ] ] ] ] ] ] ]

QTFCTVCTC 0$100$ 0$ MCMR $ 90$ ] ] ] ] ] ] ] ] ]

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MC ATC AVC AFC 9 131

MC ATC AVC AFC

MC ATC AVC AFC 9 Profit = 9 X ( ) =

Study question How would a rational, profit-maximizing competitive firm respond in the short-run to an increase in fixed costs? Will there be any change in equilibrium price or quantity in the short-run? Explain.

C:\Users\Rohan Ron\Post-Secondary\U of SASK\COURSES AT SASKATCHEWAN UNIVERSITY\Price Theory & Resource - MicroEconomics (ECON 111)\Lecture Notes Anna Klimina\ECON 111 Lecture Notes 25 Slide Recording

© 2010 Pearson Education Canada In part (c) price is less than average total cost and the firm incurs an economic loss—economic profit is negative. Output, Price, and Profit in the Short Run

P = 131

QTFCTVCTC 0$100$ 0$ MCMR $ 90$ ] ] ] ] ] ] ] ] ]

Loss-Minimizing Case Suppose price falls from $131 to $81…

QTFCTVCTC 0$100$ 0$ MCMR $ 90$ ] ] ] ] ] ] ] ] ]

550/6