Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Pure Competition 10 C H A P T E R

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Market Structure Continuum FOUR MARKET MODELS Pure Competition

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Market Structure Continuum Pure Competition FOUR MARKET MODELS Pure Monopoly

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Market Structure Continuum Pure Competition Pure Monopoly FOUR MARKET MODELS Imperfect Competition

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Market Structure Continuum Pure Competition Pure Monopoly FOUR MARKET MODELS Monopolistic Competition

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Market Structure Continuum Pure Competition Pure Monopoly Monopolistic Competition FOUR MARKET MODELS Oligopoly

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Market Structure Continuum Pure Competition Pure Monopoly Monopolistic Competition Oligopoly FOUR MARKET MODELS Pure Competition: Very Large Numbers Standardized Product “Price Takers” Free Entry and Exit

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Perfectly Elastic Demand Price Taker Role Total Revenue Average Revenue Marginal Revenue For example...

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $131 0$ 0 Product Price (P) (Average Revenue) Total Revenue (TR) Marginal Revenue (MR) Quantity Demanded (Q) DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $ $ $131 Product Price (P) (Average Revenue) Total Revenue (TR) Marginal Revenue (MR) Quantity Demanded (Q) DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER ]

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $ $ $ Product Price (P) (Average Revenue) Total Revenue (TR) Marginal Revenue (MR) Quantity Demanded (Q) DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER ] ]

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $ $ $ Product Price (P) (Average Revenue) Total Revenue (TR) Marginal Revenue (MR) Quantity Demanded (Q) DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER ] ] ]

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $ $ $ Product Price (P) (Average Revenue) Total Revenue (TR) Marginal Revenue (MR) Quantity Demanded (Q) DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER ] ] ] ]

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $ $ $ Product Price (P) (Average Revenue) Total Revenue (TR) Marginal Revenue (MR) Quantity Demanded (Q) DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER ] ] ] ] ] ] ] ] ] ]

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $ $ $ Product Price (P) (Average Revenue) Total Revenue (TR) Marginal Revenue (MR) Quantity Demanded (Q) DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER ] ] ] ] ] ] ] ] ] ] Graphically Presented…

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show DEMAND, MARGINAL REVENUE, AND TOTAL REVENUE IN PURE COMPETITION TR D = MR Price and revenue Quantity Demanded (sold)

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show SHORT RUN PROFIT MAXIMIZATION Two Approaches... First: Total-Revenue -Total Cost Approach The Decision Rule: Produce in the short-run if it can realize 1- A profit (or) 2- A loss less than its fixed costs The Decision Process: Should the firm produce? What quantity should be produced? What profit or loss will be realized?

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show SHORT RUN PROFIT MAXIMIZATION Two Approaches... First: Total-Revenue -Total Cost Approach The Decision Rule: Produce in the short-run if it can realize 1- A profit (or) 2- A loss less than its fixed costs The Decision Process: Should the firm produce? What quantity should be produced? What profit or loss will be realized? Applied Graphically…

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Total Cost Total Product Total Fixed Cost Total Variable Cost Total Revenue Profit $ $ $ Price: $131 - $ TOTAL REVENUE-TOTAL COST APPROACH $ Can you see the profit maximization?

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Total Cost Total Product Total Fixed Cost Total Variable Cost Total Revenue Profit $ $ $ Price: $131 - $ TOTAL REVENUE-TOTAL COST APPROACH $ Graphing Total Cost & Revenue

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1, Total revenue and total cost Total Revenue Total Cost Maximum Economic Profits $299 Break-Even Point (Normal Profit) Break-Even Point (Normal Profit) TOTAL REVENUE-TOTAL COST APPROACH

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show SHORT RUN PROFIT MAXIMIZATION Two Approaches... First: Total-Revenue -Total Cost Approach Three Characteristics: The rule applies only if producing is preferred to shutting down Rule applies to all markets Rule can be restated P=MC Second: Marginal-Revenue -Marginal Cost Approach MR = MC Rule

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Average Total Cost Total Product Average Fixed Cost Average Variable Cost Price = Marginal Revenue Total Economic Profit/Loss $ $ $ $ MARGINAL REVENUE-MARGINAL COST APPROACH $ Marginal Cost The same profit maximizing result!

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Average Total Cost Total Product Average Fixed Cost Average Variable Cost Price = Marginal Revenue Total Economic Profit/Loss $ $ $ $ MARGINAL REVENUE-MARGINAL COST APPROACH $ Marginal Cost Graphically

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $ Cost and Revenue MC MR AVC ATC Economic Profit $ $97.78 MARGINAL REVENUE-MARGINAL COST APPROACH Profit Maximization Position

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $ Cost and Revenue MC MR AVC ATC Economic Profit $ $97.78 MARGINAL REVENUE-MARGINAL COST APPROACH MR = MC Optimum Solution Profit Maximization Position

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show The MR=MC rule still applies If the price is lowered from $131 to $81 …But the MR = MC point changes MARGINAL REVENUE-MARGINAL COST APPROACH Loss Minimization Position

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $ Cost and Revenue MC MR AVC ATC Economic Loss $81.00 $91.67 MARGINAL REVENUE-MARGINAL COST APPROACH Loss Minimization Position

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $ Cost and Revenue MC MR AVC ATC $71.00 MARGINAL REVENUE-MARGINAL COST APPROACH Short-Run Shut Down Point Minimum AVC is the Shut-Down Point

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show MARGINAL REVENUE-MARGINAL COST APPROACH Marginal Cost & Short-Run Supply Price Quantity Supplied Maximum Profit (+) Or Minimum Loss (-) Observe the impact upon profitability as price is changed $ $

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Cost and Revenue, (dollars) MC MR 1 AVC ATC MARGINAL REVENUE-MARGINAL COST APPROACH Quantity Supplied MR 2 MR 3 MR 4 MR 5 P1P1 P2P2 P3P3 P4P4 P5P5 Q2Q2 Q3Q3 Q4Q4 Q5Q5 Marginal Cost & Short-Run Supply Do not Produce – Below AVC

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Cost and Revenue, (dollars) MC MR 1 MARGINAL REVENUE-MARGINAL COST APPROACH Quantity Supplied MR 2 MR 3 MR 4 MR 5 P1P1 P2P2 P3P3 P4P4 P5P5 Q2Q2 Q3Q3 Q4Q4 Q5Q5 Marginal Cost & Short-Run Supply Yields the Short-Run Supply Curve Supply No Production Below AVC

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show MARGINAL REVENUE-MARGINAL COST APPROACH Marginal Cost & Short-Run Supply AVC 2 MC 2 Higher Costs Move the Supply Curve to the Left Cost and Revenue, (dollars) MC 1 AVC 1 Quantity Supplied S1S1 S2S2

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show MARGINAL REVENUE-MARGINAL COST APPROACH Marginal Cost & Short-Run Supply AVC 2 MC 2 Lower Costs Move the Supply Curve to the Right Cost and Revenue, (dollars) MC 1 AVC 1 Quantity Supplied S1S1 S2S2

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P Q S=MC AVC ATC 8 D P Q 8000 D S=  MC’s Industry Firm (price taker) Economic Profit $111 SHORT RUN COMPETITIVE EQUILIBRIUM The Competitive Firm “Takes” it’s Price from the Industry Equilibrium

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P Q S=MC AVC ATC 8 D P Q 8000 D S=  MC’s Industry Firm (price taker) Economic Profit $111 SHORT RUN COMPETITIVE EQUILIBRIUM The Competitive Firm “Takes” it’s Price from the Industry Equilibrium How about the long-run?

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show PROFIT MAXIMIZATION IN THE LONG-RUN Assumptions... Entry and Exit Only Identical Costs Constant-Cost Industry Goal... Price = Minimum ATC Zero Economic Profit Model

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Temporary Profits and the Reestablishment Of Long-Run Equilibrium S1S1 MC ATC P Q 100 P Q 100,000 Industry Firm (price taker) $ $ PROFIT MAXIMIZATION IN THE LONG-RUN MR D1D1

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show An increase in demand increases profits… MR D1D1 MC ATC P Q 100 P Q 100,000 Industry Firm (price taker) $ $ PROFIT MAXIMIZATION IN THE LONG-RUN D2D2 Economic Profits S1S1

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show New Competitors increase supply and lower Prices decrease economic profits MR D1D1 MC ATC P Q 100 P Q 100,000 Industry Firm (price taker) $ $ PROFIT MAXIMIZATION IN THE LONG-RUN D2D2 Zero Economic Profits S1S1 S2S2

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Decreases in demand, Losses and the Reestablishment of Long-Run Equilibrium S1S1 MC ATC P Q 100 P Q 100,000 Industry Firm (price taker) $ $ PROFIT MAXIMIZATION IN THE LONG-RUN D1D1 MR

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show A decrease in demand creates losses… MR D1D1 MC ATC P Q 100 P Q 100,000 Industry Firm (price taker) $ $ PROFIT MAXIMIZATION IN THE LONG-RUN D2D2 Economic Losses S1S1

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show MR D1D1 MC ATC P Q 100 P Q 100,000 Industry Firm (price taker) $ $ PROFIT MAXIMIZATION IN THE LONG-RUN D2D2 Return to Zero Economic Profits S1S1 S3S3 Competitors with losses decrease supply and prices return to zero economic profits

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show LONG-RUN SUPPLY IN A CONSTANT COST INDUSTRY Constant Cost Industry Perfectly Elastic Long-Run Supply Graphically...

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P Q =$50 S D1D1 Z1Z1 Q1Q1 D2D2 Z2Z2 Q2Q2 Q3Q3 D3D3 Z3Z3 100,000110,00090,000 LONG-RUN SUPPLY IN A CONSTANT COST INDUSTRY P1P2P3P1P2P3

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P Q =$50 S D1D1 Z1Z1 Q1Q1 D2D2 Z2Z2 Q2Q2 Q3Q3 D3D3 Z3Z3 100,000110,00090,000 LONG-RUN SUPPLY IN A CONSTANT COST INDUSTRY P1P2P3P1P2P3 How does an increasing cost industry differ?

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P Q $ S D1D1 Y1Y1 Q1Q1 D2D2 Y2Y2 Q2Q2 Q3Q3 D3D3 Y3Y3 100,000110,00090,000 LONG-RUN SUPPLY IN AN INCREASING COST INDUSTRY P1P2P3P1P2P3

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P Q $ S D1D1 Y1Y1 Q1Q1 D2D2 Y2Y2 Q2Q2 Q3Q3 D3D3 Y3Y3 100,000110,00090,000 P1P2P3P1P2P3 How does a decreasing cost industry differ? LONG-RUN SUPPLY IN AN INCREASING COST INDUSTRY

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P Q $ S D1D1 Y1Y1 Q1Q1 D2D2 Y2Y2 Q2Q2 Q3Q3 D3D3 Y3Y3 100,000110,00090,000 P1P2P3P1P2P3 What is the long- run competitive equilibrium? LONG-RUN SUPPLY IN AN INCREASING COST INDUSTRY

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P MR Q MC ATC Quantity Price Price = MC = Minimum ATC (normal profit) LONG-RUN EQUILIBRIUM FOR A COMPETITIVE FIRM

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show PURE COMPETITION AND EFFICIENCY Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Price > MC Overallocation Price < MC

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show PURE COMPETITION AND EFFICIENCY Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Price > MC Overallocation Price < MC Resources are efficiently allocated under competition

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show PURE COMPETITION AND EFFICIENCY Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Price > MC Overallocation Price < MC Consumer Surplus

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show PURE COMPETITION AND EFFICIENCY Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Price > MC Overallocation Price < MC Chapter Conclusions

pure competition pure monopoly monopolistic competition oligopoly imperfect competition price taker average revenue total revenue marginal revenue break-even point MR = MC rule short-run supply curve long-run supply curve constant-cost industry increasing-cost industry decreasing-cost industry productive efficiency allocative efficiency ENDBACK Copyright McGraw-Hill/Irwin 2002

Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Coming Next... Pure Monopoly Chapter 24