1. Competitive Markets

2. Structure Fragmented Undifferentiated Products : Homogeneous
Perfect Information about Price
Equal Access to Resources

3. Three Implication
Price Takers
Law of one Price
Free Entry & Free Exit

4. Profit Maximization
Profit Maximization Condition

6. TC TR Q
TR,TC
Profit MC
MR = P
MC > MR
MC = MR
MC < MR

7. Price Q
AR = P = MR D
Firm
Industry

8. AVC AC MC P1 A C Q
Price
MR = P B
Excess Profit

9. AVC AC MC P1 A C Q
Price
MR = P

10. AVC AC MC P1 A C Q
Price
MR = P B
Loss

11. AVC AC MC P1 A C Q
Price
MR = P B
Loss

12. AVC AC MC P1 A C Q
Price
MR = P B
Loss

13. AVC AC MC P1 P2 P3 P4 Q
Price
Shut Down Point

14. AVC AC MC P1 P2 P3 P4 Q
Price
Shut Down Point
Firm’s Supply

15. The Firm’s short run total cost curve is STC = 100 +20Q + Q2.
Example
The Firm’s short run total cost curve is
STC = Q + Q2.
The short run Marginal cost curve is
SMC = Q
If SFC = 100, while SVC = 20Q + Q2
Find AVC , Minimum level of average variable cost, supply curve

16. Fixed Cost + Sunk Cost
TFC = SFC + NSFC

17. Price MC AC
ANSC
AVC B C P1
Minimum ANSC = P A Q Q

18. The Firm’s short run total cost curve is STC = 100 +20Q + Q2.
Example
The Firm’s short run total cost curve is
STC = Q + Q2.
The short run Marginal cost curve is
SMC = Q
If SFC = 36, while NSFC = 64
Find ANSC , Minimum level of average non sunk cost, supply curve

19. Firm Supply and Market SupplyQ1 Q2
Q1+Q2 Q P

20. Short Run perfectly Competitive equilibriumD S
D(P*)
SAC Q* Q P P*

21. STC = 0.1 + 150Q2 , all fixed cost are sunk.
The Market consists of 300 identical firms, and the market demand curve is given by
D(P) = 60 – P.
Each firm has a short run cost curve
STC = Q2 , all fixed cost are sunk.
The corresponding short run marginal cost curve
SMC = 300Q.
The corresponding average variable cost curve is
AVC = 150Q.
You should verify that the minimum level of AVC is 0. Thus, a firm will continue to produce as large as price is positive
Find Short run equilibrium in market, at equilibrium, do the firm make positive profit?

22. Comparative Statics in short run
Increase in the number of firm D S Q1
SAC
Q1f Q P P1 S’ Q2 P2
Q2f

23. Long Run – Plant Adjustment
Price
Quantity P1
SAC1
MC1
SAC2
MC2
LAC
LMC Q1 Q2

24. Long Run Supply Curve
Price
Quantity P1
LAC
LMC Q1 Q2 Q* P2 P*

25. Long Run Supply Curve
Price
Quantity P1
LAC
LMC Q1 Q2 Q* P2 P*

26. Free Entry and Long Run P* = MC ( Q* ) P* = AC ( Q* )
1. Long Run Profit is maximized with respect to output and plant size.
P* = MC ( Q* )
2. Economic profit is Zero.
P* = AC ( Q* )

27. Free Entry and Long Run 3. Demand equals Supply. D( P* ) = n Q* D S
LAC Q* Q P P*
SAC
LMC
SMC

28. In this market, each firm and potential entrant has a long – run average cost
AC( Q ) = 40 – Q – 0.01Q2.
And a corresponding long run marginal cost curve
MC( Q ) = 40 – 2Q Q2.
Where Q is thousand units per year. The Market demand curve is
D( P ) = 25,000 – 1,000P,
Where D(P) is also measured in thousand units. Find the long run equilibrium price, quantity per firm, and number of firms.

29. Long Run Market Supply CurveD S Q1
LAC
Q1f Q P P1
SAC
LMC S’ D’ P2
Q2f Q2 A B

30. Industry Long Run Supply Curve
Constant Cost D S Q1
LAC
Q1f Q P P1
LMC S’ D’ P2
Q2f Q2 A B SL

31. Industry Long Run Supply CurveQ1
LAC1
Q1f Q P P1
LMC1 S’ D’ P2
Q2f Q2 SL
Increasing Cost P3
LMC2
LAC2

32. STC ( Q ) = 16 + Q2 SMC ( Q ) = 2Q D ( P ) = 110 – P
Problem 1
The bolt industry currently consists of 20 producers, all of whom operate with identical short run total cost function
STC ( Q ) = 16 + Q2
Where Q is the annual output. The corresponding short run marginal cost curve is
SMC ( Q ) = 2Q
The market demand for the bolts is
D ( P ) = 110 – P
Where P is the market price

33. a ) Assuming that all of the firm fixed cost is sunk, what is the firm’s short run supply curve?
b ) What is the short run market supply curve?
c ) Determine the short run equilibrium price and quantity in the industry.

34. The corresponding long run average cost function is
Problem 2
Propylene is used to make plastic. The propylene industry is perfectly competitive, and each producer has a long run marginal cost function given by
MC ( Q ) = 40 – 12Q + Q2
The corresponding long run average cost function is
AC ( Q ) = 40 – 6Q + (1/3)Q2
The market demand curve for propylene is
D ( P ) = 2200 – 100P

35. a ) What is long run equilibrium price in the industry?
b ) At this price, how much would an individual firm produce?
c ) How many firms are in the propylene market in long run competitive equilibrium.
d ) Suppose the demand curve shifted so that it is now D ( P ) = A – 100P. How large would A have to be so that in the new long run competitive equilibrium, the number of propylene firms was twice what it was in the initial long run equilibrium?.

36. The long run total cost function for producers of mineral water is
Problem 3
The long run total cost function for producers of mineral water is
TC ( Q ) = cQ
Where Q is the output of individual firm expressed as thousand liters per year. The market demand curve is
D ( P ) = a – bP
Find the long run equilibrium price and quantity in term of a, b, c, . Can you determine the equilibrium number of firms? If so, what is it? Why not?