1. Firms in Perfectly Competitive Markets

2. A. Many buyers and sellers B. The goods are the same C. Buyers and sellers have a negligible impact on the market D. All participants are price makers E. Free entry and exit

9. 1. D 2. Maximize profits 3. Marginal Revenue 4. MR and AR 5. Decrease 6. MR = MC 7. MR and MC

10.  When a gas station increases its prices, consumers may buy elsewhere  When a water co. increases its prices, consumers may decrease consumption, but have little or no choice on their supplier  ……..these firms have…………  Market power (price makers)

11.  Different market structures shape a firm’s pricing and production decisions Perfectly Comp Monop Compet OligopolyMonopoly

12.  Goal:  Analyze competitive firms and S curves w/ relation to its costs of production

13.  Many buyers/sellers  Each has negligible impact  Price taker  Identical (same) goods  Free entry/exit  = access to info./technology

14.  Goal :  Maximize profit  TR – TC  *can only change TR if change Q; can not change Price (TR = P x Q)

15.  Average Revenue – how much a firm receives for a “typical” unit sold (see table 14-1) TR/Q  For all firms: AR = P If TR = P x Q [ 10 = 5 x 2 ] And AR = TR / Q [5 x 2 / 2 ] …AR = 5 and P = 5  AR = P : true for all firms

16.  Marginal Rev  Change in TR from sale of each additional unit of output  Change TR / Change in Q  TR = P x Q and P is fixed …so if Q increases by 1 unit, then TR increase by (P) dollars  1 unit x $5 = TR = $5  2 units x $5 = TR = $10  MR = Change TR / Change Q  MR = $5 / 1 = $5  MR = $5  MR = P  MR = P for competitive firm only (*b/c P is fixed)

17.  When a competitive firm doubles the amount it sells, what happens to the P and its TR?

18.  How much to supply?  What’s your goal?  Table 14-2 : Profit Max level of output?  Q ‘s 0-3 : what is MR MC relation?  MR > MC :  if increase Q = increase Profit  Q’s 6-8 : what is MR MC relation?  MR < MC:  If decrease Q = increase Profit  (*Q’s 6-8) why would you produce one more unit when it cost you more than the revenue you will receive)  Profit Max Q : MR = MC

20.  Marginal Cost Curve and Firm’s Supply Decision  P = horizontal in perfect competition  P=AR=MR  What Q maximizes profits?  MR = MC  This is the profit max. level of Q for ALL FIRMS  At any P, a firm will max profits where P intersects MC  MR = MC is same as P = MC (* for Perfect Competition)

22.  The MC curve determines the Q the firm is willing to supply at any P…….  The MC curve is the Supply Curve for the firm  P = MR = AR = D …..back to fig 14-1  Where S (MC) and D (P,MR,AR) meet is equilibrium and profit max.

23.  Draw a firm’s S and D (MC and MR)  Identify profit max output  Identify output where MR>MC; label it Q1  Identify output where MR<MC; label it Q2  Identify the Efficient Scale

24.  “shut down” – temporary, short run decision to halt production  When? Why?  If can not cover variable costs of production  Shut down and lose all revenue….  …will still pay fixed costs  ….but will save on variable costs  Ex: a restaurant decides to close for lunch  (its revenue was not covering variable costs of servers, cooks, etc…)

25. Shut down if TR < VC Or TR / Q < VC / Q [AR < AVC] Since AR = P…… …..shut down if P < AVC “Short Run shut down decision = P < AVC” SHORT RUN = temporarily stop production Draw it

26.  See figure 14-3  Portion of the MC that is above AVC

27.  Airline example 1990’s  Losing money but continue to operate  Why?  Cant recover “sunk” costs of airplanes  As long as MR from each flight covers variable costs – continue to operate

28.  You bought a ticket to the playoff game for $7. You told your friend you would be willing to pay $10.  When you arrive, you realize you lost your ticket.  Should you buy another ticket or just go home?  As long as MB > or = MC ; buy another ticket

29.  Exit decision  If TR < TC or TR/Q < TC/Q....since TR/Q = P……exit if P<ATC  Long Run decision – going out of business

30.  Calculate Profit : :TR-TC : PxQ = TR :ATC x Q = TC …so (P-ATC) x Q  Graphing Profit and Loss

31.  Calculate Loss : :TR-TC : PxQ = TR :ATC x Q = TC …so (P-ATC) x Q