1. Principles of Microeconomics : Ch.14 First Canadian Edition Perfect Competition - Price Takers u The individual firm produces such a small portion of the total market output that it cannot influence the price it charges for the product it sells. u The firm is a Price Taker in that it takes the market-determined price as the price it will receive for its output.

2. Principles of Microeconomics : Ch.14 First Canadian Edition The Revenue of a Competitive Firm u Total Revenue for a firm is the market selling price times the quantity sold. TR = (P x Q) u Total revenue is proportional to the amount of output. u Graphically: Total revenue increases at a constant rate, as each unit sold sells for a constant price.

3. Principles of Microeconomics : Ch.14 First Canadian Edition $25 $20 $15 $10 $ 5 $ Quantity Total Revenue 12345 At a market price of $5, total revenue is ($5x1) = $5! Total Revenue: Competitive Firm

4. Principles of Microeconomics : Ch.14 First Canadian Edition Alternative Measurements of Revenue u Average Revenue: – Tells us how much revenue a firm receives for the typical unit sold. AR = TR ÷ Q – Average Revenue equals the Price of the good, in Perfect Competition.

5. Principles of Microeconomics : Ch.14 First Canadian Edition Alternative Measurements of Revenue u Marginal Revenue: – Tells us how much revenue a firm receives for one additional unit of output. MR = TR ÷ Q – Marginal Revenue equals the Price of the good, in Perfect Competition. u Graphically: Each unit sold will add the same amount to total revenue, $5!

6. Principles of Microeconomics : Ch.14 First Canadian Edition Total Revenue: Competitive Firm $25 $20 $15 $10 $ 5 $ Quantity Total Revenue 12345 Marginal Revenue

7. Principles of Microeconomics : Ch.14 First Canadian Edition Profit Maximization $25 $20 $15 $10 $ 5 $ Quantity 12345 Total Cost

8. Principles of Microeconomics : Ch.14 First Canadian Edition Profit Maximization $25 $20 $15 $10 $ 5 $ Quantity Total Revenue 12345 Total Cost $ Maximum Profit at Q = 3 units! }

9. Principles of Microeconomics : Ch.14 First Canadian Edition Profit Maximization u Maximum profits occur at a quantity that maximizes the difference (distance) between revenue and costs.

10. Principles of Microeconomics : Ch.14 First Canadian Edition The Competitive Firm’s Cost Curves u Revisit of average cost curves: – The marginal-cost curve (MC) eventually increases. – The average-total-cost curve (ATC) is U- shaped. – Marginal Cost crosses the Average-Total- Cost at the minimum ATC. u Graphically...

11. Principles of Microeconomics : Ch.14 First Canadian Edition The Shape of Typical Cost Curves Cost ($’s) Quantity MC ATC AVC

12. Principles of Microeconomics : Ch.14 First Canadian Edition The Competitive Firm’s Profit- Maximizing Output u Add a line for the market price which is the same as the firm’s average revenue (AR) and its marginal revenue (MR). u Identify the level of output that maximizes profit.

13. Principles of Microeconomics : Ch.14 First Canadian Edition The Competitive Firm’s Profit- Maximizing Output Quantity MC ATC AVC P=MR=AR Q Max Price

14. Principles of Microeconomics : Ch.14 First Canadian Edition The Competitive Firm’s Profit- Maximizing Output Quantity MC ATC AVC P=MR=AR Q Max Maximum Profit Price P ATC

15. Principles of Microeconomics : Ch.14 First Canadian Edition The Competitive Firm’s Shut-Down Decision u Alternative levels of output produced because the firm is a price taker. u If the selling price is below the minimum average variable cost, the firm should shut-down! u The minimum loss would equal to the firm’s Total Fixed Cost.

16. Principles of Microeconomics : Ch.14 First Canadian Edition Shut-Down! Costs are greater than market price Quantity MC ATC AVC P=MR=AR Loss in Excess of Fixed Costs Q Don’t Produce! Price

17. Principles of Microeconomics : Ch.14 First Canadian Edition Short-Run Production Minimize Losses when MR = MC Quantity MC ATC AVC P=MR=AR Q short-run Price P ATC Losses are less than fixed costs

18. Principles of Microeconomics : Ch.14 First Canadian Edition Quantity MC ATC AVC P=MR=AR Q Max Price P ATC Maximum Economic Profit Short-Run Production Maximize Profits when MR = MC

19. Principles of Microeconomics : Ch.14 First Canadian Edition u In the long-run the typical firm will operate where: v MR = MC v Normal Profit where Price = ATC v Minimum ATC u Why? ¬ Due to Easy Entry ­ Due to Intense Competition Long-Run Production Normal Profits when MR = MC

20. Principles of Microeconomics : Ch.14 First Canadian Edition Quantity MC ATC P=MR=AR Q LR Price Long-Run Production Normal Profits when MR = MC

21. Principles of Microeconomics : Ch.14 First Canadian Edition The Competitive Firm’s Supply Curve u Short-Run Supply: – Is the portion of its marginal cost curve that lies above average variable cost. u Long-Run Supply: – Is the marginal cost curve above the minimum point of its average total cost curve.

22. Principles of Microeconomics : Ch.14 First Canadian Edition Competitive Firm’s SR Supply Curve Quantity MC ATC AVC P=MR=AR Q1Q1 P1P1 Price

23. Principles of Microeconomics : Ch.14 First Canadian Edition The Competitive Firm’s Supply Curve Quantity MC ATC AVC P=MR=AR Q3Q3 Q1Q1 Q2Q2 P1P1 P2P2 P3P3 Price

24. Principles of Microeconomics : Ch.14 First Canadian Edition The Competitive Firm’s Supply Curve Quantity Q3Q3 Q1Q1 Q2Q2 P1P1 P2P2 P3P3 Price Firms Short- Run Supply Curve }

25. Principles of Microeconomics : Ch.14 First Canadian Edition The Firm’s Profit u Profit equals total revenue (TR) minus total costs (TC) – Profit = TR - TC – Profit = ([TR ÷ Q] - [TC ÷ Q]) x Q – Profit = (P - ATC) x Q

26. Principles of Microeconomics : Ch.14 First Canadian Edition The Competitive Firm’s Decision To Produce, Shut-Down or Exit u In the short-run, a firm will choose to shut-down temporarily if the price of the good is less than the average variable cost. u In the long-run when the firm can recover both fixed and variable costs, the firm will choose to exit if the price is less than average total cost.

27. Principles of Microeconomics : Ch.14 First Canadian Edition The Market Supply Curve u For any given price, each firm supplies a quantity of output so that price equals its marginal cost. u The quantity of output supplied to the market equals the sum of the quantities supplied by the individual firms.

28. Principles of Microeconomics : Ch.14 First Canadian Edition The Market Supply Curve u Firms will enter or exit the market until profit is driven to zero. In the long-run, price equals the minimum of average total cost. u Because firms can enter and exit more easily in the long-run than in the short- run, the long-run supply curve is more elastic than the short-run supply curve.

29. Principles of Microeconomics : Ch.14 First Canadian Edition Summary/Conclusion u If business firms are competitive and profit-maximizing, the price of a good equals the marginal cost of making that good. u If firms can freely enter and exit the market, the price also equals the lowest possible average total cost of production.