2. Economics 111.3 Winter 14 March 21 st, 2014 Lecture 25 Ch. 12: Perfect competition

3. 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.

4. 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.

5. Minimum Efficient Scale MESMES LRATC

6. 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.

7. Fully flexible exchange rates 0.8 1.25

9. 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

11. Market (industry’s) case

12. Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

14. 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

15. 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

16. TCTRTR

17. QTFCTVCTCTR Profit or Loss 0$100$ 0$ 100$ 0 110090190131 2100170270262 3100240340393 4100300400524 5100370470655 6100450550786 7100540640917 81006507501048 91007808801179 1010093010301310

18. QTFCTVCTCTR Profit or Loss 0$100$ 0$ 100$ 0$-100 110090190131- 59 2100170270262- 8 3100240340393+ 53 4100300400524+124 5100370470655+185 6100450550786+236 7100540640917+277 81006507501048+298 91007808801179+299 1010093010301310+280

20. 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

21. © 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

22. QTFCTVCTC 0$100$ 0$ 100 110090190 2100170270 3100240340 4100300400 5100370470 6100450550 7100540640 8100650750 9100780880 101009301030

23. QTFCTVCTC 0$100$ 0$ 100 110090190 2100170270 3100240340 4100300400 5100370470 6100450550 7100540640 8100650750 9100780880 101009301030 MC $ 90 80 70 60 80 90 110 130 150 ] ] ] ] ] ] ] ] ]

24. QTFCTVCTC 0$100$ 0$ 100 110090190 2100170270 3100240340 4100300400 5100370470 6100450550 7100540640 8100650750 9100780880 101009301030 MCMR $ 90$131 80131 70131 60131 80131 90131 110131 130131 150131 ] ] ] ] ] ] ] ] ]

25. QTFCTVCTC 0$100$ 0$ 100 110090190 2100170270 3100240340 4100300400 5100370470 6100450550 7100540640 8100650750 9100780880 101009301030 MCMR $ 90$131 80131 70131 60131 80131 90131 110131 130131 150131 ] ] ] ] ] ] ] ] ]

26. Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

32. MC ATC AVC AFC 9 131

33. MC ATC AVC AFC 9131 97.78

34. MC ATC AVC AFC 9 Profit = 9 X (131 - 97.78) = 299131 97.78

35. 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.

36. 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 34-35 Recording

42. © 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

43. P = 131

44. QTFCTVCTC 0$100$ 0$ 100 110090190 2100170270 3100240340 4100300400 5100370470 6100450550 7100540640 8100650750 9100780880 101009301030 MCMR $ 90$131 80131 70131 60131 80131 90131 110131 130131 150131 ] ] ] ] ] ] ] ] ]

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

46. QTFCTVCTC 0$100$ 0$ 100 110090190 2100170270 3100240340 4100300400 5100370470 6100450550 7100540640 8100650750 9100780880 101009301030 MCMR $ 90$81 8081 7081 6081 8081 9081 11081 13081 15081 ] ] ] ] ] ] ] ] ]

47. 550/6