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McGraw-Hill/Irwin
Objectives
After studying this chapter, you will able to
Define perfect competition
Explain characteristic of perfect competition
Explain how price and output are determined
in perfect competition
Profit Maximization in the short run
Explain why perfect competition is efficient
Perfect competition
monopoly
Monopolistic competition
Oligopoly
Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Monopolistic
Competition
Oligopoly
Monopoly
Number of firms
A very large
number
Many
Few
One
Type of product
Standardized
Differentiated
Standardized or
differentiated
Unique; no
close subs.
Control over
price
None
Limited by mutual
inter-dependence;
considerable with
collusion
Considerable
Conditions of
entry
Very easy, no
restriction
Relatively easy
Significant
obstacles
Blocked
Nonprice
Competition
None
Considerable emphasis
on advertising, brand
names, trademarks
Typically a great
deal, particularly
with product
differentiation
Mostly public
relation
advertising
Examples
Agriculture
Steel, auto
Local utilities
LO1
Very
Many
Agric. products
Fishery
Some
Fair
Amount
Extensive
Fair amount
with
differentiated
Extensive
oligopolies
Cable TV
Water
Characteristics #1
Characteristics #2
Characteristics #3
Standardized product
Characteristics #4
LO2
Characteristics #5
Output is homogenous
Product is identical to that produced
by other firms
Goods produced in the perfectly
competitive market are the same.
This means that the goods produced
among the firms is replaceable (from
the aspect of price, quality of goods
and shape).
LO2
Characteristics #6
LO2
Characteristics #7
LO2
Characteristics #8
Perfectly elastic demand
LO2
Characteristics #9
LO2
Perfect Competition
Deriving the demand curve
1. The intersection of the market supply
and the market demand curve
Price per
Ounce
Market
Price per
Ounce
$400
$400
D
Firm
Demand
Curve Facing
the Firm
QD
Firms
Revenue
Data
TR
MR
0 $131
$0
] $131
1 131 131
] 131
2 131 262
] 131
3 131 393
] 131
4 131 524
] 131
5 131 655
] 131
6 131 786
] 131
7 131 917
] 131
8 131 1048
131
9 131 1179 ]
131
10 131 1310 ]
LO3
TR
D = MR = AR
Three questions:
Should the firm produce?
If so, what amount?
What economic profit (loss) will be
realized?
LO3
(2)
Total Fixed Cost
(TFC)
(3)
Total Variable
Costs (TVC)
(4)
Total Cost
(TC)
(5)
Total Revenue
(TR)
(6)
Profit (+)
or Loss (-)
$100
$0
$100
$0
$-100
100
90
190
131
-59
100
170
270
262
-8
100
240
340
393
+53
100
300
400
524
+124
100
370
470
655
+185
100
450
550
786
+236
100
540
640
917
+277
100
650
750
1048
+298
100
780
880
1179
+299
10
100
930
1030
1310
+280
LO3
Total Economic
Profit
$1800
1700
1600
1500
1400
1300
1200
1100
1000
900
800
700
600
500
400
300
200
100
LO3
$500
400
300
200
100
Break-Even Point
(Normal Profit)
Total Revenue, (TR)
Maximum
Economic
Profit
$299
Total Cost,
(TC)
P=$131
Break-Even Point
(Normal Profit)
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Quantity Demanded (Sold)
Total Economic
Profit
$299
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Quantity Demanded (Sold)
(1)
Total
Product
(Output)
(2)
Average
Fixed Cost
(AFC) =
TFC/Q
(3)
Average
Variable
Costs
(AVC)=
TVC/Q
(4)
Average
Total Cost
(ATC)= TC/Q
(5)
Marginal
Cost
(MC)=
TC/Q
(5)
Price =
Marginal
Revenue
(MR) =
TR/Q
LO3
(6)
Total
Economic
Profit (+)
or Loss (-)
$-100
$100.00
$90.00
$190
$90
$131
-59
50.00
85.00
135
80
131
-8
33.33
80.00
113.33
70
131
+53
25.00
75.00
100.00
60
131
+124
20.00
74.00
94.00
70
131
+185
16.67
75.00
91.67
80
131
+236
14.29
77.14
91.43
90
131
+277
12.50
81.25
93.75
110
131
+298
11.11
86.67
97.78
130
131
+299
10
10.00
93.00
103.00
150
131
+280
$200
MR = MC
150
P=$131
MC
MR = P
ATC
Economic Profit
100
AVC
A=$97.78
50
LO3
Output
10
Loss-Minimizing Case
Loss minimization
Still produce because P > minAVC
Losses at a minimum where
MR=MC
LO3
Loss-Minimizing Case
$200
Loss
A=$91.67
ATC
AVC
100
P=$81
50
LO3
MC
150
MR = P
V = $75
Output
10
Shutdown Case
(2)
Average
Fixed
Cost
(AFC) =
TFC/Q
(3)
Average
Variable
Costs
(AVC)=
TVC/Q
$100.00
$90.00
50.00
85.00
33.33
80.00
25.00
75.00
20.00
74.00
16.67
75.00
14.29
77.14
12.50
81.25
11.11
86.67
10
10.00
93.00
(1)
Total
Product
(Output
)
0
LO3
LO4
Price
Quantity
Supplied
$151
10
$+480
131
+299
111
+138
91
-3
81
-64
71
-100
61
-100
P5
P4
P3
P2
P1
AVC
Q4
Quantity Supplied
LO4
MR4
MR3
MR2
MR1
Q3
MR5
ATC
Q2
MC
Q5
S
e
P5
P4
P3
P2
P1
MR5
ATC
AVC
Q2
MR4
MR3
MR2
MR1
Shut-Down Point
(If P is Below)
0
Q3
Q4
Quantity Supplied
LO4
MC
Q5