hubbard01_instructorppt11.ppt

Firms in Perfectly Competitive Markets,2 of 35,After studying this chapter,you should be able to:Define a perfectly competitive market,and explain why a perfect competitor faces a horizontal demand curve.Explain how a perfect competitor decides how much to produce.Use graphs to show a firms profit or loss.Explain why firms may shut down temporarily.Explain how entry and exit ensure that firms earn zero economic profit in the long run.Explain how perfect competition leads to economic efficiency.,Perfect Competition in the Market for Organic Apples,LEARNING OBJECTIVES,The process of competition is at the heart of the market system and is the focus of this chapter.,3 of 35,Firms in Perfectly Competitive Markets,11 1,4 of 35,Perfectly Competitive Markets,Perfectly competitive market A market that meets the conditions of(1)many buyers and sellers,(2)all firms selling identical products,(3)no barriers to new firms entering the market.,5 of 35,Perfectly Competitive Markets,A Perfectly Competitive Firm Cannot Affect the Market Price,Price taker A buyer or seller that is unable to affect the market price.,11-1,6 of 35,How a Firm Maximizes Profit in a Perfectly Competitive Market,Profit Total revenue minus total cost.Profit=TR-TC,11-2,Dont Confuse the Demand Curve for Farmer Douglass Wheat with the Market Demand Curve for Wheat,7 of 35,How a Firm Maximizes Profit in a Perfectly Competitive Market,Revenue for a Firm in a Perfectly Competitive Market,Average revenue(AR)Total revenue divided by the number of units sold.,Marginal revenue(MR)Change in total revenue from selling one more unit.,8 of 35,How a Firm Maximizes Profit in a Perfectly Competitive Market,Revenue for a Firm in a Perfectly Competitive Market,11 2,9 of 35,How a Firm Maximizes Profit in a Perfectly Competitive Market,Revenue for a Firm in a Perfectly Competitive Market,11 3,10 of 35,How a Firm Maximizes Profit in a Perfectly Competitive Market,Revenue for a Firm in a Perfectly Competitive Market,11-3,11 of 35,Profit=(P x Q)TC,Illustrating Profit or Losson the Cost Curve Graph,Profit=(P ATC)Q,Or,12 of 35,Showing a Profit on the Graph,Illustrating Profit or Losson the Cost Curve Graph,13 of 35,Determining Profit-Maximizing Price and Quantity,11-1,14 of 35,Illustrating When a Firm Is Breaking Even or Operating at a LossP ATC,which means the firm makes a profitP=ATC,which means the firm breaks even(its total cost equals it total revenue)P ATC,which means the firm experiences losses,Illustrating Profit or Losson the Cost Curve Graph,15 of 35,Remember that Firms Maximize Total Profit,Not Profit per Unit,Illustrating Profit or Losson the Cost Curve Graph,16 of 35,Losing Money in the Medical Screening Industry,11-1,Providing preventive medical scans turned out not to be a profitable business.,17 of 35,Deciding Whether to Produce or to Shut Down in the Short Run,In the short run a firm suffering losses has two choices:Continue to produceStop production by shutting down temporarilySunk cost A cost that has already been paid and that cannot be recovered.,18 of 35,When to Close a Laundry,11-2,Keeping a business open even when suffering losses can sometimes be the best decision in the short run.,19 of 35,The Supply Curve of the Firm in the Short Run,Shutdown point The minimum point on a firms average variable cost curve;if the price falls below this point,the firm shuts down production in the short run.,Deciding Whether to Produceor to Shut Down in the Short Run,20 of 35,Economic Profit and the Entry or Exit Decision,“If Everyone Can Do It,You Cant Make Money At It”The Entry and Exit of Firms in the Long Run,21 of 35,“If Everyone Can Do It,You Cant Make Money At It”The Entry and Exit of Firms in the Long Run,Economic Profit and the Entry or Exit Decision,Economic profit A firms revenues minus all its costs,implicit and explicit.Economic loss The situation in which a firms total revenue is less than its total cost,including all implicit costs.,22 of 35,“If Everyone Can Do It,You Cant Make Money At It”The Entry and Exit of Firms in the Long Run,Economic Profit and the Entry or Exit Decision,11 5,23 of 35,“If Everyone Can Do It,You Cant Make Money At It”The Entry and Exit of Firms in the Long Run,Economic Profit and the Entry or Exit Decision,ECONOMIC PROFIT LEADS TO ENTRY OF NEW FIRMS,24 of 35,“If Everyone Can Do It,You Cant Make Money At It”The Entry and Exit of Firms in the Long Run,Economic Profit and the Entry or Exit Decision,ECONOMIC LOSSES LEAD TO EXIT OF FIRMS,25 of 35,“If Everyone Can Do It,You Cant Make Money At It”The Entry and Exit of Firms in the Long Run,Economic Profit and the Entry or Exit Decision,ECONOMIC LOSSES LEAD TO EXIT OF FIRMS,26 of 35,“If Everyone Can Do It,You Cant Make Money At It”The Entry and Exit of Firms in the Long Run,Long-Run Equilibrium in a Perfectly Competitive Market,Long-run competitive equilibrium The situation in which the entry and exit of firms have resulted in the typical firm just breaking even.,27 of 35,“If Everyone Can Do It,You Cant Make Money At It”The Entry and Exit of Firms in the Long Run,The Long-Run Supply Curve in a Perfectly Competitive Market,Long-run supply curve A curve showing the relationship in the long run between market price and the quantity supplied.,28 of 35,“If Everyone Can Do It,You Cant Make Money At It”The Entry and Exit of Firms in the Long Run,The Long-Run Supply Curve in a Perfectly Competitive Market,29 of 35,The Decline of Apple Production in New York State,11-3,When apple growers in New York State stopped breaking even,many sold their land to housing developers.,30 of 35,Easy Entry Makes the Long Run Pretty Short in the Apple iPhone Apps Store,Economic profits are rapidly competed away in the iPhone apps store.,YOUR TURN:Test your understanding by doing related problem 6.7 at the end of this chapter.,In a competitive market,earning an economic profit in the long run is extremely difficult.And the ease of entering the market for iPhone apps has made the long run pretty short.,Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run.,11.5 LEARNING OBJECTIVE,31 of 35,Perfect Competition and Efficiency,Productive EfficiencyProductive efficiency The situation in which a good or service is produced at the lowest possible cost.,32 of 35,How Productive Efficiency Benefits Consumers,11-2,33 of 35,Perfect Competition and Efficiency,Allocative Efficiency,Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them:,The price of a good represents the marginal benefit consumers receive from consuming the last unit of the good sold.Perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of producing the last unit.Therefore,firms produce up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.,34 of 35,Perfect Competition and Efficiency,Allocative Efficiency,Allocative efficiency A state of the economy in which production reflects consumer preferences;in particular,every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.,35 of 35,Organic Food Trend Chips Out a Niche in Snack Food Isle,36 of 35,AN INSIDE LOOK,Figure 1The demand for a product increases after it is“green certified.”The graph assumes that the firm did not spend money to acquire certification for its product.,It Isnt Easyor Cheapto Be Green,Figure 2The demand for a product increases after it is“green certified.”The marginal cost and average total cost curves shift up due to the cost of certification.,37 of 35,Allocative efficiencyAverage revenue(AR)Economic lossEconomic profitLong-run supply curveMarginal revenue,Perfectly competitive marketPrice takerProductive efficiencyProfitShutdown pointSunk cost,