Professional Documents
Culture Documents
Chap 009
Chap 009
Chap 009
Chapter 9
Pure
Competition
Chapter Objectives
The four basic market models
Conditions for pure competition
Profit maximization for
competitive firms
The competitive firm supply
curve
Industry entry and exit
Industry cost structure
Economic efficiency
9-2
Pure competition
Pure monopoly
Monopolistic competition
Oligopoly
Imperfect Competition
Pure
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Pure Competition
Pure Competition
$1179
Firms
Revenue
Data
917
QD TR
$131 0
131 1
131 2
131 3
131 4
131 5
131 6
131 7
131 8
131 9
131 10
TR
1048
$0
131
262
393
524
655
786
917
1048
1179
1310
MR
] $131
] 131
] 131
] 131
] 131
] 131
] 131
] 131
] 131
] 131
Firms
Demand
Schedule
(Average
Revenue)
786
655
524
393
262
D = MR = AR
131
2
10
12
9-5
Profit Maximization
Two approaches
Total revenue and total cost
approach
Produce where TR-TC is greatest
(2)
Total Fixed
Cost (TFC)
(3)
Total Variable
Cost (TVC)
0
1
2
3
4
5
6
7
8
9
10
$100
100
100
100
100
100
100
100
100
100
100
$0
90
170
240
300
370
450
540
650
780
930
(4)
(5)
(6)
Total Cost Total Revenue Profit (+)
(TC)
(TR)
or Loss (-)
$100
190
270
340
400
470
550
640
750
880
1030
$0
131
262
393
524
655
786
917
1048
1179
1310
$-100
-59
-8
+53
+124
+185
+236
+277
+298
+299
+280
Do
You
SeeGraph
Profit Maximization?
Now
Lets
The Results
9-8
Total Economic
Profit
$1800
1700
1600
1500
1400
1300
1200
1100
1000
900
800
700
600
500
400
300
200
100
$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)
9-9
0
1
2
3
4
5
6
7
8
9
10
(2)
Average
Fixed
Cost
(AFC)
$100.00
50.00
33.33
25.00
20.00
16.67
14.29
12.50
11.11
10.00
(3)
Average
Variable
Cost
(AVC)
(4)
Average
Total
Cost
(ATC)
$90.00 $190.00
85.00 135.00
80.00 113.33
75.00 100.00
74.00
94.00
75.00
91.67
77.14
91.43
81.25
93.75
86.67
97.78
93.00 103.00
(5)
Marginal
Cost
(MC)
$90
80
70
60
70
80
90
110
130
150
(6)
Marginal
Revenue
(MR)
(7)
Profit (+)
or Loss (-)
$131
131
131
131
131
131
131
131
131
131
$-100
-59
-8
+53
+124
+185
+236
+277
+298
+299
+280
Surprise
- Now
Lets GraphNow?
It
DoNo
You
See Profit
Maximization
9-10
$200
MR = MC
150
P=$131
MC
MR = P
ATC
Economic Profit
100
AVC
A=$97.78
50
Output
10
9-11
$200
150
Loss
A=$91.67
ATC
AVC
100
P=$81
50
MC
MR = P
V = $75
Output
10
9-13
$200
150
100
ATC
V = $74
AVC
MR = P
P=$71
50
Short-Run
Shut Down Point
P < Minimum AVC
$71 < $74
1
Output
10
9-14
Quantity
Supplied
10
9
8
7
6
0
0
9-15
P5
P4
P3
P2
P1
MC
MR5
ATC
AVC
b
a
MR4
MR3
MR2
MR1
Q2
Q3
Q4
Quantity Supplied
Q5
9-16
Firms produce
where
MR=MC
Examine the MC for the Competitive Firm
MC Above AVC Becomes
the Short-Run Supply Curve
P5
Break-even
(Normal Profit) Point
d
P4
P3
P2
P1
S
MC
MR5
ATC
AVC
b
a
MR4
MR3
MR2
MR1
Shut-Down Point
(If P is Below)
0
Q2
Q3
Q4
Quantity Supplied
Q5
9-17
Industry
P
S = MCs
s = MC
Economic
Profit
ATC
d
$111
$111
AVC
D
8000
Industry
P
S1
MC
ATC
$60
$60
50
50
MR
40
S2
D2
40
D1
100
80,000
90,000
100,000
Industry
P
S3
MC
ATC
$60
$60
50
50
MR
40
S1
D1
40
D3
100
80,000
90,000
100,000 P
9-23
P1
P2
$50
Z3
Z1
Z2
P3
D3
Q3
90,000
D1
Q1
100,000
D2
Q2
110,000
9-24
P2
$55
P1
$50
P3
$40
S
Y2
Y1
Y3
D2
D1
D3
Q3
90,000
Q1
100,000
Q2
110,000
Allocative efficiency
P = MC
Long-Run Equilibrium
Single Firm
P=MC=Minimum
ATC (Normal Profit)
Market
MC
Price
Price
ATC
MR
P
D
Qf
Quantity
Qe
Quantity
9-27
As price
decreases to f,
Consumer
surplus abc
increases to adf
Producer and
consumer
surplus is
maximized
as shown by
the gray triangle
P2
D
Q1
Q2
Quantity
Key Terms
pure competition
pure monopoly
monopolistic
competition
oligopoly
imperfect
competition
price taker
average revenue
total revenue
marginal revenue
break-even point
MR=MC rule
short-run supply
curve
long-run supply
curve
constant-cost
industry
increasing-cost
industry
decreasing-cost
industry
productive
efficiency
allocative efficiency
consumer surplus
producer surplus
9-30
Pure
Monopoly
9-31