hello, I need help in Micro Econ 2 work

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ECON266 – Chapter 21 – Perfect Competition Slide 1 Page 1 of 10 ___________________________________ ___________________________________ Perfect Competition ___________________________________ Chapter 21 Ponder: ___________________________________ Why Is the Demand Curve Horizontal for a Firm in a Perfectly Competitive Market? Would You Really Want Perfect Competition? Econ266.chapter 21_swaby ___________________________________ 21:1 ___________________________________ ___________________________________ Slide 2 ___________________________________ Introduction ___________________________________ • Objective of chapter: use demand, cost of production & marginal analysis to explain how competitive markets determine price, price, output, output, and profits • Market structure: structure: • classification system for the key traits of a market, including the number of firms, the similarity of products sold, and the ease of entry & exit from the market Econ266.chapter 21_swaby ___________________________________ ___________________________________ ___________________________________ 2 ___________________________________ ___________________________________ Slide 3 ___________________________________ Characteristics of Perfect Competition ___________________________________ • A large number of small firms • Each firm small relative to total market – eg. eg. – egg farmers; • No one firm can influence market price ___________________________________ • A homogeneous/standardized product • The good or service of each firm is identical from the buyers’ point of view – e.g. -- wheat • Buyers are indifferent as to which seller’s product they buy; • No need for advertising (non(non-price competition ___________________________________ • Very easy entry into or exit from market ___________________________________ • No financial, technical, or governmental barriers • Perfect mobility -- resources are completely mobile • Perfect knowledge – all economic opportunities are know -- example: head coaching jobs in NFL Econ266.chapter 21_swaby 3 ___________________________________ ___________________________________ ECON266 – Chapter 21 – Perfect Competition Slide 4 ___________________________________ Pure Competitor -- Price Taker ___________________________________ • No exact real real--world example of perfect competition • Close approximation of pure competition: • Farm products markets, the stock market, internet companies (?) ___________________________________ ___________________________________ • Price taker • A seller that has no direct control over the price of the product it sells; Market supply & demand determine price • Individual firm’s demand curve is perfectly elastic; Price is always read from the DEMAND curve • Will firm set price above or below market price? Econ266.chapter 21_swaby Page 2 of 10 ___________________________________ 4 ___________________________________ ___________________________________ Slide 5 ___________________________________ Graphical Illustration ___________________________________ ___________________________________ ___________________________________ ___________________________________ Econ266.chapter 21_swaby 5 ___________________________________ ___________________________________ Slide 6 ___________________________________ ShortShort-run Profit Maximization ___________________________________ • Pure competitor has no control over price, so what does the firm control? ___________________________________ • The quantity of output that will maximize profit • Two profit maximization methods: ___________________________________ – Total revenue - total cost method – [P = TRTR-TC] – MR = MC method • Compute profit using formula:[P = {R {R--ATC} x Q] • Note Note:: at break even point [BEP] -- economic profit is zero, but there is normal or accounting profit. Why? Econ266.chapter 21_swaby 6 ___________________________________ ___________________________________ ___________________________________ ECON266 – Chapter 21 – Perfect Competition Slide 7 Accounting Profit versus Economic Profit • Accountants define cost as amounts paid outout-ofof-pocket to nonnon-owners (e.g. salary, rent, etc) – Explicit costs • Economists define costs as Explicit as well as implicit (opportunity cost) • Accounting Profit = TR – Explicit Cost • Economic Profit = TR – Explicit Cost – Opportunity Cost • Economic Profit = Accounting Profit – Implicit/Opportunity Cost Econ266.chapter 21_swaby 7 Page 3 of 10 ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ Slide 8 ___________________________________ ShortShort-Run Profit Maximization Schedule ___________________________________ ___________________________________ ___________________________________ ___________________________________ Econ266.chapter 21_swaby 8 ___________________________________ ___________________________________ Slide 9 ___________________________________ Graphical Illustration ___________________________________ ___________________________________ ___________________________________ ___________________________________ Econ266.chapter 21_swaby 9 ___________________________________ ___________________________________ ECON266 – Chapter 21 – Perfect Competition Slide 10 ___________________________________ MR = MC Method ___________________________________ • Marginal Revenue (MR) • the extra revenue a firm receives when it sells one more unit of a product • Output for profit maximization? ___________________________________ ___________________________________ • occurs at the point where MC & MR intersect • Conclusion: • in perfect competition the firm’s marginal revenue equals the price that the firm views as a horizontal demand curve Econ266.chapter 21_swaby Page 4 of 10 ___________________________________ 10 ___________________________________ ___________________________________ Slide 11 ___________________________________ Graphical Illustration – TR minus TC method ___________________________________ ___________________________________ ___________________________________ ___________________________________ Econ266.chapter 21_swaby 11 ___________________________________ ___________________________________ Slide 12 ___________________________________ Graphical Illustration: MC = MR method ___________________________________ ___________________________________ ___________________________________ ___________________________________ Econ266.chapter 21_swaby 12 ___________________________________ ___________________________________ ECON266 – Chapter 21 – Perfect Competition Slide 13 ___________________________________ ShortShort-Run Loss Minimization ___________________________________ • MR=MC Rule: ___________________________________ • firm minimizes loss by producing the output where MR = MC • ShortShort-run Shutdown Point: ___________________________________ • point at which MC curve intersects the AVC • if price is below minimum point on the AVC curve, each additional unit produced would not cover the variable cost per unit, and, therefore, operating would increase losses Econ266.chapter 21_swaby Page 5 of 10 ___________________________________ 13 ___________________________________ ___________________________________ Slide 14 ___________________________________ Graph of SS-R Loss Minimization ___________________________________ ___________________________________ ___________________________________ ___________________________________ Econ266.chapter 21_swaby 14 ___________________________________ ___________________________________ Slide 15 ___________________________________ Graphical Illustration: S-R Supply Curve ___________________________________ ___________________________________ ___________________________________ ___________________________________ Econ266.chapter 21_swaby 15 ___________________________________ ___________________________________ ECON266 – Chapter 21 – Perfect Competition Slide 16 Page 6 of 10 ___________________________________ Graph of SS-R Shutdown Point ___________________________________ ___________________________________ ___________________________________ ___________________________________ Econ266.chapter 21_swaby 16 ___________________________________ ___________________________________ Slide 17 ___________________________________ Firm’s & Industry’s S-RSC ___________________________________ • Perfectly competitive firm’s S-RSC ___________________________________ • curve that shows the quantities supplied by the industry at different prices after firms complete their entry and exit • Purely competitive industry’s S-RSC • supply curve derived from the horizontal summation of all firm’s marginal cost curves in the industry above the minimum point of each firm’s AVC curve Econ266.chapter 21_swaby 17 ___________________________________ ___________________________________ ___________________________________ ___________________________________ Slide 18 ___________________________________ ShortShort-Run Equilibrium ___________________________________ • Firm earns an economic profit ___________________________________ • price is above ATC • MR = MC • state of short run equilibrium will remain until some factor changes and causes a new equilibrium condition in the industry Econ266.chapter 21_swaby ___________________________________ ___________________________________ 18 ___________________________________ ___________________________________ ECON266 – Chapter 21 – Perfect Competition Slide 19 Page 7 of 10 ___________________________________ Graphical Illustration ___________________________________ ___________________________________ ___________________________________ ___________________________________ Econ266.chapter 21_swaby 19 ___________________________________ ___________________________________ Slide 20 ___________________________________ LongLong-Run Supply Curves (L(L-RSC) ___________________________________ Key Concepts: 1) all inputs are variable in the long run 2) free entry & exit characteristic of pure competition is a crucial determinant of shape of LL-RSC • Long Long--Run Equilibrium Conditions: • MR = MC • P = lowest point on ATC • firm earns a normal profit (zero economic profit) • P = MR = MC = ATC = AVC Econ266.chapter 21_swaby 20 ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ Slide 21 ___________________________________ Graphical Illustration ___________________________________ ___________________________________ ___________________________________ ___________________________________ Econ266.chapter 21_swaby 21 ___________________________________ ___________________________________ ECON266 – Chapter 21 – Perfect Competition Slide 22 3-Types of LRSC supply curve) Page 8 of 10 ___________________________________ (long(long-run ___________________________________ Recall: L-R Supply Curve of purely competitive industry is firm’s MC curve above the minimum point on its AVC curve • shows the quantities supplied by the industry at different prices after firms complete their entry and exit • shape depends on response of input prices as new firms enter the industry • constantconstant-cost industry • expansion of industry output by entry of new firms has no effect on the firm’s cost curves • LRSC in a perfectly competitive Econ266.chapter 21_swaby is perfectly constantindustry constant-cost elastic (horizontal) ___________________________________ ___________________________________ ___________________________________ 22 ___________________________________ ___________________________________ Slide 23 ___________________________________ LRSC -- Constant Cost Industry ___________________________________ ___________________________________ ___________________________________ ___________________________________ Econ266.chapter 21_swaby 23 ___________________________________ ___________________________________ Slide 24 ___________________________________ DecreasingDecreasing-cost Industry ___________________________________ • industry in which the expansion of industry output by the entry of new firms decreases the firm’s cost curves • REASON? • greater sales volume allows the suppliers to achieve economies of scale and lower their input prices ___________________________________ ___________________________________ • CONCLUSION: ___________________________________ • LRSC in a perfectly competitive decreasingdecreasingcost industry is downward sloping Econ266.chapter 21_swaby 24 ___________________________________ ___________________________________ ECON266 – Chapter 21 – Perfect Competition Slide 25 Page 9 of 10 ___________________________________ LRSC - Decreasing Cost Industry ___________________________________ ___________________________________ ___________________________________ ___________________________________ Econ266.chapter 21_swaby 25 ___________________________________ ___________________________________ Slide 26 IncreasingIncreasing-cost Industry • industry in which the expansion of industry output by the entry of new firms increases the firm’s cost curves • REASON? • use of more input, say labor, the demand for greater quantities drives up input prices ___________________________________ ___________________________________ ___________________________________ • Conclusion: • LRSC in a perfectly competitive increasingincreasingcost industry is upward sloping • in practice, most industries are increasingincreasingcost industries Econ266.chapter 21_swaby ___________________________________ ___________________________________ 26 ___________________________________ ___________________________________ Slide 27 ___________________________________ LRSC - Increasing Cost Industry ___________________________________ ___________________________________ ___________________________________ ___________________________________ Econ266.chapter 21_swaby 27 ___________________________________ ___________________________________ ECON266 – Chapter 21 – Perfect Competition Slide 28 ___________________________________ Summary of Major Statements ___________________________________ • the large large--number number--ofof-sellers condition is met when each firm is so small relative to the total that no single firm can influence the market price • if a product is homogeneous, buyers are indifferent as to which product they buy; no advertising needed • perfect competition requires that resources be completely mobile to freely enter or exit a market • in perfect competition, the firm’s MR equals the price the firm views as a horizontal demand curve • profit maximization/loss minimization output? MR = MC • in perfect competition, each firm is forced to produced at the lowest point on its ATC and produce a high quantity Econ266.chapter 21_swaby Page 10 of 10 28 ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________

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