© 2008 Pearson Addison Wesley. All rights reserved Chapter Eight Competitive Firms and Markets

© 2008 Pearson Addison Wesley. All rights reserved

Chapter Eight

Competitive Firms and Markets

台灣的完全競爭產業

© 2008 Pearson Addison Wesley. All rights reserved. 8-2

大類產業名稱產業數 4位數字產業名稱

礦業及土石採取業 0

製造業 8 金屬模具製造業、紙容器製造業

水電燃氣業 0

製造業 2 建物裝潢業、其他營造業

批發、零售及餐飲業 37 成衣批發業、鞋類批發業

運輸、倉儲及通訊業 3 計程車客運業、遊覽車客運業

金融、保險及不動產業 2 農會、漁會信用部、建築投資業

工商服務業 3 戶外廣告業、其他物品租賃業

社會服務業及個人服務業 8 視聽及視唱中心、其他娛樂業

總計 63

6.1 表台灣的完全競爭產業

1. 85 50註本表分類係依據民國年工商普查資料，並以家廠商以上，每家市場占有率不3%超過為標準處理而得

2. 85 4 523 12%註年工商普查位數字之工商服務產業共個，表列產業約佔

資料來源：陳正倉、林惠玲、陳忠榮、莊春發，產業經濟學 ( 雙葉書廊 )

運將大軍圍北市府更新日期 :2009/12/09 00:07 【記者蔡明樺／台北報導】

• 台北市滿街都是「小黃」，衛星車隊間的車資折扣戰，樂了民眾卻苦了運將，差額大多由運將吸收，層層剝削的結果，有運匠抱怨時薪比工讀生還低，昨天集結上千輛計程車包圍北市府，要求交通局協助抵制車隊間的折扣大戰。

• 北市公運處主任秘書楊金樹表示，台北縣市和基隆市有統一的計程車費率標準，宜蘭縣和桃園縣的計程車也可以進到北北基載客，因此，針對運將反映的車資折扣現象，必須邀集五個縣市的交通主管機關，以及公路總局代表一併協商，預計兩周內完成。


資料來源： http://tw.news.yahoo.com/article/url/d/a/091209/128/1wirq.html

Competitive Firms and Markets

• In this chapter, we examine four main topics

– Competition

– Profit Maximization

– Competition in the Short Run

– Competition in the Long Run


Competition

• Competition is a common market structure that

has very desirable properties, so it is useful to

compare other market structures to competition.


Price Taking

• Economists say that a market is competitive if

each firm in the market is a price taker: a firm

that cannot significantly affect the market price

for its output or the prices at which it buys its

inputs.


Why A Firm’s Demand Curve is Horizontal

• Consumers believe that all firms in the market sell

identical products.• Firms freely enter and exit the market.• Buyers and sellers know the prices charged by

firms.• Transaction costs—the expenses of finding a

trading partner and making a trade for a good or

service other than the price paid for that good or

service—are low.


Why A Firm’s Demand Curve is Horizontal

• We call a market in which all these conditions

hold a perfectly competitive market. In such a

market, if a firm raised its price above the market

price, the firm would be unable to make any

sales.


Derivation of A Competitive Firm’s Demand Curve

• The demand curve that an individual firm faces is

called the residual demand curve: the market

demand that is not met by other sellers at any

given price.

• The residual demand curve that a single firm

faces is the market demand minus the supply of

the other firms in the market.

(8.1)



Figure 8.1Residual Demand Curve

Derivation of A Competitive Firm’s Demand Curve

• The residual demand curve that the firm faces is

much flatter than the market demand curve.

• The elasticity of the residual demand curve is

much higher than the market elasticity.

• The elasticity of demand, i ,facing Firm i is :

(8.2)


Why Perfect Competition is Important

• Perfectly competitive markets are important for two

reasons.

– First, many markets can be reasonably described as competitive. Many agricultural and other commodity markets, stock exchanges, retail and wholesale markets, building construction markets, and others have many or all of the properties of a perfectly competitive market.


Why Perfect Competition is Important

– Second, a perfectly competitive market has many desirable properties. Economists use this model as the ideal against which real-world markets are compared.


Profit Maximization

• Profit

– A firm’s profit, , is the difference between a firm’s revenues, R, and its cost, C :

R - C

If profit is negative, < 0, the firm makes a loss.

• Equation 8.3


Two Steps to Maximizing Profit

• To maximize its profit, any firm (not just

competitive, price-taking firms) must answer two

questions:

– Output decision: If the firm produces, what output level, q*, maximizes its profit or minimizes its loss?

– Shutdown decision: Is it more profitable to produce q* or to shut down and produce no output?



Figure 8.2Maximizing Profit

Output Rules

• marginal profit

– the change in profit a firm gets from selling one more unit of output

• marginal revenue (MR)

– the change in revenue a firm gets from selling one more unit of output


Output Rules

• Output Rule 1: The firm sets its output where its

profit is maximized.

• Output Rule 2: A firm sets its output where its

marginal profit is zero.

(8.4)

(8.5)

(8.6)


Output Rules

• Output Rule 3: A firm sets its output where its

marginal revenue equals its marginal cost.

(8.7)

(8.8)


Shutdown Rules

• Shutdown Rule 1: The firm shuts down only if it can reduce

its loss by doing so.

– The firm compares its revenue to its variable cost only when deciding whether to stop operating.

– Because the fixed cost is sunk—the expense cannot be avoided by stopping operations—the firm pays this cost whether it shuts down or not. The sunk fixed cost is irrelevant to the shutdown decision.


Shutdown Rules

• Shutdown Rule 2: The firm shuts down only if

its revenues is less than its avoidable cost.

– This rule holds for all types of firms in both short run and the long run.


Competition in the Short Run• Short-Run Output Decision

– Because a competitive firm’s marginal revenue equals the market price, a profit-maximizing competitive firm produces the amount of output at which its marginal cost equals the market price.

(8.9)

(8.10)



Figure 8-3

How a Competitive Firm Maximizes Profit

Solved Problem 8.1

• If a specific tax of is collected from only one

competitive firm, how should that firm change its

output level to maximize its profit, and how does its

maximum profit change?

1.Use calculus to find the firm’s profit-maximizing output before the tax is imposed

2.Use calculus to find the firm’s profit-maximizing output after the tax is imposed


Solved Problem 8.1

3. Use comparative statics to determine how a change in the tax rate affects output

4. Show that the profit must fall, using the definition of a maximum or showing that profit falls at every output


© 2007 Pearson Addison-Wesley. All rights reserved. 8–26

Solved Problem 8.1

q1

q2

e1

e2

q, Units per year

p p = MR

AC 1

MC 1

MC 2 = MC 1 +

AC 2 = AC 1 +

AC 2(q 2)

AC 1(q 1)

A

B

Short-Run Shutdown Decision

• The firm can gain by shutting down only if its

revenue is less than its short-run variable cost

as shown in equation (8.14)

• A competitive firm shuts down if the market price

is less than the minimum of its short-run average

variable cost curve as shown in equation (8.15).



Figure 8.4The Short-Run Shutdown Decision

Short-Run Firm Supply Curve

• Tracing Out the Short-Run Supply Curve

– If the price falls below the firm’s minimum average variable cost, the firm shuts down.

– The competitive firm’s short-run supply curve is its marginal cost curve above its minimum average variable cost.



Figure 8.5How the Profit-Maximizing Quantity Varies with Price

Short-Run Firm Supply Curve

• Factor Prices and the Short-Run Firm Supply

Curve

– An increase in factor prices causes the production costs of a firm to rise, shifting the firm’s supply curve to the left.



Figure 8.6Effect of an Increase in the Cost of Materials on the Vegetable Oil Supply Curve

Short-Run Market Supply Curve

• Short-Run Market Supply with Identical Firms– The market supply curve flattens as the number of firms in the market increases because the market supply curve is the horizontal sum of more and more upward-sloping firm supply curves.

– The more identical firms producing at a given price, the flatter (more elastic) the short-run market supply curve at that price.



Figure 8.7Short-Run Market Supply with Five Identical Lime Firms

Short-Run Market Supply Curve

• Short-Run Market Supply with Firms That Differ– Where firms differ, only the low-cost firm supplies goods at relatively low prices. As the price rises, the other, higher-cost firm starts supplying, creating a stairlike market supply curve. The more suppliers there are with differing costs, the more steps there are in the market supply curve.

– Differences in costs are one explanation for why some market supply curves are upward sloping.



Figure 8.8Short-Run Market Supply with Two Different Lime Firms

Short-Run Competitive Equilibrium

• By combining the short-run market supply curve

and the market demand curve, we can

determine the short-run competitive equilibrium.



Figure 8.9Short-Run Competitive Equilibrium in the Lime Market

Competition in the Long Run

• Long-run competitive profit maximization

– In the long run, typically all costs are variable, so the firm does not have to consider whether fixed costs are sunk or avoidable.


Long-Run Competitive Profit Maximization

• Long-Run Output Decision

– The firm picks the quantity that maximizes long-run profit, which is the difference between revenue and long-run cost.

– Equivalently, it operates where long-run marginal profit is zero and where marginal revenue equals long-run marginal cost.


Long-Run Competitive Profit Maximization

• Long-Run Shutdown Decision

– After determining the output level, q*, that maximizes its profit or minimizes its loss, the firm decides whether to produce or shut down.


Long-Run Firm Supply Curve

• A firm’s long-run supply curve is its long-run

marginal cost curve above the minimum of its

long-run average cost curve (because all costs

are variable in the long run).



Figure 8.10The Short-Run and Long-Run Supply Curves

Long-Run Market Supply Curve

• The competitive market supply curve is the

horizontal sum of the supply curves of the

individual firms in both the short run and long run.• In the long run, firms can enter or leave the

market. Thus before we can add all the relevant

firm supply curves to obtain the long-run market

supply curve, we need to determine how many

firms are in the market at each possible market

price.



• Role of Entry and Exit

– The number of firms in a market in the long run is determined by the entry and exit of firms.

•A firm enters the market if it can make a long-run profit, > 0.

•A firm exits the market to avoid a long-run loss, < 0.



Table 8.1Average Annual Entry and Exit Rates in Selected U.S. Industries, 1989-1996


• Long-Run Market Supply with Identical Firms

and Free Entry

– The long-run market supply curve is flat at the minimum long-run average cost if firms can freely enter and exit the market, an unlimited number of firms have identical costs, and input prices are constant.



Figure 8.11Long-Run Firm and Market Supply with Identical Vegetable Oil Firms


• Long-Run Market Supply When Entry is Limited

– If the number of firms in a market is limited in the long run, the market supply curve slopes upward. (the first)

– The number of firms in a market is limited if the government restricts that number, if firms need a scarce resource, or if entry is costly.



• Long-Run Market Supply When Firms Differ

– A second reason why some long-run market supply curves slope upward is that firms differ.

– Firms with relatively low minimum long-run average costs are willing to enter the market at lower prices than others, resulting in an upward-sloping long-run market supply curve.



• Long-Run Market Supply When Input Prices

Vary with Output

– A third reason why market supply curves may slope is nonconstant input prices.

– In conclusion, the long-run supply curve is upward sloping in an increasing-cost market and flat in a constant-cost market.



Figure 8.12Long-Run Market Supply in an Increasing-Cost Market

Long-Run Competitive Equilibrium

• The intersection of the long-run market supply

and demand curves determines the long-run

competitive equilibrium.



Figure 8.14The Short-Run and Long-Run Equilibria for Vegetable Oil

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© 2008 Pearson Addison Wesley. All rights reserved Chapter Eight Competitive Firms and Markets