Microeconomics Ch 22

8/12/2019 Microeconomics Ch 22

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M i c r o e c o n o m i c

s

Dr. Karim Kobeissi



Chapter 22: The Competitive Firm



Four Distinct Market Models

• 1) Pure Monopoly

• One frm--sole seller o a specifc product (e.g., electricity), the price is usually regulated by the government.

• 2) Oliopoly

• e! sellers (e.g., cars producers), di"erentiated products,must ta#e prices o others into account !hen determining its

o!n price and strategies.

• !) Monopolistic Competition

– " Many sellers (e.g., clothes producers), !ho trade over a

range o prices.

– - $ellers can di"erentiate their o"ers to buyers .

• #) Per$ect or Pure Competition

•Many sellers o an identical product (e.g., sugar)

%%priceta#ers&.





Efficient Markets Mean Loss of Pricing Control

The market structure distinction is e&tremelyimportant $or sellers 'ecause i$ price transparency eventually results in a completely e(cient market%sellers ill have no control over prices *they'ecome price ta#ers)+the result ill 'e pure

competition.



actors 'hat Ma#e Mar#ets erectly ompetitive

• 1) ,ery lare num'er o$ sellers:

e&amples include $arm commodities% stockmarket% and $orein e&chane markets.

• 2) -tandardied product: i$ the price is

the same% 'uyers ill 'e indi/erent a'outhich seller they 'uy a 0homoeneousproduct $rom.

• !) 0Price Takers: individual rms e&ertno sinicant control over price.

• #) Free entry and e&it: no o'stacles to

entry""leal% technoloical% nancial etc.



3 CompetitiveFirm



Demand Curve o$ a Competitive Firm

* competitive frm !hich has a perect

demand curve+

For any price increase Demand ill drop to ero%

'ecause customers ill 'uy $rom somehere else

at the e4uili'rium price The rm cannot o'tain

a hiher price 'y restrictin its output5 nor does it

have to loer price to increase its sales volume.





This does 6OT mean that M3789T demand is

per$ectly elastic. n $act% TOT3;"D9M36D

curves $or most aricultural products is very

69;3-TC.

<oever% the demand schedule $or the

6D,D=3; rm in a purely competitive

















• 3 rm?s prot $unction:

Prot *4)@ Π(q) @ Total revenue*4) " Total cost*4)

Or% a $unction is ma&imum hen its derivative is

e4ual to ero A Π B A4 @

• The rm ma&imies its prot 'y producin 4here:

ETotal revenue*4)?"ETotal cost*4)?@

Marinal 7evenue G Marinal Cost @ Marinal 7evenue@Marinal Cost

M7 @ MC

Or M7 @ Price

M7 @ MC @ Price

-hort 7un Prot Ma&imiation







9conomic Prot

The competitive rm ill ain prot

hen:

Price @ M7 H 3TC *3T P7OFT

M3IMJ6K L=36TT>).











9conomic ;oss

The competitive rm ill loose hen:

Price @ M7 3TC *3T P7OFT

M3IMJ6K L=36TT>).



; Mi i i ti N -h t D 7 l



;oss Minimiation N -hut"Don 7ule

" -uppose that P 3TC. -ince the rm is

e&periencin a loss% should it shut don;et us compare the prots o$ producin L to the

prots hen the rm shuts don:

hen the $irm shut don: Q *) @ " Fi&ed Cost

hen the $irm produce L: Q *L) @ PRL " FC " ,C

There$ore% Q*L) H Q*) hen PRL H ,C.

Divide 'oth sides 'y L: P H 3,C.

• $ P H 3,C% then producin L is 'etter thanshuttin don -tay in 'usiness .

• $ P 3,C then it is impossi'le to do 'etter

than shuttin don.



-unk Costs

Sunk costs are costs that are

already incurred and cannot 'e

recovered.

6otice that the rm?s &ed costs

did not a/ect hether or not to

shut don. 3ll &ed costs are

- k C t



-unk Cos ts

• n the 1SUs ;ockhead spent V 1

'illion

developin a ne airplane *Tristar).3$ter

sinkin the money% it as clear thatthe venture as not oin to 'e a

success.• ;ockhead ent to its creditors%

and asked

$or more money% sayin% 0e have

- k C t



-unk Cos ts

-ome o$ the creditors said% 0hy

put in

more money% since there is no ay

e can



ho as

riht



-unk Costs

3nser: Both arguments are wrong.

The billion dollar initial investment is

a sunk cost that is irrelevant to

the decision.

We should compare the

extra revenue of



0Don?t cry over spiltmilk



-unk Costs

n the lon run% -ome &ed costs

remain sunk hile others miht not

'e.

For e&ample% n the lon run% you can

sell your $actory and e&it the industry

i$ the prots remain neative.

-hort 7un -upply Curve



-hort 7un -upply Curve

The supply curve o$ a rm correspond to

the set o$ couples: 4uantity supplied $oreach price level.

Wecause the rm?s marinal cost curve *MC)determines ho much the rm is illin tosupply at any price% it is the competitivefrm’s supply curve (M ! Supply urve".

n the short run% the supply curve o$ aper$ectly competitive rm correspond to the

marinal cost curve in its part a'ove 3,C.



The Fi rm ? s ;on 7un D ec i s i on




• n the lon run% a prot"ma&imiin rm

ould e&it the industry i$ T7 TC at alloutput levels.

• Dividin 'y L% the condition $or e&it is:

P 3TC

–Market supply decreases

–Price rises

–;osses decline until loss @ prot @ *and e&ist stops).




The Fi rm s ;on 7un D ec i s i on

• Firms enter i$ P H 3TC

–Market supply increases

–Price declines

–Prot declines until prot @ *and

entry stops).



;on 7un -upply Curve



;on 7un -upply Curve

3 per$ectly competitive rm?slong run supply curve is #

below $T% and correspond

to the M curve in its part

a'ove 3TC *;73C).



;on 7un Prot Ma&imiation



;on 7un Prot Ma&imiation

The 4uantity at hich 3TC isminimied is the 4uantity

that ma&imies the rm?s

prot per unit *sometimes

called prot marin).



Documents

Microeconomics Ch 22