Click to edit Master text styles,Second level,Click to edit Master title style,7.,*,2005 Prentice Hall,Inc.,Chapter 7,Market Structure:,Perfect Competition,Perfect Competition,Characterized by,A large number of firms in the market,An undifferentiated product,Ease of entry into the market,Complete information available to all market participants,Perfect Competition,Distinguished between behavior of individual firms and outcomes for entire market,No single firm has any influence on the price of a product,Price-taker,:a firm cannot influence the price of its product,thus it can sell any amount of output at that price,Perfectly Competitive,Figure 7.1,Industry/Market,Individual Firm,0,P,E,Q,Q,E,D,S,Q,P,0,Q,1,MC,Q,2,ATC,D=P=MR,B,A,Profit Maximization,TC,=total cost,where,TR,=total revenue,=TR-TC,=profit,Profit-maximization rule,:to maximize profits,a firm should produce the level of output where marginal revenue equals marginal cost,Marginal Revenue,Price equals marginal revenue for a perfectly competitive firm because the firm does not have to lower the price to sell more units of output,The profit-maximizing level of output occurs where marginal revenue equals marginal cost because any other level of output will result in smaller profit,Determining the Amount of Profit Earned,If you know total revenue and total cost,you can calculate amount of profit,Using TR and TC function graphs,you can calculate level of profit-maximizing by finding the greatest distance between the two curves and calculate the profit at that point,The Shutdown Point,The shutdown point for perfectly competitive firm,:the price,which just equals AVC,below which it is more profitable for the perfectly competitive firm to shut down than to continue to produce,The supply curve is that portion of its marginal cost curve above minimum AVC,Supply Curve for Perfectly Competitive Industry,The supply curve shows the output produced by all perfectly competitive firms in the industry at different prices,The curve will be flatter than the firms supply curve because it reflects output produced by all firms in the industry at each price,Long-run Adjustment,Two factors:,Entry and exit by new and existing firms,Changes in the scale of operations by all firms,These factors can occur simultaneously,Long-run Adjustment,Equilibrium point for the perfectly competitive firm,:the point where price equals ATC since the firm earns zero economic profit at this point,Economic profit incorporates all implicit costs of production including normal rate of return on investment,Long-run Adjustment:Entry and Exit,Figure 7.3,Industry/Market,Individual Firm,D,2,0,P,E2,Q,E2,Q,E1,D,1,S,1,S,2,Q,E3,P,E1,MC,ATC,D,1,=P,1,=MR,1,P,0,Q,1,Q,2,A,B,D,2,=P,2,=MR,2,Long-run Adjustment,Firm is a price-taker;therefore,it must accept new equilibrium price and determine appropriate level of output,All firms know the positive economic profits,Other firms are able to enter the market,Optimum Scaleof Production,LRAC,P,1,=MR,1,P,2,=MR,2,SMC,1,SATC,1,SMC,2,SATC,2,$,0,Q,1,Q,2,Q,Figure 7.5,Optimum Scaleof Production,In Figure 7.5,LRAC incorporates both economies of scale and diseconomies of scale,Large-scale production will give managers competitive edge by decreasing production costs,Cannot influence price of product,Managers have little or no control over product price,They compete on basis of lowering costs of production,Perfectly competitive firms earn zero economic profit because entry of other firms compete away excess profit,Managerial Rule of Thumb:,Competition Means Little Control Over Price,Other Competitive Markets,Industry concentration,:measure of how many firms produce the total output of an industry,Price-cost margin(PCM),:relationship between price and costs for an industry,Managers in competitive industries can gain market power by,Merging with other companies,Differentiating products,Forming producer association to change consumer preferences and increase demand for output of the entire industry,Managerial Rule of Thumb:,Strategies to Gain Market Power,Summary of Key Terms,Diseconomies of scale,Economies of scale,Equilibrium point for the perfectly competitive firm,Industry concentration,Marginal revenue curve for the perfectly competitive firm,Competitive firm,Perfect competition,Summary of Key Terms,Price-cost margin(PCM),Price taker,Profit maximization,Shutdown point for the perfectly competitive firm,Supply curve for the perfectly competitive firm,Supply curve for the perfectly competitive industry,Do you have,any questions?,