Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,Market structure,What is market ?,How to divide the market,？,The buyers,quantity and scale,The sellers quantity and scale,The product,Entry barrie,Any force that prevents firms from entering a new market,Examples: monopoly over inputs, large fixed investment, distribution network, legal entry barriers (copyrights, patent), (illegal) anti-competitive practices,Information,Four Marke,t structures,Perfectly competitive market,Monopolistic competition,oligopoly,monopoly,Competitive,intensity,Competitive,intensity,Competitive intensity depends more on the nature of competition than the number of competitors.,Competition is most intense when firms compete on price.,The more intense competition is, the lower is firm profitability.,市场结构：,许多企业,完全竞争,完全垄断,寡头垄断,企业数量？,几家企业,垄断竞争,有差别产品,一家企业,产品类型,相同产品,Marke,t structure overview,市场结构及其特征表,The Meaning of Competition,A,perfectly competitive market,has the following characteristics:,There are many buyers and sellers in the market.,The goods offered by the various sellers are largely the same.,Firms can freely enter or exit the market.,perfect competitive market /,Competitive Market,4 characteristics of,perfect competitive market:,P154,The Meaning of Competition,As a result of its characteristics, the,perfectly competitive market,has the following outcomes:,The actions of any single buyer or seller in the market have a negligible impact on the market price.,Each buyer and seller takes the market price as given.,The Meaning of Competition,Buyers and sellers in competitive markets are said to be,price takers.,Buyers and sellers must accept the price determined by the market.,Q,p,（,Demand curve,）,Law of demand ?,D,D,S,Revenue of a Competitive Firm,Total revenue,for a firm is the,selling price,times the,quantity sold,.,TR = P,X,Q,Total revenue,is proportional to the amount of output.,Revenue of a Competitive Firm,Average revenue,tells us how much revenue a firm receives for the typical unit sold.,Q,Revenue of a Competitive Firm,In perfect competition,average revenue,equals the price of the good.,Q,average revenue,Revenue of a Competitive Firm,Marginal revenue,is the change in total revenue from an additional unit sold.,MR = d T R / d Q = P,For competitive firms,marginal revenue,equals the price of the good.,Revenue of a Competitive Firm,AR = TR / Q = PQ / Q = P,MR = d T R / d Q = P,结论：平均收益、边际收益和需求曲线三线重合为一条水平线。,Q,p,Total, Average, and Marginal Revenue for a Competitive Firm,Profit Maximization for the Competitive Firm,The goal of a competitive firm is to,maximize profit.,This means that the firm will want to produce the quantity that,maximizes,the,difference between total revenue and total cost,.,Profit Maximization: A Numerical Example,P = AR = MR,Profit Maximization for the Competitive Firm.,Costs,and,Revenue,AC,MR,Q*,Q,MC,Profit Maximization for the Competitive Firm,Profit maximization,occurs at the quantity where marginal revenue equals marginal cost.,When MR = MC,，,Profit is maximized.,P=MR, P=MC,The Firms Short-Run Decision to Shut Down,A,shutdown,refers to a short-run decision not to produce anything during a specific period of time because of current market conditions.,Exit,refers to a long-run decision to leave the market.,The Firms Short-Run Decision to Shut Down,The firm considers its,sunk costs,when deciding to exit, but ignores them when deciding whether to shut down.,Sunk costs,are costs that have already been committed and cannot be recovered.,The Firms Short-Run Decision to Shut Down,The firm shuts down if the revenue it gets from producing is less than the variable cost of production.,Shut down if TR VC,Shut down if TR/Q VC/Q,Shut down if P AC (ATC),P1,P2,P3,AC,AVC,MC,If P ATC, keep producing,at a profit.,The Firms Short-Run Decision to Shut Down.,Quantity,ATC,AVC,0,Costs,MC,If P AVC,keep producing,in the short run.,If P ATC,keep producing,at a profit.,Firms short-run supply curve.,b. P2AVC,AC,AVC,P1,P2,P3,If P AVC, keep producing in the short run.,c.,If,P,3,AVC0,shut down.,AC,AVC,P1,P2,P3,The Firms Short-Run Decision to Shut Down,The portion of the marginal-cost curve that lies above average variable cost is the competitive firms,short-run supply curve.,The Marginal-Cost Curve and the Firms Supply Decision.,Costs,and,Revenue,This section of the firms MC curve is also the firms supply curve.,MC,AC,P=MR=AR,O,Q,The Firms Long-Run Decision to Exit or Enter a Market,In the long-run, the firm exits if the revenue it would get from producing is less than its total cost.,Exit if TR TC,Exit if TR/Q TC/Q,Exit if P TC,Enter if TR/Q TC/Q,Enter if P ATC,The Competitive Firms Long-Run Supply Curve.,Quantity,MC = Long-run S,ATC,AVC,0,Costs,Firm enters,if P ATC,Firm exits,if P ATC,The Competitive Firms Long-Run Supply Curve,The competitive firms,long-run supply curve,is the portion of its marginal-cost curve that lies above average total cost.,The Firms Short-Run and Long-Run Supply Curves,Short-Run Supply Curve,The portion of its marginal cost curve that lies above average variable cost.,Long-Run Supply Curve,The marginal cost curve above the minimum point of its average total cost curve.,Profit,Q,Measuring Profit in the Graph for the Competitive Firm.,Quantity,0,Price,P = AR = MR,ATC,MC,P,ATC,Profit-maximizing quantity,a. A Firm with Profits,Loss,Measuring Profit in the Graph for the Competitive Firm.,Quantity,0,Price,P = AR = MR,ATC,MC,P,Q,Loss-minimizing quantity,ATC,b. A Firm with Losses,Supply in a Competitive Market,Market supply equals the sum of the quantities supplied by the individual firms in the market.,The Short Run: Market Supply with a Fixed Number of Firms,For any given price, each firm supplies a quantity of output so that its marginal cost equals price.,The market supply curve reflects the individual firms marginal cost curves.,The Short Run: Market Supply with a Fixed Number of Firms.,(a) Individual Firm Supply,Quantity,(firm),0,Price,(b) Market Supply,Quantity,(market),Price,0,Supply,MC,1.00,$2.00,100,200,1.00,$2.00,100,000,200,000,The Long Run: Market Supply with Entry and Exit,Firms will enter or exit the market until profit is driven to zero.,In the long run, price equals the minimum of average total cost.,The long-run market supply curve is horizontal at this price.,The Long Run: Market Supply with Entry and Exit.,(a) Firms Zero-Profit Condition,Quantity,(firm),0,Price,P,=,minimum,ATC,(b) Market Supply,Quantity,(market),Price,0,Supply,MC,ATC,The Long Run: Market Supply with Entry and Exit,At the end of the process of entry and exit, firms that remain must be making zero economic profit.,The process of entry & exit ends only when price and average total cost are driven to equality.,Long-run equilibrium must have firms operating at their efficient scale.,Firms Stay in Business with Zero Profit,Profit equals total revenue minus total cost.,Total cost includes all the opportunity costs of the firm.,In the zero-profit equilibrium, the firms revenue compensates the owners for the time and money they expend to keep the business going.,Increase in Demand in the Short Run,An increase in demand raises price and quantity in the short run.,Firms earn profits because price now exceeds average total cost.,Increase in Demand in the Short Run.,Market,Firm,Quantity,(firm),0,Price,MC,ATC,P,1,Quantity,(market),Price,0,D,1,P,1,Q,1,A,S,1,Long-run,supply,(a) Initial Condition,P,D,2,Increase in Demand in the Short Run.,Market,Firm,Quantity,(firm),0,Price,MC,ATC,P,1,Quantity,(market),Price,0,D,1,P,1,Q,1,A,S,1,Long-run,supply,(b) Short-Run Response,Q,2,B,P,2,P,2,Profit,Increase in Demand in the Short Run.,Market,Firm,Quantity,(firm),0,Price,MC,ATC,P,1,Quantity,(market),Price,0,D,1,P,1,Q,1,A,S,1,Long-run,supply,(c) Long-Run Response,D,2,B,Q,2,P,2,S,2,C,Q,3,Summary,Because a competitive firm is a price taker, its revenue is proportional to the amount of output it produces.,The price of the good equals both the firms average revenue and its marginal revenue.,Summary,To maximize profit a firm chooses the quantity of output such that marginal revenue equals marginal cost.,This is also the quantity at which price equals marginal cost.,Therefore, the firms marginal cost curve is its supply curve.,Summary,In the short run when a firm cannot recover its fixed costs, the firm will choose to shut down temporarily if the price of the good is less than average variable cost.,In the long run when the firm can recover both fixed and variable costs, it will choose to exit if the price is less than average total cost.,Summary,In a market with free entry and exit, profits are driven to zero in the long run and all firms produce at the efficient scale.,Changes in demand have different effects over different time horizons.,Class assignments,Cha 6: 5 ,7,8,9,10,Homework after class:,Cha 6:2,3,4,