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1、7.1 2005 Prentice Hall,Inc.Economics for Managersby Paul FarnhamChapter 7Market Structure:Perfect Competition7.2 2005 Prentice Hall,Inc.Perfect CompetitionCharacterized byA large number of firms in the marketAn undifferentiated productEase of entry into the marketComplete information available to al
2、l market participants7.3 2005 Prentice Hall,Inc.Perfect CompetitionDistinguished between behavior of individual firms and outcomes for entire marketNo single firm has any influence on the price of a productPrice-taker:a firm cannot influence the price of its product,thus it can sell any amount of ou
3、tput at that price7.4 2005 Prentice Hall,Inc.Perfectly CompetitiveFigure 7.1Industry/MarketIndividual Firm0PEQQE D SQP0Q1MCQ2ATCD=P=MRBA7.5 2005 Prentice Hall,Inc.Profit MaximizationTC=total costwhereTR=total revenue=TR-TC =profitProfit-maximization rule:to maximize profits,a firm should produce the
4、 level of output where marginal revenue equals marginal cost7.6 2005 Prentice Hall,Inc.Marginal RevenuePrice equals marginal revenue for a perfectly competitive firm because the firm does not have to lower the price to sell more units of outputThe profit-maximizing level of output occurs where margi
5、nal revenue equals marginal cost because any other level of output will result in smaller profit7.7 2005 Prentice Hall,Inc.Determining the Amount of Profit EarnedIf you know total revenue and total cost,you can calculate amount of profitUsing TR and TC function graphs,you can calculate level of prof
6、it-maximizing by finding the greatest distance between the two curves and calculate the profit at that point7.8 2005 Prentice Hall,Inc.The Shutdown PointThe shutdown point for perfectly competitive firm:the price,which just equals AVC,below which it is more profitable for the perfectly competitive f
7、irm to shut down than to continue to produceThe supply curve is that portion of its marginal cost curve above minimum AVC 7.9 2005 Prentice Hall,Inc.Supply Curve for Perfectly Competitive IndustryThe supply curve shows the output produced by all perfectly competitive firms in the industry at differe
8、nt pricesThe curve will be flatter than the firms supply curve because it reflects output produced by all firms in the industry at each price7.10 2005 Prentice Hall,Inc.Long-run AdjustmentTwo factors:Entry and exit by new and existing firmsChanges in the scale of operations by all firmsThese factors
9、 can occur simultaneously7.11 2005 Prentice Hall,Inc.Long-run AdjustmentEquilibrium point for the perfectly competitive firm:the point where price equals ATC since the firm earns zero economic profit at this pointEconomic profit incorporates all implicit costs of production including normal rate of
10、return on investment7.12 2005 Prentice Hall,Inc.Long-run Adjustment:Entry and ExitFigure 7.3Industry/MarketIndividual Firm D20PE2QE2QE1 D1 S1 S2QE3PE1MCATCD1=P1=MR1P0Q1Q2ABD2=P2=MR27.13 2005 Prentice Hall,Inc.Long-run AdjustmentFirm is a price-taker;therefore,it must accept new equilibrium price and
11、 determine appropriate level of outputAll firms know the positive economic profitsOther firms are able to enter the market7.14 2005 Prentice Hall,Inc.Optimum Scaleof ProductionLRACP1=MR1P2=MR2SMC1SATC1SMC2SATC2$0Q1Q2QFigure 7.57.15 2005 Prentice Hall,Inc.Optimum Scaleof ProductionIn Figure 7.5,LRAC
12、incorporates both economies of scale and diseconomies of scaleLarge-scale production will give managers competitive edge by decreasing production costs Cannot influence price of product7.16 2005 Prentice Hall,Inc.Managers have little or no control over product priceThey compete on basis of lowering
13、costs of productionPerfectly competitive firms earn zero economic profit because entry of other firms compete away excess profitManagerial Rule of Thumb:Competition Means Little Control Over Price7.17 2005 Prentice Hall,Inc.Other Competitive MarketsIndustry concentration:measure of how many firms pr
14、oduce the total output of an industryPrice-cost margin(PCM):relationship between price and costs for an industry7.18 2005 Prentice Hall,Inc.Managers in competitive industries can gain market power by Merging with other companiesDifferentiating productsForming producer association to change consumer
15、preferences and increase demand for output of the entire industryManagerial Rule of Thumb:Strategies to Gain Market Power7.19 2005 Prentice Hall,Inc.Summary of Key TermsDiseconomies of scaleEconomies of scaleEquilibrium point for the perfectly competitive firmIndustry concentrationMarginal revenue c
16、urve for the perfectly competitive firmCompetitive firmPerfect competition7.20 2005 Prentice Hall,Inc.Summary of Key TermsPrice-cost margin(PCM)Price takerProfit maximizationShutdown point for the perfectly competitive firmSupply curve for the perfectly competitive firmSupply curve for the perfectly competitive industry7.21 2005 Prentice Hall,Inc.Do you have any questions?