Microeconomics Chapter 10: Pure Competition

Microeconomics Chapter 10: Pure Competition

Introduction to Market Models

  • Market Models Overview

    • Four Market Models include:

    • Pure Competition (Perfect Competition)

    • Monopolistic Competition

    • Oligopoly

    • Pure Monopoly

Characteristics and Occurrence of Pure Competition

  • Characteristics of Pure Competition

    • Very large number of sellers.

    • Products are standardized (identical).

    • Sellers are "price takers".

    • Free entry and exit for firms.

  • Demand Curves

    • Market Demand vs. Individual Demand

    • Market/Industry Demand is downward sloping while Individual Firm Demand is perfectly elastic (horizontal line at market price).

  • Demand as Seen by a Purely Competitive Seller

    • The firm can produce as much or as little as they desire at the market price.

Revenue Concepts

  • Average, Total, and Marginal Revenue

    • Average Revenue (AR):

    • Revenue per unit: AR=racTRQ=PAR = rac{TR}{Q} = P

    • Total Revenue (TR):

    • Calculated as TR=P⋅QTR=P\cdot Q

    • Marginal Revenue (MR):

    • Additional revenue from selling one more unit: MR=racriangleTRriangleQMR = rac{ riangle TR}{ riangle Q}

  • Firm’s Demand and Revenue Curves

    • Graphical representation of price and revenue based on varying quantities and the constant price of $131.

Profit Maximization Strategies

  • Profit Maximization: TR - TC Approach

    • A competitive producer should operate where total revenue exceeds total cost by the largest margin.

  • Constructing a TR - TC Table:

    • Example output based on a fixed price of $131 and varying quantities produced (Q).

  • Profit Calculating Table

    • Includes columns for total product, total fixed cost (TFC), total variable costs (TVC), total cost (TC), total revenue (TR), and calculated profit or loss.

  • Profit and Loss Outcomes

    • Economic profit occurs when TR > TC; break-even occurs at TR=TCTR = TC; and loss is TR < TC.

  • Profit Maximization: MR = MC Approach

    • A firm should maximize profit where marginal revenue equals marginal cost: MR=MCMR = MC.

    • Outcomes:

    • MR > MC
      Profit ext{ increases with } Q

    • MR < MC
      Profit ext{ decreases with } Q

    • MR = MC
      Profit ext{ maximized or Loss minimized}</p></li></ul></li><li><p>Profit=TR−TC</p></li><li><p>Profit=(P−ATC)xQ</p></li></ul><imgsrc="https://assets.knowt.com/user−attachments/6ac4b049−16ce−4259−ac74−a202d5f7535f.png"data−width="75</p></li></ul></li><li><p>Profit = TR-TC</p></li><li><p>Profit = (P-ATC) x Q</p></li></ul><img src="https://assets.knowt.com/user-attachments/6ac4b049-16ce-4259-ac74-a202d5f7535f.png" data-width="75%" data-align="center"><ul><li><p><strong>Short-Run Profit Maximization</strong></p><ul><li><p>Relates marginal cost (MC) to the supply and demand equilibrium.</p></li></ul></li></ul><img src="https://assets.knowt.com/user-attachments/d87b3eeb-eb97-4dd9-9057-bc51dd1617aa.png" data-width="100%" data-align="center"><h4 id="024b0f42-2904-46d7-944e-12c0bbfd6052" data-toc-id="024b0f42-2904-46d7-944e-12c0bbfd6052" collapsed="false" seolevelmigrated="true">Loss Minimization Strategies</h4><ul><li><p><strong>Short-Run Loss Minimization</strong></p><ul><li><p>When the price is less than minimum average total cost, firms may still produce if price exceeds average variable costs.</p></li></ul></li><li><p><strong>Shutdown Scenarios</strong></p><ul><li><p>If price is even lower than the minimum average variable cost, firms may consider shutting down operations.</p></li><li><p>Producing can minimize losses if revenue from producing covers some variable costs even if total costs encompass losses.</p></li><li><p>Produce</p><ul><li><p>P &gt;= AVC min</p></li></ul></li><li><p>Shut Down</p><ul><li><p>P &lt; AVC min</p></li></ul></li><li><p>Profit</p><ul><li><p>P&gt;ATC Min</p></li></ul></li><li><p>Loss</p><ul><li><p>P&lt;ATC</p></li></ul></li><li><p></p><img src="https://assets.knowt.com/user-attachments/2c059d13-0b17-4cec-b0f1-5f403614afb7.png" data-width="100%" data-align="center"></li></ul></li></ul><h4 id="6e9fcb8a-592f-43d9-a618-dab522ab349b" data-toc-id="6e9fcb8a-592f-43d9-a618-dab522ab349b" collapsed="false" seolevelmigrated="true">Long-Run Adjustments in Pure Competition</h4><ul><li><p><strong>Long-Run Market Dynamics</strong></p><ul><li><p>Firms can enter or exit the industry, with profits or losses incentivizing these movements.</p></li><li><p>Constant-cost industry ensures that the entry and exit of firms do not affect the market price of resources, keeping costs stable.</p></li></ul></li><li><p><strong>Long-Run Equilibrium Considerations</strong></p><ul><li><p>Market price tends to equal minimum average total cost (ATC).</p></li><li><p>Entry eliminates economic profits causing prices to fall and vice versa for losses.</p></li></ul></li><li><p><strong>Achieving Efficiency in Pure Competition</strong></p><ul><li><p>Productive efficiency occurs when price = minimum ATC.</p></li><li><p>Allocative efficiency occurs when price = marginal cost (MC).</p></li><li><p>Emphasis on the concept of triple equality:P=MC={ATC}$$ .

Impact of Technological Advances

  • Technological Advances and Competition

    • Firms aim to innovate to increase profits by either reducing costs or developing new products (e.g., SpaceX, Tesla).

  • Creative Destruction

    • The process whereby new innovations replace older methods and products, leading to continual industrial evolution.

Conclusion: Economic Impacts of External Events

  • Last Word: The Pandemic Pause

    • Discussion on how the COVID-19 pandemic adversely affected revenues across various sectors such as restaurants, hotels, and rental car services.