The document discusses key concepts regarding sellers in a perfectly competitive market including:
1. No single seller or buyer can influence market price due to many participants.
2. Sellers produce identical goods so no unique pricing power.
3. Free entry and exit allows supply response to profits.
It then covers the seller's problem of maximizing profits by optimizing production and understanding costs and revenues. Key cost concepts like fixed, variable, and marginal costs are introduced along with graphs showing cost curve patterns.
The document discusses key concepts regarding sellers in a perfectly competitive market including:
1. No single seller or buyer can influence market price due to many participants.
2. Sellers produce identical goods so no unique pricing power.
3. Free entry and exit allows supply response to profits.
It then covers the seller's problem of maximizing profits by optimizing production and understanding costs and revenues. Key cost concepts like fixed, variable, and marginal costs are introduced along with graphs showing cost curve patterns.
The document discusses key concepts regarding sellers in a perfectly competitive market including:
1. No single seller or buyer can influence market price due to many participants.
2. Sellers produce identical goods so no unique pricing power.
3. Free entry and exit allows supply response to profits.
It then covers the seller's problem of maximizing profits by optimizing production and understanding costs and revenues. Key cost concepts like fixed, variable, and marginal costs are introduced along with graphs showing cost curve patterns.
The document discusses key concepts regarding sellers in a perfectly competitive market including:
1. No single seller or buyer can influence market price due to many participants.
2. Sellers produce identical goods so no unique pricing power.
3. Free entry and exit allows supply response to profits.
It then covers the seller's problem of maximizing profits by optimizing production and understanding costs and revenues. Key cost concepts like fixed, variable, and marginal costs are introduced along with graphs showing cost curve patterns.
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PERFECT Lecture 3
COMPETITION LEARNING OBJECTIVE
6.1 Sellers in a Perfectly Competitive Market
6.2 The Seller’s Problem: Profit maximization, Introducing Production, Costs and Revenues, optimizing at the margins
6.3 From the Short run to the Long run
6.4 From the Seller’s Problem to the Supply Curve 6.5 Shut down Condition
6.6: Efficiency of Perfect Competition and Deadweight loss of Price controls
SELLERS IN A PERFECTLY COMPETITIVE MARKET 1. No buyer or seller is big enough to influence the market price Because there are so many consumers and producers, no one individual can change the market price with his/her behavior. Example: If a farmer decides to rotate crops and grow corn this year rather than soybeans, this choice does not cause price fluctuations throughout the world. SELLERS IN A 2. Sellers in the market produce identical goods PERFECTL An individual seller can’t influence the market price by
Y selling a unique product.
COMPETI Example: If all bushels of corn are the same, a farmer can’t charge a higher price for his/her corn since there are many other farmers selling exactly the same thing. TIVE MARKET SELLERS IN A 3. There is free entry and exit in the market
PERFECTL Sellers can respond to potential profits in a market
by entering, or by leaving markets that are no Y longer profitable—both of which have implications on market price. COMPETI Example: If many firms leave a market, the supply curve will shift (that’s one of the determinants) and TIVE market price will increase.
MARKET Goal of the Seller: Maximize Profit To achieve this goal, sellers must solve 3 problems: THE 1. How to make the product SELLER’S PROBLEM 2. What is the cost of making the product?
3. How much can the seller get for the product in the market? MAKING THE GOODS: HOW INPUTS ARE TURNED INTO OUTPUTS Short run: Period of time when some of the firm’s inputs cannot be changed. Example: in the short run, you can’t buy another oven - if you are baking cakes today you are limited by the number of ovens you have today Long run: Period of time when all of the firm’s inputs can be changed. Example: in the long run, you can buy another oven, even build another kitchen Variable factor of production: Input that can be changed in a certain period of time and that changes if the level of output changes Fixed factor of production: Input that cannot be changed in the short-run and that stays the same, regardless of how much output is produced MAKING THE GOODS: HOW INPUTS ARE TURNED INTO OUTPUTS Production Data for The Wisconsin Cheeseman
A firm produced 376 units with ten workers. When an eleventh worker was hired,
the output increased to 398 units. The marginal product of the eleventh worker is:
A) 22 units
B) 37.6 units
C) 36.18 units
D) 398 units MAKING THE GOODS: HOW INPUTS ARE TURNED INTO OUTPUTS Exhibit 6.2 The Short-Run Production Function for The Cheeseman MAKING THE GOODS: HOW INPUTS ARE TURNED INTO OUTPUTS
What’s important about this production table?
1. Marginal product increases with the first workers = specialization Workers are more efficient when they specialize in production and work together to produce a good. Marginal product increases through Worker 4.
What’s important about this production table?
2. Eventually, marginal product falls = law of diminishing returns At some point, each additional worker contributes less output than the worker before. Why? Production can lead to bottlenecks because capital is fixed—workers are waiting for machinery to become open, etc. Point of diminishing returns is at 4 workers. 3. Marginal product can be negative. Why? Capital is fixed in the short run. If more and more workers keep getting added, they will get in each other’s way and actually cause output to fall.
Marginal product becomes negative with the 39 th worker.
https://youtu.be/yrFETnz8wFg THE COST OF DOING BUSINESS: INTRODUCING COST CURVES
Short-run: Total Cost = Variable Cost + Fixed Cost
Variable Cost The cost associated with the variable factors of production. Variable costs change as the level of output changes. Fixed Cost The cost associated with the fixed factors of production. Fixed costs do not change as output changes.
One other kind of cost: Opportunity (or implicit) costs
Poll 2
Which of the costs below is an example of a fixed cost in the short run?
A) The cost of paper to a copy shop
B) The wages paid to workers at a landscaping firm
C) Fuel costs to a taxicab service
D) A 3-year lease on retail space at the local mall for a clothing retailer THE COST OF DOING BUSINESS: INTRODUCING COST CURVES Cost of Production
(9) (10) (1) (3) (4) (5) (6) (7) (8) (2) Average Marginal Cost Marginal Variable Fixed Cost Total Cost Average Total Average Fixed Output # Product Cost (VC) (FC) (TC) Cost (ATC) Cost (AFC) Variable Cost (MC) Per Day Empl (AVC) = change in (6)/ = (4) + (5) = (6)/(1) = (5)/(1) = (4)/(1) change in (1)
Since fixed costs are fixed, average fixed costs decline as output increases. Both average total costs and average variable costs first decline, then start to increase as output increases. when diminishing returns sets in, the cost of adding a worker stays the same, but the additional output generated by that worker falls. That leads to increases in per unit costs. Marginal cost follows the same pattern as the average curves (first declining then increasing) for the same reason THE COST OF DOING BUSINESS: INTRODUCING COST CURVES
Exhibit 6.4 Marginal Cost, Average Total Cost, and Average
Variable Cost Curves for The Wisconsin Cheeseman THE REWARDS OF DOING BUSINESS: INTRODUCING REVENUE CURVES
Total revenue = Price × Quantity Sold
What does the firm have control over?
Remember: In a competitive market firms have no control over price and are therefore price takers and can only decide the quantity they produce Each additional unit produced increases Revenues by the market Price Marginal Revenue = Price THE REWARDS OF DOING BUSINESS: INTRODUCING REVENUE CURVES Exhibit 6.5 Supply and Demand: The Market versus The Wisconsin Cheeseman
The price is dictated by market supply and demand, which represents 100s of buyers and sellers. Make sure students notice the differences in the horizontal axes—that the industry quantity is expressed in terms of millions. One individual seller faces a constant price, represented by $1.13 on the graph. PUTTING IT ALL TOGETHER: USING THE THREE COMPONENTS TO DO THE BEST YOU CAN
What kind of profit?
Accounting profit Total revenue – Total costs (explicit only)
Economic profit Total revenue – Total costs (explicit + implicit) PUTTING IT ALL TOGETHER: USING THE THREE COMPONENTS TO DO THE BEST YOU CAN
Profits = Total Revenues – Total Costs
Total Revenue = P × Q
Total Cost = ATC × Q
Profit = (P × Q) – (ATC × Q) = (P – ATC) × Q
= (P – ATC) × Q PUTTING IT ALL TOGETHER: USING THE THREE COMPONENTS TO DO THE BEST YOU CAN (1) Output (2) (5) (6) (7) Average (9) (10) TR=P*Q; Per Day # Employed Fixed Cost Total Cost Total Cost Average Marginal (FC) (TC) (ATC) Variable Cost Cost (MC) P=1.13 (AVC) 0 0 $200 $200 100 1 $200 $272 $2.72 $0.72 $0.72 207 2 $200 $344 $1.66 $0.70 $0.67 =100*1.13 321 3 $200 $416 $1.29 $0.67 $0.63 =207*1.13 444 4 $200 $488 $1.10 $0.65 $0.59 558 5 $200 $560 $1.00 $0.65 $0.63 664 6 $200 $632 $0.95 $0.65 $0.68 762 7 $200 $704 $0.92 $0.66 $0.73 854 8 $200 $776 $0.91 $0.67 $0.79 939 9 $200 $848 $0.90 $0.69 $0.84 1019 10 $200 $920 $0.90 $0.71 $0.91 1092 11 $200 $992 $0.91 $0.73 $0.98 1161 12 General $200 Rule $1,064 for Firms $0.92 $0.74 $1.05 1225 13 $200 $1,136 $0.93 $0.76 $1.13 1284 14 Choose$200to produce $1,208 where$0.94 MC = MR $0.79 $1.21 1339 15 $200 $1,280 $0.96 $0.81 $1.31 1390 16 $200 $1,352 $0.97 $0.83 $1.40 FROM THE SELLER’S PROBLEM TO THE SUPPLY CURVE Exhibit 6.8 Impact of Price Changes on The Wisconsin Cheeseman FROM THE SELLER’S PROBLEM TO THE SUPPLY CURVE SHUT DOWN
Two options: 1. Stay open What costs do you pay? Fixed + Variable 2. Close What costs do you pay? You must pay these Fixed SHUT DOWN IN SHORT RUN AND LONG RUN
Should I harvest the corn?
Short Run: If price (MR) isn’t high enough to cover the diesel fuel (a variable cost) to run
the tractor then we cannot run the tractor to harvest the corn; this is a shutdown in the
short run. The decision to stop producing in the short run—occurs if price falls below AVC
In the short run, Profits = P*Q –V*Q –F………………….1
When you shut down: Profits = - F………………………..2 Combining equations 1 and 2, short run profits if we shut down: P*Q –V*Q –F = - F………3 i.e, P*Q – V*Q =0………………………………….4 Dividing by Q, P*Q – V*Q, we get (P –AVC) =0 or P = AVC. Shut down if P< AVC In the Long run, shut down if P< ATC Poll 3
A firm is seeing a $500 loss in the short run if it continues to be in business. The
fixed cost of operation for this firm is $1,000. What is the best decision for this firm
in the short run?
A) This firm should shut down production.
B) This firm should not shut down production.
C) This firm should produce more than what it is currently producing.
D) There is not enough information provided to answer.
Continue operations: Losses = -500
Shut down, losses= Fixed cost= -1000 PRICES GUIDE THE INVISIBLE HAND DEADWEIGHT LOSS Exhibit 7.15 Deadweight Loss from Price Controls PRICES GUIDE THE INVISIBLE HAND DEADWEIGHT LOSS Exhibit 7.15 Deadweight Loss from Price Controls What if a Price Ceiling is set at P1? Society loses area D Price decreases, firms set MR=MC and decrease Deadweight Loss production; Quantity decreases to Q1
Deadweight Loss: The reduction in social surplus resulting from a market intervention
