Perfect Competition Continued…
Key Graph (Figure 9-6)
• P1 – Company should not operate at all
• P2 – Operate at Q2 to cover variable costs,
fixed costs will be lost. Shut-Down Point
• P3 – To minimize losses, operate at Q3. It is
above AVC.
• P4 – The Break Even Point. Q4
• P4+ Anything above P4 = higher profits.
Marginal Cost Curves and Supply
• In Figure 9-7 (230) note the similarity between
the MC curve and the S curve.
• How much we supply (Q) is directly related to
how much it costs to make the product (MC),
and how much we are paid to produce it (P).
• Many factors that cause supply to shift cause
MC to shift.
Market Shifts
• Since we utilize Marginal Revenue = Marginal
Cost to find our profit maximizing point, drops
in demand hurt profits. Note similarity
between MR and D.
• Businesses have to pay close attention to
demand, otherwise they might be producing
too much or too little, which hurts business.
• Figure 9-7 (What would happen if D declines?)
Key Question 4 (243)
Long-Run Profit Maximization
• In the long-run firms can adjust their plant
capacities or enter or leave the industry.
• After all long-run adjustments are made the
Price = Minimum ATC.
• Previously, in the short-run, they would still
operate at Minimum AVC, why?
Why does P = Min. ATC?
• Firms seek profits and avoid losses. If they do
not make money, they leave the industry.
• Firms leaving the industry reduces supply,
which increases price for firms that remain.
• If an industry is profitable, new firms join, this
increases supply and reduces price back to
Min. ATC... Or lower. Which starts the cycle
again.
Long-Run Equilibrium
• Long-Run Equilibrium in the Perfectly
Competitive industry is created by businesses
seeking higher profits or reduced losses.
• Over-time, supply and demand oscillate back
and forth around the equilibrium point.
• Figures 9-8 and 9-9 (232-233)
Costs and the Slope of Supply
• If costs are constant, firms entering or leaving
the industry do not affect resource prices,
supply is perfectly elastic. Fig 9-10
• Most industries have increasing costs, which
means that firms entering the industry
increase resource costs for the others. Fig 9-11
• Higher costs shift the ATC upwards.
• Some industries have decreasing costs.
Pure Competition and Efficiency
• Productive and Allocative Efficiency lead to
the most efficient use of scarce resources.
• Productive Efficiency: P = Minimum ATC
• In the Long-Run firms must produce at the
minimum ATC because new firms are coming
and going.
• Productive Efficiency MUST be achieved in
perfect competition or you will not survive.
• This is called the low-cost producer.
Allocative Efficiency and
Perfect Competition.
• The Price of any product is society’s measure
of the relative worth of an additional unit.
• The long-run price = the marginal benefit
• The long-run price = the marginal cost
(otherwise we would not sacrifice the
resources)
• Under allocation: P > MC
• Over allocation: P < MC
The Commodities Exchange
The Commodities Exchange
• The pre-eminent example of perfect
competition in practice on a daily basis is the
Chicago Board of Trade.
• It facilitates the purchase and sale of a
multitude of commoditized or standardized
goods, such as wheat, barley, sugar, cotton et
cetera.
• http://www.cmegroup.com/company/cbot.ht
ml
Market Structure Summary Videos
• It helps to watch these prior to completing the
chapter assignment for Perfect Competition.
• The Market Structures
• Perfect Competition Summarized
Assignment # 12
• Questions 5, 7, and 8 on page 244.