Perfect Competition - Price Takers
The
individual firm produces such a
small portion of the total market output
that it cannot influence the price it
charges for the product it sells.
The firm is a Price Taker in that it takes
the market-determined price as the
price it will receive for its output.
Principles of Microeconomics : Ch.14
First Canadian Edition
The Revenue of a Competitive Firm
Total
Revenue for a firm is the market
selling price times the quantity sold.
TR = (P x Q)
Total
revenue is proportional to the
amount of output.
Graphically: Total revenue increases
at a constant rate, as each unit sold
sells for a constant price.
Principles of Microeconomics : Ch.14
First Canadian Edition
Total Revenue: Competitive Firm
$
Total Revenue
$25
$20
At a market
price of $5,
total revenue
is ($5x1) = $5!
$15
$10
$5
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Principles of Microeconomics : Ch.14
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3
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5
Quantity
First Canadian Edition
Alternative Measurements of Revenue
Average
–
Revenue:
Tells us how much revenue a firm
receives for the typical unit sold.
AR = TR ÷ Q
–
Average Revenue equals the Price of the
good, in Perfect Competition.
Principles of Microeconomics : Ch.14
First Canadian Edition
Alternative Measurements of Revenue
Marginal
–
Revenue:
Tells us how much revenue a firm
receives for one additional unit of output.
MR =
–
TR ÷
Q
Marginal Revenue equals the Price of the
good, in Perfect Competition.
Graphically:
Each unit sold will add
the same amount to total revenue, $5!
Principles of Microeconomics : Ch.14
First Canadian Edition
Total Revenue: Competitive Firm
$
Total Revenue
$25
$20
$15
$10
Marginal
Revenue
$5
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Principles of Microeconomics : Ch.14
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3
4
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Quantity
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Profit Maximization
Total
Cost
$
$25
$20
$15
$10
$5
1
Principles of Microeconomics : Ch.14
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3
4
5
Quantity
First Canadian Edition
Profit Maximization
Total
Cost
$
$25
Total Revenue
$20
$15
$ Maximum
Profit
at Q = 3 units!
}
$10
$5
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Principles of Microeconomics : Ch.14
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3
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Quantity
First Canadian Edition
Profit Maximization
Maximum
profits
occur at a quantity
that maximizes the
difference (distance)
between revenue and
costs.
Principles of Microeconomics : Ch.14
First Canadian Edition
The Competitive Firm’s Cost Curves
Revisit
of average cost curves:
The marginal-cost curve (MC) eventually
increases.
– The average-total-cost curve (ATC) is Ushaped.
– Marginal Cost crosses the Average-TotalCost at the minimum ATC.
–
Graphically.
Principles of Microeconomics : Ch.14
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First Canadian Edition
The Shape of Typical Cost Curves
MC
AVC
Cost ($’s)
Principles of Microeconomics : Ch.14
ATC
Quantity
First Canadian Edition
The Competitive Firm’s ProfitMaximizing Output
Add
a line for the market
price which is the same as
the firm’s average revenue
(AR) and its marginal
revenue (MR).
Identify the level of output
that maximizes profit.
Principles of Microeconomics : Ch.14
First Canadian Edition
The Competitive Firm’s ProfitMaximizing Output
Price
MC
ATC
P=MR=AR
AVC
Principles of Microeconomics : Ch.14
QMax
Quantity
First Canadian Edition
The Competitive Firm’s ProfitMaximizing Output
Price
MC
P
ATC
P=MR=AR
AVC
ATC
Maximum
Profit
Principles of Microeconomics : Ch.14
QMax
Quantity
First Canadian Edition
The Competitive Firm’s Shut-Down
Decision
Alternative
levels of output produced
because the firm is a price taker.
If the selling price is below the
minimum average variable cost, the
firm should shut-down!
The minimum loss would equal to the
firm’s Total Fixed Cost.
Principles of Microeconomics : Ch.14
First Canadian Edition
Shut-Down! Costs are greater than
market price
Price
MC
ATC
AVC
Q Don’t Produce!
P=MR=AR
Loss in Excess of Fixed Costs
Quantity
Principles of Microeconomics : Ch.14
First Canadian Edition
Short-Run Production
Minimize Losses when MR = MC
Price
MC
ATC
AVC
ATC
P
P=MR=AR
Losses are less
than fixed costs
Q short-run
Principles of Microeconomics : Ch.14
Quantity
First Canadian Edition
Short-Run Production
Maximize Profits when MR = MC
Price
MC
ATC
P
P=MR=AR
ATC
AVC
Maximum
Economic
Profit
Principles of Microeconomics : Ch.14
QMax
Quantity
First Canadian Edition
Long-Run Production
Normal Profits when MR = MC
In
the long-run the typical firm will
operate where:
 MR
= MC
 Normal Profit where Price = ATC
 Minimum ATC
Why?
 Due
to Easy Entry
 Due to Intense Competition
Principles of Microeconomics : Ch.14
First Canadian Edition
Long-Run Production
Price
Normal Profits when MR = MC
MC
ATC
P=MR=AR
Principles of Microeconomics : Ch.14
QLR
Quantity
First Canadian Edition
The Competitive Firm’s
Supply Curve
Short-Run
Supply:
– Is the portion of its marginal cost
curve that lies above average
variable cost.
Long-Run Supply:
– Is the marginal cost curve above the
minimum point of its average total
cost curve.
Principles of Microeconomics : Ch.14
First Canadian Edition
Competitive Firm’s SR Supply Curve
Price
MC
ATC
P=MR=AR
AVC
P1
Q1
Principles of Microeconomics : Ch.14
Quantity
First Canadian Edition
The Competitive Firm’s Supply Curve
Price
MC
P3
ATC
P=MR=AR
AVC
P2
P1
Q1
Principles of Microeconomics : Ch.14
Q2 Q3
Quantity
First Canadian Edition
The Competitive Firm’s Supply Curve
Price
P3
P2
Firms ShortRun Supply
Curve
P1
Q1
Principles of Microeconomics : Ch.14
Q2 Q3
Quantity
First Canadian Edition
The Firm’s Profit
Profit
equals total revenue (TR) minus
total costs (TC)
Profit = TR - TC
– Profit = ([TR ÷ Q] - [TC ÷ Q]) x Q
– Profit = (P - ATC) x Q
–
Principles of Microeconomics : Ch.14
First Canadian Edition
The Competitive Firm’s Decision To
Produce, Shut-Down or Exit
In
the short-run, a firm will choose to
shut-down temporarily if the price of
the good is less than the average
variable cost.
In the long-run when the firm can
recover both fixed and variable costs,
the firm will choose to exit if the price
is less than average total cost.
Principles of Microeconomics : Ch.14
First Canadian Edition
The Market Supply Curve
For
any given price, each firm supplies
a quantity of output so that price
equals its marginal cost.
The quantity of output supplied to the
market equals the sum of the
quantities supplied by the individual
firms.
Principles of Microeconomics : Ch.14
First Canadian Edition
The Market Supply Curve
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.
Because firms can enter and exit more
easily in the long-run than in the shortrun, the long-run supply curve is more
elastic than the short-run supply
curve.
Principles of Microeconomics : Ch.14
First Canadian Edition
Summary/Conclusion
If
business firms are competitive and
profit-maximizing, the price of a good
equals the marginal cost of making
that good.
If firms can freely enter and exit the
market, the price also equals the
lowest possible average total cost of
production.
Principles of Microeconomics : Ch.14
First Canadian Edition