PERFECT COMPETITIONPowerPoint PresentationSTANDARD PROBLEMSlide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Recall what the marginal and average cost curves looked like in the case of our example.Now for marginal revenue and average revenue.Slide 16Important pointSlide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Rule to remember:slide 1Competitive firms in the short-runPERFECT COMPETITIONPERFECT COMPETITIONThis section analyzes the behavior of firms that operate in competitive markets. We take up the short-run first, and focus on two issues:1) How firms choose their outputs.2) How prices are determined.slide 2Competitive firms in the short-runIn the short-run firms have some fixed costs. In addition, in the short-run firms cannot leave an industry, and new firms cannot enter.slide 3Competitive firms in the short-runSTANDARD PROBLEMSTANDARD PROBLEMSuppose a typical apple orchard in Michigan has a short-run total cost curve like the one in our example.Suppose the firm (the orchard) is a perfect competitor and can sell apples at a price of $7 per bushel.If the firm wants to maximize profits, how many bushels of apples should it produce in each time period?slide 4Competitive firms in the short-runThe total costcurve looks like this.The total costcurve looks like this.Q TC0 1400001000 14190432000 16240033000 16587234000 16973635000 17673636000 18474437000 19376038000 20524044000 38802445000 448000slide 5Competitive firms in the short-run0500001000001500002000002500003000003500004000004500005000000 10000 20000 30000 40000 50000Q$TCslide 6Competitive firms in the short-runThe firm’s total economic profit is total revenue minus total cost.Total revenue is price times quantity sold, where price means the revenue per unit that the firm takes in. Price is the fixed, known market price of the firm’s output.slide 7Competitive firms in the short-runQ PRICE TR0 7 01000 7 700032000 7 22400033000 7 23100034000 7 23800035000 7 24500036000 7 25200037000 7 25900038000 7 26600044000 7 30800045000 7 315000TR is price times quantity.Price here is $7/unit.PQ = 7(33000The total revenue curve shows total receipts at each level of output.The dependent variable is total revenue and the independent variable is output.The total revenue curve shows total receipts at each level of output.The dependent variable is total revenue and the independent variable is output.slide 8Competitive firms in the short-run0500001000001500002000002500003000003500004000004500005000000 10000 20000 30000 40000 50000Note that because price is a constanthere (P=7), the TRcurve is a ray fromthe origin.TR is proportionalto Q. QTRTR=7*Qslide 9Competitive firms in the short-run0500001000001500002000002500003000003500004000004500005000000 10000 20000 30000 40000 50000Here are the total revenue and cost curves.Here are the total revenue and cost curves.TCTR$Qslide 10Competitive firms in the short-runQ TR TC PROFIT0 0 140000 -1400001000 7000 141904 -13490432000 224000 162400 6160033000 231000 165872 6512834000 238000 169736 6826435000 245000 176736 6826436000 252000 184744 6725637000 259000 193760 6524038000 266000 205240 6076044000 308000 388024 -8002445000 315000 448000 -133000Profit = TR - TC = 245000- 176736Profit is total revenue minus total cost.Profit is total revenue minus total cost.slide 11Competitive firms in the short-run-200000-10000001000002000003000004000005000000 10000 20000 30000 40000 50000Profit is maximized at 35000 units of output.Profit is maximized at 35000 units of output.PROFITTRTC$Qslide 12Competitive firms in the short-runWhere profit is maximized here is obvious from looking at the previous figure.The next thing to be shown is that the profit maximizing output is the output at which MARGINAL COST equals MARGINAL REVENUE.slide 13Competitive firms in the short-runThe profit maximization problem is going to be solved by looking at it from the point of view of average and marginal quantities and curves, instead of total quantities.The reason for doing this is that some problems are going to be much easier to solve if we look at the firm’s choices in terms of marginal and average revenue and cost.slide 14Competitive firms in the short-run0.001.002.003.004.005.006.007.008.009.000 10000 20000 30000 40000 50000Q$/QACMCAVCRecall what the marginal and average cost curves looked like in the case of our example.slide 15Competitive firms in the short-runNow for marginal revenue and average revenue.Average revenue: The firm’s total revenue divided by output. Revenue per unit of output. The same thing as PRICE.The average revenue curve shows average revenue as a function of output. The average revenue curve is the demand curve for output as seen by the firm.In the case of perfect competition, the average revenue curve is horizontal at the going market price. The firm is a price taker.slide 16Competitive firms in the short-runMarginal revenue: The change in total revenue per unit change in output. The slope of the total revenue curve. MR = TR / Q.The marginal revenue curve shows marginal revenue at each level of output. Output is the independent variable, and MR is the dependent variable.For a competitive firm MR is constant.slide 17Competitive firms in the short-runImportant pointImportant pointIn perfect competition, marginal revenue and average revenue are always equal and constant for a firm.The sense of this is that a competitive firm can always sell additional units of output at the going market price.slide 18Competitive firms in the short-runHere’s the cost and revenue curves togetheron the same set of axes.0.001.002.003.004.005.006.007.008.009.000 10000 20000 30000 40000 50000Q$/QACMCAVCP=MRslide 19Competitive firms in the short-runHere’s the cost and revenue curves togetheron the same set of axes.0.001.002.003.004.005.006.007.008.009.000 10000 20000 30000 40000 50000Q$/QACMCAVCP=MROutput = 35,000slide 20Competitive firms in the short-runCan you find total profitat the output where total profit is maximized?Can you find total profitat the output where total profit is maximized?slide 21Competitive firms in the short-run0.001.002.003.004.005.006.007.008.009.000 10000 20000 30000 40000 50000Q$/QACMCAVCP=MRMeasuring total profits in the average/marginal approach to finding the profit maximizing output.Profit is the shaded area shown in green$68,264Profit is the shaded area shown in green$68,264slide