Econ 2023 1st Edition Lecture 14Outline of Last Lecture (Lecture 12, No new information was given in lecture 13)I. FirmsII. TechnologyIII. Costsa. Short Runi. TC, TFC, TVCb. Long runi. TC(=TVC)c. Marginal Cost.Outline of Current Lecture II. Characteristics of perfectly competitive marketa. Perfect competitionIII. Short run profit maximizationa. Positive, even out, negativeb. More insight to short run profitCurrent LectureChapter 8: Perfect Competition1. Characteristics of perfectly competitive market.a. Market structure: Four types (*=implications) A market is a set of buyers and sellers, commonly referred to as agents, who through their interaction, both real and potential, determine the price of a good, or a set of goods. The concept of a market structure is therefore understood as those characteristics of a market that influence the behavior and results of the firms working in that market. The main aspects that determine market structures are: the number of agents in the market, both sellers and buyers; theirrelative negotiation strength, in terms of ability to set prices; the degree of concentration among them; the degree of differentiation and uniqueness of products; and the ease, or not, of entering and exiting the market.i. Perfect competition: Many firms producing a specific item- Number of *buyers and seller are many, relative strength of buyers and sellers are all *too small to influence market outcomes, *Degree of product differentiation is none- the These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.products are homogeneous, ease of entry and exit have no barriers (implications:profits are ephemeral).ii. Monopolistic competition: Fewer firms producing a specific item. Oligopoly: Very few firms producing a specific item. Monopoly: One firm producing a specific item1. Determinants: Number of buyers and sellers, relative size or strength of buyers and sellers, degree of product differentiation, ease of entry and exit. The closer to monopoly production is more concentrated and the market is less competitive.iii. Price-taker--"A company that must accept the prevailing prices in the market of its products, its own transactions being unable to affect the market price."iv. Marginal revenue--"The change in total revenue resulting from a change in thequantity of output sold. Marginal revenue indicates how much extra revenue a firm receives for selling an extra unit of output. It is found by dividing the change in total revenue by the change in the quantity of output. Marginal revenue is the slope of the total revenue curve and is one of two revenue concepts derived from total revenue. The other is average revenue. To maximize profit, a firm equates marginal revenue and marginal cost."1. MR = ΔTR/ΔQ ≡ Slope of TR.2. For perfectly competitive firms, MR = P. Since the price facing a perfectly competitive firm is constant (equal to the market equilibrium price), a perfectly competitive firm's marginal revenue is constant.2. Short run profit maximization: goal is to maximize profit. (Π= TR-TC)a. Profit > 0 (positive)b. Profit = 0 (even out)c. Profit < 0 (negative)i. Keep producing (q*>0) Market equilibrium price determines firm demand.ii. Shut down (q*=0)d. A short run perfectly competitive equilibrium consists of a market price such that that total quantity supplied by firms is equal to the total quantity demanded by consumers. Furthermore, each firm is maximizing its profit by producing the output level (Q*Firm) for which P* ≡ MR = MCShort Run; because its profit is maximized, no firm wishes to either expand or contract its rate of output. The level of short run profit earned by a firm depends on the level of ATCShort Run at Q*Firm relative to P*:π = 0 if P* = ATCShortRun at Q*Firme. Break-even point--"The quantity of output in which the total revenue is equal to total cost such that a firm earns exactly a normal profit, but no economic profit. Break-even output can be identified by the intersection of the total revenue and total cost curves, orby the intersection of the average total cost and average revenue curves. The most straightforward way of noting break-even output, however, is with the profit curve. For aperfectly competitive firm break-even output occurs where price is equal to average total cost."f. Shut-down point--"In economics, a firm will choose to implement a shutdown of production when the revenue received from the sale of the goods or services produced cannot even cover the variable costs of production. In that situation, the firm will experience a higher loss when it produces, compared to not producing at all. Technically, shutdown occurs if marginal revenue is below average variable cost at the profit-maximizing output. Producing anything would not generate returns significant enough to offset the associated variable costs; producing some output would add losses (additional costs in excess of revenues) to the costs inevitably being incurred (the fixed costs). By not producing, the firm loses only the fixed costs."g. Normal profit--"Minimum profit necessary to attract and retain suppliers in a perfectlycompetitive market (see perfect competition). Only normal profit could be earned in such markets because, if profit was abnormally high, more competitors would appear and drive prices and profit down. If profit was abnormally low, firms would leave the market and the remaining ones would drive the prices and profit up. Markets where suppliers are making normal profits will neither expand nor shrink and will, therefore, bein a state of long-term equilibrium. Normal profit typically equals opportunity