Interviewing to Human Communication - Lecture Slides | EC 201, Study notes of Microeconomics

Download Interviewing to Human Communication - Lecture Slides | EC 201 and more Study notes Microeconomics in PDF only on Docsity! Chapter 14 Handout EC-201-011 Spring Semester 2012 Chapter 14 Characteristics of a perfectly competitive market: 1) Homogenous goods (exactly the same) 2) The buyers and sellers are so numerous that no single buyer or seller has any influence over market price (price takers) 3) Free entry and exit [4) Perfect information)] Examples: Commodities (raw or primary products) A firm in a perfectly competitive market—corn: Market price is $6 per bushel of corn Q Price TR (P*Q) AR (TR/Q) MR (calc) MR 0 6 0 -- ∆TR/∆Q ∆ 1 6 6 6 (6-0)/9(1-0) 6 2 6 12 6 (12-6)/(2-1) 6 3 6 18 6 (18-12)/(3-2) 6 4 6 24 6 (24-28)/(4-3) 6 5 6 30 6 (30-24)/(5-4) 6 6 6 36 6 6 7 6 42 6 6 8 6 48 6 6 Average revenue: total revenue divided by quantity Marginal revenue: the change in total revenue from an additional unit sold “Competitive firm price rule”: price = AR = MR (flat line) How does a competitive firm decide how much to produce? Which Q? Thinking on the margin (MR &MC) Q TR TC MR MC MC Economic Profit (TR-TC) 0 0 3 ∆ ∆ ∆ -3 1 6 5 6 (5-3)/(1-0) 2 1 2 12 8 6 (8-5)/(2-1) 3 4 3 18 12 6 (12-8)/(3-2) 4 6 4 24 17 6 (17-12)/(4-3) 5 7 5 30 23 6 (23-17)/(5-4) 6 7 6 36 30 6 (30-23)/(6-5) 7 6 7 42 38 6 (38-30)/(7-6) 8 4 8 48 47 6 (47-38)/(8-7) 9 1 When is profit maximized? 4 or 5 bushels of corn “Profit maximization rule for any firm”: produce the quantity for which MC = MR (thinking on the margin) Graph: $/unit MC 6 MR=AR=P Competitive price firm rule (flat line) Q Q max profit Firm’s individual supply curve: the firm’s marginal cost curve (not market supply) Profit = TR- TC Profit = Q x AR – Q x ATC Profit = Q (AR - ATC) = base x height Identifying profit on a graph: Positive Profit FIRM A $/unit MC 6 MR=AR=P ATC Q Q max profit Profit Problems Problem 5: Ball Bearings, Inc. faces costs of production as follows: Q FC VC AFC AVC ATC MC =∆TC/∆Q = ∆VC/∆Q 0 100 0 -- -- -- ∆ 1 100 50 100 50 150 (100+50-100)/(1-0) = 50 2 100 70 50 35 85 20 3 100 90 33 30 63 20 4 100 140 25 35 60 50 5 100 200 20 40 60 60 6 100 360 17 60 77 160 A) Calculate the company’s AFC, AVC, ATC, and MC. B) The price of a case of ball bearings is $50. Seeing that she can’t make a profit, the CEO decides to shut down operations. What are the firm’s profits/losses? When Q=0, revenues are 0 and costs are 0+100=100. Therefore the profit is 0-100= -100 Was this a wise decision? Explain. The CEO only looked at profits, which includes sunk cost (fixed cost), so no, not a wise decision because they did the wrong calculation. C) Vaguely remembering his introductory economics course, the CFO tells the CEO it is better to produce 4 cases of ball bearings, because MR=MC at that quantity. What are the firm’s profits/losses at that level of production? TR = P*Q = 50*4 = 200 TC = FC+VC = 100+140 = 240 Profits = TR-TC = 200-240 = -40 Was this the best decision? Explain. Yes. Problem 7: A firm in a competitive market receives $500 in total revenue and has marginal revenue of $10. What is the average revenue, and how many units were sold? Average revenue is $10. For a competitive firm: MR=AR=P So, AR=MR=10 so AR=10 Since AR=TR/Q so 10=500/Q so Q=50 Review If a firm is in a competitive market, what happens to its total revenue if it doubles its output? Why? Its total revenue doubles because the firm faces a flat demand curve (the firm is a price-taker), so the price remains the same and the firm can sell as much as it likes at the price. So double the output at the time price as before means double the revenue. Why must the long-run equilibrium in a competitive market (with free entry and exit) have all firms operating at their efficient scale? In the long-run equilibrium, firms must be making zero economic profits due to free entry and exit. Supply will shift to the left until market prices go up and the profit is not negative. Suppose the price for a firm’s output is above the average variable cost of production but below the average total cost of production. Will the firm shut down in the short run (stop production)? Will the firm exit the market in the long run? The firm will not shut down in the short-run. P>AVC so the firm can cover the cost of its inputs, and the fixed costs are already sunk costs. The firm will exit the market in the long run. P<ATC so profits are negative. True or False: They earn zero profits in the long run. In the long run, perfectly competitive firms earn small but positive economic profits. For the perfectly competitive firm described above, if the price is $3, what is the optimal level of production? Either two or three