Financial Accounting, Schemi e mappe concettuali di Finanza

Scarica Financial Accounting e più Schemi e mappe concettuali in PDF di Finanza solo su Docsity! 24/10/2021 1 FOUNDATIONS OF MICROECONOMICS FÁTIMA BARROS 2021/2022 FIRMS IN COMPETITIVE MARKETS Based on Managerial Economics by Baye & Prince 24/10/2021 2 3Foundations of Microeconomics Fátima Barros 1. Introduction ●What is a perfectly competitive market? ● How does a competitive firm determine the quantity that maximizes profits? ● When might a competitive firm shut down in the short run? Exit the market in the long run? ● What does the market supply curve look like in the short run? In the long run? 4Foundations of Microeconomics Fátima Barros 4 youtu.be/aFBGsad_qE0 https://www.youtube.com/watch?v=61GCogal zVc 2. Perfect Competition 24/10/2021 5 9Foundations of Microeconomics Fátima Barros 9 3.1 Setting Price Market QM $ D S Pe Firm Qf $ DfPe 10Foundations of Microeconomics Fátima Barros Competitive Firm’s Demand The demand curve for a competitive firm is an horizontal line at the market price. 3.2 The Firm’s Demand Curve 24/10/2021 6 11Foundations of Microeconomics Fátima Barros 3.3 The revenue of a Competitive firm • Total revenue (TR) • Average revenue (AR) • Marginal revenue (MR): The change in TR from selling one more unit. 𝑇𝑅 = 𝑃 × 𝑄 𝑀𝑅 = Δ𝑇𝑅 Δ𝑄 = 𝑃 𝐴𝑅 = 𝑇𝑅 𝑄 = 𝑃 × 𝑄 𝑄 = 𝑃 𝑀𝑅 = 𝑑𝑇𝑅 𝑑𝑄 = 𝑃 The market price is the firm´s marginal revenue P=MR 12Foundations of Microeconomics Fátima Barros Active Learning 1 Calculating TR, AR, MR Fill in the empty spaces of the table. €50€105 €40€104 €103 €102 €10€101 n/a€100 TRPQ MRAR €10 24/10/2021 7 13Foundations of Microeconomics Fátima Barros Active Learning 1 Answers €50€105 €40€104 €103 €10 €10 €10 €10€102 €10€101 n/a €30 €20 €10 €0€100 TR = P x QPQ ∆TR ∆Q MR = TR Q AR = €10 €10 €10 €10 €10 Notice that MR = P 14Foundations of Microeconomics Fátima Barros For a Competitive Firm: MR = P • A competitive firm can keep increasing its output without affecting the market price. • So, each one-unit increase in Q causes revenue to rise by P, i.e., MR = P. MR = P is only true for firms in competitive markets. 24/10/2021 10 19Foundations of Microeconomics Fátima Barros 19 A Numerical Example • Given Market Price: 𝑃 = $10 is the market price Cost Function ∶ 𝐶 𝑄 = 5 + 𝑄2 • Marginal Cost? 𝑀𝐶 = 2𝑄 • Optimal Output? 𝑀𝑅 = 𝑃 = $10 and 𝑀𝐶 = 2𝑄 𝑀𝑅 = 𝑀𝐶 then 10 = 2𝑄 𝑄 = 5 units • Maximum Profits? 𝑃𝑄 − 𝐶 𝑄 = 10 5 − 5 + 25 = $20 20Foundations of Microeconomics Fátima Barros 20 Graphically $ Qf ATC AVC MC Pe = Df = MR Qf* ATC Pe 24/10/2021 11 21Foundations of Microeconomics Fátima Barros 21 Graphically $ Qf ATC AVC MC Pe = Df = MR Qf* ATC Pe Profit = (Pe - ATC)  Qf* 22Foundations of Microeconomics Fátima Barros 3.5 The firm’s supply decision P1 MR1 P2 MR2 If price rises to P2, then the profit- maximizing quantity rises to Q2. The MC curve determines the firm’s Q at any price. Hence, Q Costs MC Q1 Q2 the MC curve is the firm’s supply curve. 24/10/2021 12 23Foundations of Microeconomics Fátima Barros The firm’s Supply curve 23 To maximize profits, a perfectly competitive firm produces the output at which +rice equals margina cost in the range over which marginal cost is increasing. 𝑃 = 𝑀𝐶 𝑄 24Foundations of Microeconomics Fátima Barros 3.6 Shutdown vs. Exit • Shutdown: A short-run decision not to produce anything because of market conditions. • Exit: A long-run decision to leave the market. • A key difference: – If shut down in Short Run, must still pay Fixed Costs (FC). – If exit in Long Run, zero costs. 24/10/2021 15 29Foundations of Microeconomics Fátima Barros 29 3.7 Short-Run Firm Supply Curve Firm’s output $ 0 Short-run supply curve for individual firm 30Foundations of Microeconomics Fátima Barros 30 Short-Run Supply Curve The Short-run supply curve for a perfectly competitive firm is its marginal cost curve above the minimum point of the AVC curve 24/10/2021 16 31Foundations of Microeconomics Fátima Barros 3.8 The Short Run Market Supply Curve • As long as P ≥ AVC, each firm will produce its profit- maximizing quantity, where MR = MC. • Recall: At each price, the market quantity supplied is the sum of quantities supplied by all firms. 32Foundations of Microeconomics Fátima Barros The Short Run Market Supply Curve MC P2 Market Q P (market) One firm Q P (firm) S P3 Example: 1000 identical firms At each P, market Qs = 1000 x (one firm’s Qs) AVC P2 P3 30 P1 2010 P1 30,00010,000 20,000 24/10/2021 17 33Foundations of Microeconomics Fátima Barros Market Supply Curve Market output P 0 1 $10 $12 Market supply curve Individual firm’s supply curve 500 S 34Foundations of Microeconomics Fátima Barros The Irrelevance of Sunk Costs • Sunk cost: a cost that has already been committed and cannot be recovered • Sunk costs should be irrelevant to decisions: you must pay them regardless of your choice. • The firm must pay its fixed costs whether it produces or shuts down • So, Fixed Costs should not matter in the decision to shut down (they become sunk costs). 24/10/2021 20 39Foundations of Microeconomics Fátima Barros A New Firm’s Decision to Enter Market • In the long run, a new firm will enter the market if it is profitable to do so: if TR > TC (equivalent to say that profits are positive). • Divide both sides by Q to express the firm’s entry decision as: Enter if P > ATC 40Foundations of Microeconomics Fátima Barros A Firm’s Long-Run Decision to Exit • Cost of exiting the market: revenue loss = TR • Benefit of exiting the market: cost savings = TC (zero FC in the long run) • So, firm exits if profits are negative or TR < TC • Divide both sides by Q to write the firm’s decision rule as: Exit if P < ATC 24/10/2021 21 41Foundations of Microeconomics Fátima Barros 4.2 The Competitive Firm’s LR Supply Curve The firm’s Long Run (LR) supply curve is the portion of its MC curve above LRATC (Long Run Average Total Cost) Q Costs MC LRATC 42Foundations of Microeconomics Fátima Barros 24/10/2021 22 43Foundations of Microeconomics Fátima Barros 4.3 Market Supply: Assumptions 1) All existing firms and potential entrants have identical costs. 2) Each firm’s costs do not change as other firms enter or exit the market. 3) The number of firms in the market is – fixed in the short run (due to fixed costs) – variable in the long run (due to free entry and exit) 44Foundations of Microeconomics Fátima Barros Entry & Exit in the Long Run • In the Long Run (LR), the number of firms can change due to entry & exit. • If existing firms earn positive economic profit, – new firms enter, SR market supply shifts right. – P falls, reducing profits and slowing entry. • If existing firms incur losses, – some firms exit, SR market supply shifts left. – P rises, reducing remaining firms’ losses.