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Firms in Perfectly Competitive Markets
小学课堂教学模式Chapter Summary
In a perfectly competitive market there are many buyers and many firms, all of whom are small relative to the total market. Products sold by the firms are identical and there are no barriers to new firms entering the market. Firms in a perfectly competitive market are unable to control the prices of goods they ll and are unable to earn economic profits in the long run.
Prices in perfectly competitive markets are determined by the interaction of market demand and market supply. Since each firm must accept the market price, the firm is called a price taker. The objective of the firm is to maximi profit. Profit is the difference between total revenue and total cost. The firm will produce the output for which marginal revenue (MR) is equal to marginal cost (MC). (A characteristic of price taker firms is this: marginal revenue is the same as price. This is not true of other market structures.) In the short run the firm’s price: (a) will exceed its average total cost (ATC) which means it will make an economic profit, or (b) will equal ATC so its total cost will equal total revenue and it earns no economic profit, or (c) will be less than ATC, which means the firm experiences an economic loss. (
Remember economic costs include all opportunity costs as well as explicit accounting costs.)
A firm experiencing loss can continue to produce, it can stop production by shutting down temporarily, or it can go out of business. The third option is a long-run decision while the first two are short-run. In the short run, the firm can either produce the profit maximising level of output or produce zero output. If shutting down (Q = 0) would lo an amount greater than its fixed cost, the firm will shut down temporarily. If the firm can reduce its loss below the amount of its fixed cost it will continue to produce. The firm will produce output even though total profits remain negative if total revenue is greater than total variable cost. This is identical to saying that the price of its output (P) must exceed average variable cost (AVC). The condition P = AVC is called the shutdown condition. The minimum point on the firm’s average variable cost curve is called the shutdown point.
When firms earn short-run profits, other firms will enter the industry. This shifts the industry supply curve to the right and lowers the market price. Entry continues until economic profits are zero. When firms suffer short-run loss, some firms will exit the industry. The exit of firms shifts the industry supply curve to the left and the market price increas. Exit continues until economic profits are zero.
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The long-run supply curve in a perfectly competitive market shows the relationship between market price and quantity supplied. In a long run competitive equilibrium entry and exit of firms caus the typical firm to earn zero economic profits.
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Learning Objectives
When you finish this chapter you should be able to:
明光绿豆>strtok1.Define a perfectly competitive market, and explain why a perfect competitor faces a horizontal
demand curve. A perfectly competitive market has many buyers and llers, all firms ll identical products and there are no barriers to new firms entering the market. A perfectly competitive firm faces a horizontal demand curve becau if the firm tried to rai its price, consumers would buy from the firm’s competitors. Since the firm can ll all the output it wants at the current market price there would be no point to trying to charge a lower price. If a firm increas the output it lls, the price will not decrea becau each firm is too small to shift the market supply curve enough to low
er equilibrium price.
2.Explain how a perfect competitor decides how much to produce. To make profit as large as possible, a
firm will produce that quantity of output for which marginal revenue equals marginal cost. Since marginal revenue equals price for a perfectly competitive firm, price will also equal marginal cost at the profit-maximising quantity of output.
3.U graphs to show a firm’s profit or loss. The firm’s profit-maximising rate of output is determined by
the interction of the demand curve with the marginal cost curve. The position of the average total cost (ATC) curve in this graph will indicate whether the firm earns a profit (price exceeds ATC) or suffers a loss (price is less than ATC).
4.Explain why firms may shut down temporarily. A firm experiencing loss in the short run will shut
down if the revenue from producing is insufficient to cover its total variable costs. By shutting down, the firm will avoid variable costs and minimi its loss.
5.Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the
long run. If firms earn short run economic profits, other firms will enter the market. The entry of firms will shift the market supply curve to the right and lower price until the short run profits are eliminated. If firms suffer short run loss, some firms will leave the market. The exit of firms will shift the market supply curve to the left and rai price until the short run loss are eliminated.
6.Explain how perfect competition leads to economic efficiency. In the long run, competitive forces will
drive the market price to the minimum average total cost of the typical firm. This means that perfect competition results in productive efficiency. Firms also produce at the point where the marginal cost of producing another unit equals the marginal benefit consumers receive from consuming that unit. This means that perfect competition achieves allocative efficiency. This result only applies to perfectly competitive firms becau only a horizontal demand curve can touch the long run ATC curve at its lowest point. Downward sloping demand curves will always be tangent to LRATC at a point above the minimum.gay是什么意思
Chapter Review
Chapter Opener: Perfect Competition in the Market for Organic Foodafriendinneedisafriendindeed
The market for organic food has grown rapidly in Australia recently. In respon to rising demand many farmers switched to organic methods (from 372,000 hectares in 1990 up to 7 million in 2007). At the moment, organic food, although it costs around 15% more to produce, attracts a price premium of around 50%. However, in respon to this increa in demand for organic food, supply is expected to increa further, which will probably force the prices down again. Therefore this industry exhibits characteristics of perfect competition, whereby short run profits are eventually eroded in the long run due to the increa in other firms (farmers) entering the market.
Firms in perfectly competitive markets 122
初级管理会计师Perfectly Competitive Markets
A perfectly competitive market is a market that meets the conditions of (1) many buyers and llers, (2) all firms lling identical products, and (3) no barriers to new firms entering the market. Prices in perfectly competitive markets are determined by the interction of market demand and supply. Consumers and firms must accept the market price if they want to buy and ll in a competitive market.
A price taker is a buyer or ller that is unable to affect the market price. A firm in a perfectly competitive market is a price taker becau it is very small relative to the market and lls exactly the same product as every other firm. Although the market demand curve has the normal downward shape, the demand curve for a perfectly competitive firm is horizontal at the market price.
Helpful Study Hint
In order to understand what a perfectly elastic demand curve is, draw a ries of demand curves
that are increasingly more elastic, but not perfectly so. With each of the curves the respon
of quantity demanded to a given price change becomes greater and greater. The most elastic of
the curves will have a slight downward slope. The perfectly competitive firm’s demand curve
on salecan then be understood as reprenting what happens to quantity demanded for the smallest
成长的烦恼第一季
increa in price — quantity demanded drops to zero even if the price, is incread by only a
cent! Since the firm can ll all it can at the market price the question “what happens to
quantity if price is decread?” is irrelevant. The firm would not choo to lower price.
Consider a farmer offering to ll wheat at $2.95 per bushel if he can ll all he produced for a
price of $3.00.
How a Firm Maximis Profit in a Perfectly Competitive Market
Economists assume that the objective of a firm is to maximi profits. Profit is the difference between total revenue (TR) and total cost (TC). Therefore, a firm will produce that quantity of output where the difference between TR and TC is as large as possible. A firm’s average revenue (AR) equals total revenue divided by the number of units sold. Average revenue is the same as market price. For a firm in a perfectly competitive market, price is also equal to marginal revenue. Marginal revenue (MR) is the change in total revenue caud by producing and lling one more unit. The marginal revenue curve for a perfectly competitive firm is the same as its demand curve.
The marginal cost (MC) of production for a perfectly competitive firm first falls, then ris. So long as MR exceeds MC the firm’s profits are increasing and production will increa. The firm’s profits will decrea if production is incread beyond the output for which MC exceeds MR. The profit maximis
ing level of output is where MR = MC. Since P = MR for the firms, profit will be maximid when P = MC.
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Helpful Study Hint
Students often ask “Why wouldn’t the firm want to maximi the difference between MR and
MC?” This question is addresd in the feature Don’t Let This Happen to You! [page 254]
Read this feature and understand the firm’s goal is to maximi total profit not additional
profit. Another frequently asked question is “Why would the firm produce a unit of output for
which MR = MC since it would not earn any profit from this last unit?” Included in the cost of
production is a normal return so that the revenue earned from the profit maximising unit of
output is just enough to compensate the firm’s owner(s) for the effort made to produce it.
Illustrating Profit or Loss on the Cost Curve Graph
Profit equals total revenue (TR) minus total cost (TC). Since TR equals price multiplied by quantity sold, this can be written as:
Profit = (P x Q) - TC
Dividing both sides by Q:
Profit(PxQ)TC
= -
Q Q Q
This equation means that profit per unit (or average profit) equals price minus average total cost. Multiplying both sides of the equation by Q yields an equation that tells us a firm’s total profit is equal to the quantity produced multiplied by the difference between price and average total cost. (P – ATC is called the profit margin per unit.) Profit = (P − ATC) x Q
The graph illustrating the perfectly competitive firm’s demand curve, marginal revenue and average total cost curves [Figure 8.4, page 251] can be ud to identify rectangles with areas equal to TR, TC and profit. The firm will make a profit if P > ATC. The firm will break even if P = ATC. The firm will experience loss if P < ATC.
Helpful Study Hint
Study Solved Problem 8.1 (page 252) carefully. Be sure you understand the graphs that show a
firm’s profit or loss. If properly drawn, graphs can help you to answer questions that would be
more difficult to answer using only words or numbers. Aids to learning from the graphs: (1)
When a firm’s demand curve intercts the ATC curve, price will exceed ATC for some level
of output. That means the firm earns a profit. (2) To show a firm suffering loss the ATC
curve is drawn everywhere above the demand curve. (3) Always draw the demand curve and
the MC curve first to determine the profit-maximising output. This will make it easier to
identify ATC and AVC at this same output.
Firms in perfectly competitive markets 124
Deciding Whether to Produce or to Shut Down in the Short Run
In the short run, a firm suffering loss has two choices. The first choice is whether to produce any output at all. The firm will produce the profit-maximising output and reduce its loss below the amount of its fixed cost if, by continuing to produce, its total revenue is greater than its total variable cost. The firm’s cond choice is to stop production by shutting down temporarily (producing zero output). During a temporary shut down a firm must still pay its fixed costs. If, by producing, the firm would lo an amount greater than its fixed costs, it will shut down.
A sunk cost is a cost that has already been paid and cannot be recovered. The firm should treat its sunk costs as irrelevant to its decision making.
The firm’s marginal cost curve is its supply curve only for prices at or above average variable cost. The shutdown point is the minimum point on a firm’s average variable cost curve. If the price falls below this point, the firm shuts down production in the short run. The market supply curve can be derived by adding up the quantity that each firm in the market is willing to supply at each price.
Helpful Study Hint
The decision to shut down is not the same as deciding to leave the market or go out of business.
Many firms ll goods or rvices only in certain asons. Examples include ski resorts, retail
stores near summer resorts and Christmas tree vendors. The firms shut down temporarily
during the off ason. Going out of business permanently, however, is a long-run decision.
“If Everyone Can Do It, You Can’t Make Money at It” – The Entry and Exit of Firms in the Long Run
In the long run, unless a firm can cover all of its costs it will shut down and exit the industry. Economic profit is a firm’s revenues minus all its costs, implicit and explicit. Economic loss means a firm’s total revenue is less than its total cost, including all implicit costs. If firms in a perfectly competitive market are earning economic profits in the short run, firms in other markets that are breaking even or suffering loss will have an incentive to enter the market so they too can earn an economic profit. Entrepreneurs will start new firms as well.
The entry of new firms shifts the industry supply curve to the right. As a result, the market price will f
all. The entry of firms will continue until price is equal to average total cost. If firms in a perfectly competitive market are suffering loss in the short run, some of the firms will exit the industry since they will not be able to cover all of their costs. The exit of firms shifts the industry supply curve to the left. As a result, the market price will ri. The exit of firms will continue until price is equal to average total cost.
Long-run competitive equilibrium is the situation in which the entry and exit of firms have resulted in the typical firm just earning zero economic profits. The long-run supply curve shows the relationship in the long run between market price and the quantity supplied in the long run. A constant cost industry is an industry in which the typical firm’s average total costs do not change as the industry expands. This means that the firm will have a horizontal long-run supply curve. An increasing cost industry is an industry in which the typical firm’s long run average total cost increas as the industry expands. This means the firm will have an upward sloping long run supply curve. A decreasing cost industry is an industry in which the typical firm’s average total costs decrea as the industry expands. This means that the firm will have a downward sloping long run supply curve.
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