chapter eightmx.nthu.edu.tw/~hlchuang/econ2061_2010/perloff_ppt_ch08... · 2010. 12. 31. ·...

© 2008 Pearson Addison Wesley. All rights reserved

Chapter Eight

Competitive Firms and Markets

火鍋店生意爆好，一位難求民視新聞2010/12/08

強烈冷氣團來襲，熱門的火鍋店幾乎一位難求，業者備

貨量比平常多一倍，但火鍋食材也漲價了，光是老薑就上漲

4成，海鮮漲2成，讓吃到飽的火鍋店增加不少成本。收桌、

擺桌，手腳俐落，服務生得在2分鐘內完成，這頭還得忙著

補貨，手沒停過，吃到飽的火鍋店備貨量比平常多一倍，冷

氣團來襲，店裡坐得滿滿滿，本子密密麻麻的，不只假日，

連平常日都客滿到晚上十點，人氣火鍋店一位難求。

© 2008 Pearson Addison Wesley. All rights reserved. 8-2

燒滾滾的火鍋大受歡迎，市場需求量增加，食材也跟著漲價，

老薑批發價從一公斤46元漲到66元，漲了4成，香菇從一台斤700元

漲到850元，漲2成，茼蒿漲更兇，批發價漲了2倍之多，至於火鍋料

也跟著漲，漲1成，就連螃蟹海鮮也是，零售價也漲了2成。

儘管食材成本增加，但吃到飽的業者還是不敢漲價，看看一級

戰區，台北市公館商圈的汀洲路上，有1，2，3，4，5，短短50公尺

就有5家火鍋店，競爭如此激烈，誰漲價，誰就輸，業者靠薄利多銷

，還是可以大發一筆冬天財。


火鍋店生意爆好，一位難求民視新聞2010/12/08

Competitive Firms and Markets• In this chapter, we examine four main topics

– Competition

– Profit Maximization

– Competition in the Short Run

– Competition in the Long Run


Competition

• Competition is a common market structure that has very desirable properties, so it is useful to compare other market structures to competition.


Price Taking

• Economists say that a market is competitive if each firm in the market is a price taker: a firm that cannot significantly affect the market price for its output or the prices at which it buys its inputs.


Why A Firm’s Demand Curve is Horizontal• Consumers believe that all firms in the market sell

identical products.• Firms freely enter and exit the market.• Buyers and sellers know the prices charged by

firms.• Transaction costs—the expenses of finding a

trading partner and making a trade for a good or service other than the price paid for that good or service—are low.


Why A Firm’s Demand Curve is Horizontal• We call a market in which all these conditions

hold a perfectly competitive market. In such a market, if a firm raised its price above the market price, the firm would be unable to make any sales.


Derivation of A Competitive Firm’s Demand Curve

• The demand curve that an individual firm faces is called the residual demand curve: the market demand that is not met by other sellers at any given price.

• The residual demand curve that a single firm faces is the market demand minus the supply of the other firms in the market.

(8.1)



Figure 8.1Residual Demand Curve

Derivation of A Competitive Firm’s Demand Curve

• The residual demand curve that the firm faces is much flatter than the market demand curve.

• The elasticity of the residual demand curve is much higher than the market elasticity.

• The elasticity of demand, εi ,facing Firm i is :

(8.2)


Why Perfect Competition is Important• Perfectly competitive markets are important for

two reasons.

– First, many markets can be reasonably described as competitive. Many agricultural and other commodity markets, stock exchanges, retail and wholesale markets, building construction markets, and others have many or all of the properties of a perfectly competitive market.


Why Perfect Competition is Important

– Second, a perfectly competitive market has many desirable properties. Economists use this model as the ideal against which real-world markets are compared.


Profit Maximization

• Profit– A firm’s profit, π , is the difference between a

firm’s revenues, R, and its cost, C :

π = R - CIf profit is negative, π < 0, the firm makes a loss.

• Equation 8.3


Two Steps to Maximizing Profit• To maximize its profit, any firm (not just

competitive, price-taking firms) must answer two questions:

– Output decision: If the firm produces, what output level, q*, maximizes its profit or minimizes its loss?

– Shutdown decision: Is it more profitable to produce q* or to shut down and produce no output?



Figure 8.2Maximizing Profit

Output Rules

• marginal profit– the change in profit a firm gets from selling

one more unit of output

• marginal revenue (MR)– the change in revenue a firm gets from selling

one more unit of output


Output Rules

• Output Rule 1: The firm sets its output where its profit is maximized.

• Output Rule 2: A firm sets its output where its marginal profit is zero.

(8.4)

(8.5)

(8.6)


Output Rules

• Output Rule 3: A firm sets its output where its marginal revenue equals its marginal cost.

(8.7)

(8.8)


Shutdown Rules

• Shutdown Rule 1: The firm shuts down only if it can reduce its loss by doing so.

– The firm compares its revenue to its variable cost only when deciding whether to stop operating.

– Because the fixed cost is sunk—the expense cannot be avoided by stopping operations—the firm pays this cost whether it shuts down or not. The sunk fixed cost is irrelevant to the shutdown decision.


Shutdown Rules

• Shutdown Rule 2: The firm shuts down only if its revenues is less than its avoidable cost.

– This rule holds for all types of firms in both short run and the long run.


Competition in the Short Run• Short-Run Output Decision

– Because a competitive firm’s marginal revenue equals the market price, a profit-maximizing competitive firm produces the amount of output at which its marginal cost equals the market price.

(8.9)

(8.10)



Figure 8-3

How a Competitive Firm Maximizes Profit

Solved Problem 8.1

• If a specific tax of τ is collected from only one competitive firm, how should that firm change its output level to maximize its profit, and how does its maximum profit change?1. Use calculus to find the firm’s profit-maximizing

output before the tax is imposed2. Use calculus to find the firm’s profit-maximizing

output after the tax is imposed


Solved Problem 8.1

3. Use comparative statics to determine how a change in the tax rate affects output

4. Show that the profit must fall, using the definition of a maximum or showing that profit falls at every output


© 2007 Pearson Addison-Wesley. All rights reserved. 8–26

Solved Problem 8.1

q1

q2

e1

τ

τ

e2

q , Units per year

p p = MR

AC 1

MC 1

MC 2 = MC 1 + τ

AC 2 = AC 1 + τ

AC 2 (q 2)

AC 1(q 1)

A

B

Short-Run Shutdown Decision• The firm can gain by shutting down only if its

revenue is less than its short-run variable cost as shown in equation (8.14)

• A competitive firm shuts down if the market price is less than the minimum of its short-run average variable cost curve as shown in equation (8.15).



Figure 8.4The Short-Run Shutdown Decision

Short-Run Firm Supply Curve• Tracing Out the Short-Run Supply Curve

– If the price falls below the firm’s minimum average variable cost, the firm shuts down.

– The competitive firm’s short-run supply curve is its marginal cost curve above its minimum average variable cost.



Figure 8.5How the Profit-Maximizing Quantity Varies with Price

Short-Run Firm Supply Curve• Factor Prices and the Short-Run Firm Supply

Curve– An increase in factor prices causes the

production costs of a firm to rise, shifting the firm’s supply curve to the left.



Figure 8.6Effect of an Increase in the Cost of Materials on the Vegetable Oil Supply Curve

Short-Run Market Supply Curve• Short-Run Market Supply with Identical Firms

– The market supply curve flattens as the number of firms in the market increases because the market supply curve is the horizontal sum of more and more upward-sloping firm supply curves.

– The more identical firms producing at a given price, the flatter (more elastic) the short-run market supply curve at that price.



Figure 8.7Short-Run Market Supply with Five Identical Lime Firms

Short-Run Market Supply Curve• Short-Run Market Supply with Firms That Differ

– Where firms differ, only the low-cost firm supplies goods at relatively low prices. As the price rises, the other, higher-cost firm starts supplying, creating a stairlike market supply curve. The more suppliers there are with differing costs, the more steps there are in the market supply curve.

– Differences in costs are one explanation for why some market supply curves are upward sloping.



Figure 8.8Short-Run Market Supply with Two Different Lime Firms

Short-Run Competitive Equilibrium

• By combining the short-run market supply curve and the market demand curve, we can determine the short-run competitive equilibrium.



Figure 8.9Short-Run Competitive Equilibrium in the Lime Market

Competition in the Long Run• Long-run competitive profit maximization

– In the long run, typically all costs are variable, so the firm does not have to consider whether fixed costs are sunk or avoidable.


Long-Run Competitive Profit Maximization• Long-Run Output Decision

– The firm picks the quantity that maximizes long-run profit, which is the difference between revenue and long-run cost.

– Equivalently, it operates where long-run marginal profit is zero and where marginal revenue equals long-run marginal cost.


Long-Run Competitive Profit Maximization• Long-Run Shutdown Decision

– After determining the output level, q*, that maximizes its profit or minimizes its loss, the firm decides whether to produce or shut down.


Long-Run Firm Supply Curve

• A firm’s long-run supply curve is its long-run marginal cost curve above the minimum of its long-run average cost curve (because all costs are variable in the long run).



Figure 8.10The Short-Run and Long-Run Supply Curves

Long-Run Market Supply Curve• The competitive market supply curve is the

horizontal sum of the supply curves of the individual firms in both the short run and long run.

• In the long run, firms can enter or leave the market. Thus before we can add all the relevant firm supply curves to obtain the long-run market supply curve, we need to determine how many firms are in the market at each possible market price.


Long-Run Market Supply Curve• Role of Entry and Exit

– The number of firms in a market in the long run is determined by the entry and exit of firms.

• A firm enters the market if it can make a long-run profit, π > 0.

• A firm exits the market to avoid a long-run loss, π < 0.



Table 8.1Average Annual Entry and Exit Rates in Selected U.S. Industries, 1989-1996

Long-Run Market Supply Curve• Long-Run Market Supply with Identical Firms

and Free Entry– The long-run market supply curve is flat at the

minimum long-run average cost if firms can freely enter and exit the market, an unlimited number of firms have identical costs, and input prices are constant.



Figure 8.11Long-Run Firm and Market Supply with Identical Vegetable Oil Firms

Long-Run Market Supply Curve• Long-Run Market Supply When Entry is

Limited– If the number of firms in a market is limited in

the long run, the market supply curve slopes upward. (the first)

– The number of firms in a market is limited if the government restricts that number, if firms need a scarce resource, or if entry is costly.


Long-Run Market Supply Curve• Long-Run Market Supply When Firms Differ

– A second reason why some long-run market supply curves slope upward is that firms differ.

– Firms with relatively low minimum long-run average costs are willing to enter the market at lower prices than others, resulting in an upward-sloping long-run market supply curve.


Long-Run Market Supply Curve• Long-Run Market Supply When Input Prices

Vary with Output– A third reason why market supply curves may

slope is nonconstant input prices.

– In conclusion, the long-run supply curve is upward sloping in an increasing-cost market and flat in a constant-cost market.



Figure 8.12Long-Run Market Supply in an Increasing-Cost Market

Long-Run Competitive Equilibrium• The intersection of the long-run market supply

and demand curves determines the long-run competitive equilibrium.



Figure 8.14The Short-Run and Long-Run Equilibria for Vegetable Oil

chapter eightmx.nthu.edu.tw/~hlchuang/econ2061_2010/perloff_ppt_ch08... · 2010. 12. 31. ·...

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