perfect competition

perfect competition

The assumptions of perfect competitions	- the industry is made of a very large nmber of firms - each firm is so small that they have no effect on the market if they change output - all the firms produce homogenous products - firms are completly free to enter and leave the market as they choose. -all producers and consumers have perfect knowledge of the market Good example is agricultural
Profit maximimization
Possible short run profit and loss	Short run abnornmal profits Short run losses
Short run abnormal profits to long run norma l profits
Short run losses to long run normal profits
Long run equilibrium in perfect competion
Productive and allocative efficiency in perfect competition
Allocative efficiency •Allocative efficiency (the socially optimal level of output) occurs where suppliers are producing the optimal mix of goods and services required by consumers. •Price reflects the value that consumers place on a good and is shown on the demand curve (average revenue) •Marginal cost reflects the cost to society of all the resources used in producing an extra unit of a good, including the normal profit required for a firm to stay in business. •Allocative efficiency occurs where marginal cost (the cost of producing one more unit) is equal to average revenue (the price received for a unit). •MC=AR [allocatively efficient (socially optimal) level of output]
Productiove and allocative effeciency in the short run in perfect competition
Productive and allocative efficiency in the long run in perfect competion

Exercises for costs of prod.

1.

0 0 - -

1 120 120 120

2 300 150 180

3 500 166 200

4 640 160 140

5 675 135 35

6 710 118 0

2. As more variable resources are added more products are made up until the point where their averafe decreases and even further where less products are made

3. Variable

Fixed

Ficed

Variable

Fixed

Variable

Variable

Variable

Fixed

Variable

4.

500 - - - -

1 500 20 520 500 20

2 500 100 300 250 50

3 500 400 300 166 133

4 500 1100 400 125 275

5. A. yes it is constant

b. yes the law holds.

6.

7. They take the tangent of all the infinite curves

8. Economies of scale happen when-

a. Companies get so large they get discounts on a variety of things such as advertizing, bulk buying of materials and shipping

b. Diseconomies happen when there is a lacka of management and alienation

9. They don’t have their own transportation, little money to spend on advertizing and usually an ineffective production line

10. From 1, 150, 150, 150, 280, 130, 140, 130, 390, 130, etc. (if u actually want to see this, ask me)

11. -30

49*20

50*20

1000*0.05=50

1000-50=950

950-980=-30

12. Because they are covering all their costs even the opp. Cost

13. 1. Investing, 2. Financial 3.normal 4. Sacrifice 5. 15 percent 6. Opp.cost 7. Super normal

14. 1. Management 2. Information 3. 4. Targets 5. Satisficing 6. Growth 7. Management 8. Economies 9. Pricing 10. Share 11. Stake holders 12. Profits 13. Csr

15. Baumol wants to have the most sales and increase revenue but doesn’t think about profits whilst marris, wants to grow as a firm thus making more money in the future. Simon wants to satifice meaning that he wants to cover his costs but not much more

16. Because csr is good advertizing.

warm up on perfect competition

Warm up

	Number of firms	Market power	Level of differentiation	Barriers to entry	Examples
Perfect composition	Infinite	none	Homogenous	No	Agricultural
Monopolistic competition	many	small	Lots- differentiate	Small	Clothing
oligopoly	3-4 (70 %)	Quite large	Maybe- homogenous or heterogeneous products	Very hard	Oil/cereal
monopoly	1	100%	None	Virtually impossible	EDF (Energy of france)

Exercises

12. Mr=0

13. Because at one unit there would be a 400 dollar difference between selling one unit and 0 units but from there it starts decreasing.

14. because once the firm has reached less than mr=0 then the mr would start to decrease and the firm would stop maximizing profit.

15. a. at a output of 5

b. 45 dollars

c. 4 output

d. 8 output

16.

17. This is because since the price does not get higher the output stays constant making the revenue stay constant, meaning there would be no change in MR

18. a. at 4 output

b. 815 dollar

c.

d. at 8

19.

20.

21.

revenue and profitz

Revenue	Revenue is the income that a firm receives from selling its products, goods and services, over a certain time period. (TR)- is the total amount of money that a firm receives from selling its products (ar)- is the revenue that a firm receives per unit of its sales. (MR)- is the extra revenue that a firm gains when it sells one more unit of a product in a given time period.
Basics	When PED is elastic an firm wishing to increase revenue should lower its price. When PED is inelastic any firm wishing to increase revenue should raise its price. When PED is unit elastic the firm should leave the price unchanged since revenue is being maximized.

Revenue and profit theory

Economists & Accountants	Profit = Total revenue minus total costs To an accountant total costs = fixed + variable cost Economic cost=explicit fixed costs + explicit variable costs +implicit costs
Profits	total revenue=total cost----- breaking even total revenue more then total cost----- profit total revenue less than total cost ----- making losses
Shut down price	The shut-down price is the level of price that enables a firm to cover its variable cost in the short run. Shut down price = P = AVC P less than AVC
Break even cost	The price at which a firm is able to make a normal profit in the long run. This means it will break even, covering all its cost, including opportunity cost (normal profit). Break even price = P = ATC
General graphs
The profit maximizing level of output	Mr=mc Tells the firm at which level of ouput produces the most profit
Firms and maximizing profit	• Revenue maximization: Entrepreneurs often measure success by the amount of revenue they make. • Growth Maximization: companies may set their target to achieve growth in the short run, rather than profits, in order to gain a large market share and then dominate the market in the long run. • Satisficing: They claim that what entrepreneurs do is “satisifice” (work hard enough to make a reasonable living [cover opportunity cost] but in most cases don’t push themselves further. • Corporate social responsibility (CSR): this is where a business includes “public interest” in it’s decision making. – Attract and keep a better workforce – Build reputation and develop brand loyalty – Reduce the need for government intervention in business activities. bad – Some adopt CSR approach to take attention away from their main (demerit) good products.

cost-

Short run and long run	Short run- period of time in which at least 1 factor is fixed all production takes place in the short runt Long run- the long run is the period of time in which all factors are changed but the state of production is fixed
Total average and marginal product	Total product is the total output that a firm produces . Average product is the output that is produced on average by each unit of the variablle factor Ap= tp/v Marginal proudct is the extra outpuut that is produced by using an extra unit of the variable factor
The law of diminishing returns	The hypothesis of eventually diminishing marginal returns- As extra units of a variable factor are added to a given quantity of a fixed unit of the variable factor will eventually diminish The hypothesis of eventually diminshing average returns- as extra units of a variable factors are added to a given quantity of a fixed factor, the output per unit of the variable facto will eventually diminish.
Economic cost	Econoimic cost is the oppurtunity cost of the firms production 1. factors that are purchased from others and not already owned by the firm- getting a worker and paying 1000$ cost is the 1000$ and everything that 1000$ could be used on 2. factors that are already owned by the firm- implicit costs- the earnings that a firm could have had if it had emplyed its factors in another use or if it had hired out- An owner of a firm could make 100 $ working somewhere else as a tax collecter, has to reach that and + or selse he will take that job instead and the shop will close.
Short run costs-	Firms have certain costs 1. Total costs-total costs is the complete cost pf producing output Total fixed costs- the costs of the fixed assets Total variable costs- total costs of the variable assets Total costs-tfc plus tvc 2. average fixed costs- the fixed costs per unit of output average variable costs- the variable costs per unit of output average total cost- the total cost per unit of output 3. marginal cost- mc is the increase in total cost of producing an extra unit of output
The long run	• We have already said that the long run is the planning stage and the entrepreneur is free to adjust the quantity of all factors of production and is only restrained by the level of technology. • The long-run average cost curve [LRAC] in theory is an “envelope curve,” it envelopes an infinite number of short-run average cost [SRAC] curves.
Economies of Scale	• Explains the down sloping part of the long-run ATC curve. • Scale increases, will for a time lead to lower average cost of production. As economies get bigger they will benifit through specification- workers will specify thus work better Division of later-repititive and effecient Bulk bying- discounts given Transport economies- with bul transporting prices go down Large machines- they can buy their own machines Promotional- advertizing
Diseconomies	When a firm becomes to large problems may arise 1. Control and communication problems- the larger a firm is the harder it is for management to coordinate production and communicate effectively. Both lead to inefficiency (and increased costs per unit output). 2. Alienation and loss of identity- As firms grow both workers and managers may begin to feel they are only a very small part of a very large organization; they start to think what they do doesn’t matter and they lose a sese of belonging and loyalty . As this happens they become less productive forcing up the per unit cost
External economies and diseconomies of scale	• +Example- A firm grows large so colleges in the area start teaching the skills necessary to perform in the industry; lowering LRAC costs to the firm with a better educated workforce. - Competition among individual firms cause the cost of labor, capital and raw materials to go up.
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