Unit 6. Firm behaviour and market structure: perfect competition

Transcription

1 Uni 6. Firm behaviour and marke srucure: erfec comeiion

2 In accordance wih he APT rogramme objecives of he lecure are o hel You o: deermine shor-run and long-run equilibrium, boh for he rofi-maximizing individual firm and for he indusry; exlain he equilibrium relaionshis among rice, marginal and average revenues, marginal and average coss, and rofis; undersand he adjusmen rocess o long-run equilibrium.

3 Required reading Begg, D., R.Dornbusch, S.Fischer. Economics. 8h ediion. McGraw Hill. 25. Chaer 8. Perfec comeiion and ure monooly: 8.1. Perfec comeiion; 8.2. A erfecly comeiive firm s suly decision; 8.3. Indusry suly curves; 8.4. Comaraive saics for a comeiive indusry; 8.5. Global comeiion.

4 uesions o be revised The relaionshis among he shor-run and long-run coss: oal, average and marginal; Toal and marginal revenue; The rofi-maximizing rule; Marke suly and he law of suly; Marke equilibrium; Efficiency of a comeiive marke; Tax incidence and dead weigh loss.

5 Perfec Comeiion Many buyers and sellers Each marke arician is oo small o affec he marke rice: firms are rice-akers All firms roduce an idenical (homogeneous) good Free enry and exi

6 Comeiive Firm s Demand Curve P P DD A comeiive firm can sell as much as i wans a he marke rice P. I canno sell anyhing a a higher rice. Is demand curve DD is horizonal.

7 Profi maximizaion by a comeiive firm in shor run. PR, TR, TC break-even oin TC TR PR P, MC, AC MC AC P MR=AR 1 break-even ouu A comeiive firm will suly he roduc according o he rule: P=MC().

8 Examle: APT 1999

9 Shor-Run Ouu Decision and Suly P, C SMC SAC AVC P loss shudown rice shudown ouu shudown oin A comeiive firm will suly he roduc in shor run according o he rule P=MC() if MC AVC min.

10 Examle: APT 27, form B (coninued)

11 Equilibrium of a comeiive firm and indusry in he shor run P P SMC P D S SATC SATC P SMC q 1 q 2

12 Equilibrium of a comeiive firm and indusry in he shor run P P SMC P D SATC S P AVC SATC SMC AVC q 3 q 4

13 Shor-Run Indusry Suly Curve P P MC B P MC A AVC B D 1 D 1 S P 1 D P P min AVC A q q A q A A 1 q B 1 q B q A q A 1 q A +q B

14 Long-Run Ouu Decision Firm (Producer) makes decisions: 1) wheher i wans o be in he marke, and, if so, 2) how much ouu o roduce. Decision 2: MR=P=MC; Decision 1: Price mus exceed average cos.

15 P Long-Run Ouu Decision and Suly P SMC LMC P D S SAC P MR LAC q A comeiive firm will suly he roduc in long run according o he rule P=MC() if MC AC min. q

16 Equilibrium of a comeiive firm and indusry in long run. P P 1 Marke equilibrium D S 1 S 2 P, C P 1 Equilibrium of a firm Economic rofi MC AC MR 1 =AR 1 P 2 P 2 MR 2 =AR q 2 q 1 When he marke rice exceeds P 2, a yical firm can make an economic rofi. Hence many new firms will ener, and he rice will fall back o P 2. q

17 Comaraive Saics for a Comeiive Indusry Equilibrium: SR: marke rice equaes he quaniy demanded o he oal quaniy sulied by he given number of firms in he indusry when each firm roduces on is shor-run suly curve; LR: marke rice equaes he quaniy demanded o he oal quaniy sulied when each firm roduces on is long-run suly curve, and he marginal firm makes only normal rofis. P MR LMC SMS P LAC SAC

18 Examle: APT 26 (coninued)

19 Examle: APT 23

20 Indusry Suly Curves Indusry SRS - horizonal sum of he SRS curves of individual (exising) firms. Indusry LRS - horizonal sum of he LRS curves of exising firms and firms ha migh oenially ener he indusry. LRS curve is flaer han he SRS curve.

21 Uward-sloing Long-Run Suly Curve in an Increasing Cos Indusry P P SMC P LMC SMC LMC SAC P 1 P SAC LAC LAC D 1 S D S 1 LS q q q q 1 q 2 1 2

22 $ P 2 P 3 P 1 A Uward-sloing Long-Run Suly Curve in an Increasing Cos Indusry B 1 2 C 3 SRS 1 D 2 D 1 SRS 2 LRS Wih an exansion of ouu of he indusry inu rices go u or higher-coss roducers ener he marke. A is he oin of he iniial shorrun and long-run equilibrium. An increase in demand shifs he demand curve o he righ (or u). In he shor run he equilibrium moves from A o B., P Exising firms make osiive economic rofis. In he long run exising firms exand heir caial sock, new firms ener he indusry, SRS curve shifs down. The equilibrium moves from B o C., P 22

23 Examle: APT 211, form B

24 P 1 Horizonal Long-Run Suly Curve in a Consan Cos Indusry SMC LMC SAC LAC P LS D 1 S D S 1 q q q 1 All firms are idenical 1 2 Inu coss do no change wih ouu

25 Downward-sloing Long-Run Suly Curve in a Decreasing Cos Indusry P SMC P SMC P LMC LMC SAC P 1 P SAC LAC P 2 LAC D D 1 S S 1 LS q q q q 1 q 2 1 2

26 , MC Per uni ax and comeiive equilibrium in shor run A firm s =MC + A Marke S S MC D - E 2 E 1 - B E C E q 1 q q q Profi wihou ax: 1 PR ( ) q TC q MC ( q) PR q TC( q) q ( ) q TC( q) dpr MC ( ) q dq MC ( q) Profi maximizaion wihou ax: Profi wih a er uni ax: Profi maximizaion wih ax:

27 Per uni ax and comeiive equilibrium in shor run: welfare effecs, MC A firm s =MC + A Marke S S MC D - E 2 E 1 - B E C E q 1 q q q 1 Consumer surlus wihou ax: Consumer surlus wih ax: CS Change in consumer surlus: CS S A E S A E CS S E E

28 Per uni ax and comeiive equilibrium in shor run: welfare effecs, MC A firm s =MC + A Marke S S MC D - E 2 E 1 - B E C E q 1 q q q Variable cos wihou ax: Producer surlus wihou ax: Producer surlus wih ax: Change in roducer surlus: VC VC S PS TR VC S E Variable cos wih ax: E SC PS TR T VC S PS S B E F 1 BC TR Toal revenue wihou ax: TR S E S Toal revenue wih ax: E

29 Per uni ax and comeiive equilibrium in shor run: welfare effecs, MC A firm s =MC + A Marke S S MC D - E 2 E 1 - B E C E q 1 q q q 1 Tax revenue of he governmen: T S DWL CS PS T S CE E B E C

30 Examle: APT 26 (coninued)