Bài giảng Understanding Economics - Chapter 5 Perfect Competition

Understanding Economics2nd edition by Mark Lovewell and Khoa NguyenChapter 5Perfect CompetitionCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Chapter ObjectivesIn this chapter you will:Consider the four market structures, and the main differences among them.Learn about the profit-maximizing rule and how perfectly competitors use it in the short run.Examine how perfect competitive markets adjust in the long run, and the benefits they provide to consumers.Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Market StructuresThere are four main market structuresperfect competitionmonopolistic competitionoligopolymonopolyCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Perfect CompetitionPerfectly competitive markets have three main featuresmany buyers and sellersa standard producteasy entry and exitCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Monopolistic CompetitionMonopolistically competitive markets have three main featuresmany buyers and sellersslightly different productseasy entry and exitCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Oligopoly and MonopolyIn an oligopoly a few businesses (protected by entry barriers) provide standard or similar products.In a monopoly a single business (protected by entry barriers) provides a product with no close substitutes.Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Entry BarriersThere are six main entry barriers in oligopolies and monopoliesincreasing returns to scalemarket experiencerestricted ownership of resourceslegal obstacles (such as patents)market abuses (such as predatory pricing)advertising (which is most common in oligopolies)Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Market PowerMarket poweris a business’s ability to affect the price it chargesvaries with market structure, such that monopolists have the most and perfect competitors have the leastAttributes of Market StructuresFigure 5.1, Page 120Numbers ofBusinessesStandardProductEntry and Exit ofNew BusinessMarket PowerExamplePerfect Competitionvery manyalwaysvery easynonefarmingMonopolisticCompetitionmanyneverfairly easysomerestaurantsOligopolyfewsometimesdifficultsomeautomobilemanufacturingMonopolyonenotapplicableverydifficultgreatpublicutilitiesCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Perfect Competitor’s Demand (a)A perfect competitor has a demand curve different from the market demand curve.The business’s demand curve is horizontal at the prevailing market price.Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Perfect Competitor’s Demand (b)Figure 5.2, page 122Market Demand and SupplyCurves for T-Shirts027 0006Quantity of T-Shirts per DayPrice ($ per T-Shirt)SmDmPure ‘n’ Simple T-Shirts’Demand Curve06Quantity of T-Shirts per DayPrice ($ per T-Shirt)DbCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Average and Marginal RevenueTotal revenue is used to find two other revenue conceptsaverage revenue (total revenue divided by output)marginal revenue (change in total revenue divided by change in output)Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Revenue Conditions for a Perfect CompetitorAverage revenue equals price, so that a perfect competitor’s average revenue curve is its horizontal demand curve.A perfect competitor’s average revenue (price) is constant so that marginal revenue and average revenue are always equal.Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Revenues for a Perfect CompetitorFigure 5.3, page 123--66666Revenue Curves for Pure ‘n’ Simple T-Shirts06Quantity of T-Shirts per Day$ per T-ShirtDb = AR = MR08020025027028004801200150016201680480/80 = 6720/120 = 6300/50 = 6120/20 = 660/10 = 6480/80 = 61200/200 = 61500/250 = 61620/270 = 62680/280 = 6Price(P)($ per T-shirt)Revenue Schedules for Pure ‘n’ Simple T-ShirtsQuantity(q)(T-Shirts per day)Total Revenue(TR)(P x q)Marginal Revenue(MR)(ΔTR x Δq)Average Revenue(AR)(TR x q)Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.The Profit-Maximizing RuleThe profit-maximizing rule states that profit is maximized when marginal revenue equals marginal cost.Output should be increased if marginal revenue exceeds marginal cost.Output should be decreased if marginal cost exceeds marginal revenue.Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Profit Maximization for a Perfect Competitor Figure 5.4, page 125 080200250270280Total Product(q)Price(P)(=AR)MarginalRevenue(MR)MarginalCost(MC)(ΔTC/Δq)AverageVariable Cost(AVC)(VC/q)Profit Maximization Table for Pure ‘n’ Simple T-ShirtsAverageCost(AC)(TC/q)TotalRevenue(TR)TotalCost(TC)TotalProfit(TR - TC)666666666661.751.332.505.5010.501.751.501.701.982.2912.065.635.005.045.24048012001500162016808259651125125013601465-825-485752502602155.04Profit Maximization Graph for Pure ‘n’ Simple T-Shirts0Quantity of T-Shirts per Day$ per T-Shirt6.00270MCACAVCDb = MR = ARabProfit = $260Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.The Breakeven and Shutdown PointsThe breakeven point is where a business breaks even while maximizing profit.For a perfect competitor this occurs where price equals minimum average cost.The shutdown point is the lowest price at which a business will choose to operate in the short run.It occurs where price equals minimum average variable cost.Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.A Perfect Competitor’s Supply CurveA perfect competitor’s supply curve is its marginal cost curve above the shutdown point.The market supply curve can be found by horizontally adding the supply curves for all the businesses in the industry.Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Supply Curve for a Perfect Competitor Figure 5.5, page 127Supply Curve for Pure ‘n’ Simple T-Shirts05.00Quantity of T-Shirts per Day$ per T-Shirt6.002701.401.50200250abcdMC(=Sb)MR1ACMR2AVCSupply Schedule forPure ‘n’ Simple T-ShirtsPrice(P)($ per T-ShirtQuantitySupplied(q)(T-Shirts per day)6.005.001.501.402702502000Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Supply Curves for a Perfectly Competitive Business and Market Figure 5.6, page 129Supply Curve forPure ‘n’ Simply T-Shirts05.00Quantity of T-Shirts per DayPrice ($ per T-Shirt)6.002702502001.500Supply Curve for T-Shirt Market5.00Quantity of T-Shirts per DayPrice ($ per T-Shirt)6.0027 00025 00020 0001.506.005.001.5027025020027 00025 00020 000Business and Market Supply Schedules for T-ShirtsPrice(P)($ per T-Shirt)Quantity Supplied(q)(Sb)(q)(Sm)(T-Shirts per day)SbSmCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Perfect Competition in the Long RunEntry and exit by businesses in the long run drives a perfectly competitive market to the breakeven pointbusinesses enter markets where economic profits are made so that supply shifts right and price fallsbusinesses leave markets where economic losses are made so that supply shifts left and price risesCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Long-Run Equilibrium for a Perfectly Competitive Business Figure 5.7, page 130T-Shirt Market0Quantity of T-Shirts per Day$ per T-Shirt30 00027 00025 00056Pure ‘n’ Simply T-Shirts05Quantity of T-Shirts per Day$ per T-Shirt6270250MRMCACabD0S0S1D1decCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.The Benefits of Perfect CompetitionPerfectly competitive markets in long-run equilibrium meet two conditions that benefit consumersminimum-cost pricing (price = minimum average cost)marginal-cost pricing (price = marginal cost)Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Prophet of Capitalism’s DoomAccording to Karl Marx’s theory of exploitationa product’s price is based on the amount of labour that goes into producing itcapitalists cut costs by minimizing workers’ wages and by maximizing the length of the workday capitalists keep any surplus value which is the excess of their revenues over their costsCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Marx’s Theory of ExploitationFigure A, Page 135$30$50Creation of Surplus Value080Daily WageValue produced ($ per day)204060Creation of Surplus Value(when producing 2 shirts or 1 suit)Daily WageMaterials andmachine wearand tear (M)Surplus Value (SV)Total ValueExploitation Rate(SV/W)$50 Wage$50$10$20$8025$30 Wage$30$10$40$8043W = 50M = 10SV = 10SV = 40W = 10W = 30Understanding Economics2nd editionby Mark LovewellChapter 5The EndCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.