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1、Chapter FivePerfectly Competitive Market(1)完全竞争市场1Chapter Five includes:2n 5.1 Introductionn 5.2 Assumptions of Perfectly Competitive Marketsn 5.3 The Optimal Output Decision in the Short Runn 5.4 The Optimal Output Decision in the Long Runn 5.5 The Evaluations of a Competitive Marketn Zhang(2007):

2、Chapter 7,P231-257n Nicholson: Chapter 13, P334-354n Chapter 14,P368-3973Readings about the part of this chapterChapter Five includes:4n 5.1 Introductionn 5.2 Assumptions of Perfectly Competitive Marketsn 5.3 The Optimal Output Decision in the Short Runn 5.4 The Optimal Output Decision in the Long R

3、unn 5.5 The Evaluations of a Competitive MarketThe Determinant of Firm Supplyn How does a firm decide how much to supply at a given price? This depends upon the firmsn technology;n market environment (Structure);n goals;n competitors behaviors.Market Environment (Structure)n Are there many other fir

4、ms?n How do other firms decisions effect the firms payoffs?Market Environment (Structure)n Monopoly(市场):Just one sellerthat determines the quantitysupplied/the market-clearing price.n Oligopoly(寡头市场):A smallnumber of firms, the decisions of each influencing the payoffs(得益) of the other firms.Market

5、Environment (Structure)n Monopolistic Competition(竞争市场): Many firms each making aslightly different product. Each firmsoutput level is small relative to the total.n Perfect Competition(完全竞争市场): Many firms, all making the same product. Each firms output level is small relative to the total output lev

6、el.The Four Types of Market StructureMany firmsOne firmFew firmsIdentical products(同质Differentiated products(异质)9Profitization(利润最大化)n Each firm is a profit-izern Each firm choose its output level by solvingmax P(q) = TR(q) - TC(q)q³0- TC(q)pp = p(q)is the inverse demand function(反需求函数)Profitiz

7、ationn The necessary condition for choosing thevalue of q thatizes profits is:) = 0dpdq= p '(n The first-order condition for a that:um isMR = dTR = dTC = MCdqdq11Profitizationn The second condition is that:d 2p= dp '(q)< 0= *= *dq2d 2pdq= dMR(q) - dMC(q) <0*dq2dqdq MR '(q) < MC

8、'(q)12Profit Expressionization: An GraphicCost,n Comparing TR(q) and Revenue,TC(q)Profit$ (per year)TC(q)n Question: Why is profit negative when output is zero?TR(qADBCq0q*0p (q)Output (units per year)13Marginal Revenue, Marginal Cost,and ProfitizationCost,n Comparing TR(q) and Revenue,TC(q)n Ou

9、tput levels: q0 - q*n TR(q)> TC(q)n MR > MCn Indicates higher profit at higher outputn Profit is increasingProfitTC(q)$ (per year)TR(q)ABqq*00p (q)Output (units per year)14Marginal Revenue, Marginal Cost,and ProfitizationCost, Revenue, Profit$ (per year)Comparing TR(q) andTC(q)TC(q)Output leve

10、ls beyondq*:n TR(q)< TC(q)n MR < MCn Profit is decreasingTR(q)ABq0q*0p (q)Output (units per year)15Marginal Revenue, Marginal Cost,and ProfitizationCost, Revenue, Profitn QuestionTC(q)$ (per year)n Why is profit reducedTR(q)Awhen producingmore or less than q*?Bq0q*0p (q)Output (units per year)

11、16Marginal Revenue, Marginal Cost,and ProfitizationCost,n Comparing TR(q) and Revenue,TC(q)n Output level: q*n TR(q)= TC(q)n MR = MCProfit$ (per year)TC(q)TR(q)ABn Profit isizedq0q*0p (q)Output (units per year)17Marginal Revenue, Marginal Cost,and ProfitizationCost, Revenue, Profit$ (per year)n Ther

12、efore, it can be said:n Profits areized when MC = MR.TC(q)TR(q)ABq0q*0p (q)Output (units per year)18The Marginal Revenue/Marginal Cost Rulen At the profitizing level of outputMarginal Revenue = Marginal CostorMR = MC.n Firms, starting at zero output, can expand output so long as marginal revenue exc

13、eeds marginal cost, but dont go beyond the point where these two are equal.19TR(总),AR(平均)and MR(边际)TR = TR(q) = pqAR = TR =pq = pqMR = dTR = p(1 -1)dqeq, p20Chapter Five includes:21Assumptions of Perfect Competitionn There are many buyers and sellers(有许多买者和卖者), i.e.n no one firm can dominate/influen

14、ce the marketn firms are price takersn Homogeneous product (同质)n Freedom of entry and exit(进入与n Perfect information(完全信息)自由)Perfectly Competitive Marketsn (Assumption 1) There are many buyers and sellersn The individual firm sells a very small share of the total market output and, therefore, cannot

15、influence market price.n The individual consumer buys too small a share of industry output to have any impact on market price.23Perfectly Competitive Marketsn (Assumption 1)n Each seller is too small to affect the pricen sellers can sell all they can produce at the market price.n sellers can sell no

16、thing above the market price.n sellers have no incentive to offer anything below market price.24Perfectly Competitive Markets(Assumption 2) Product Homogeneity (质性)同n The products of all firms are perfect substitutes.n buyers dont care where product comes fromn Examplesn Agricultural products (wheat

17、, rice and corn), oil, copper, iron, lumber25Perfectly Competitive Marketsn (Assumption 3) Free Entry and Exit(自由进入与)n Buyers can easily switch from one supplier to another.n Suppliers can easily enter or exit a market.26Perfect Competition(Assumption 4) Perfect information (完全信息)Perfect knowledge o

18、nall parts of buyers andSellers.27Perfectly Competitive Marketsn Discussion Questionsn What are some barriers to entry and exit?n Are all markets competitive?n When is a market highly competitive?28Perfect Competitionthe demand curve faced by the firmThe Demand Curve of Perfectly Competitive Markets

19、PMarket Supplype Market DemandQThe Demand Curve of Perfectly Competitive MarketsPMarket SupplypAt a price of p, zero is demanded from the firm.pe Market DemandQThe Demand Curve of Perfectly Competitive MarketsPMarket SupplypAt a price of p, zero is demanded from the firm.pe p”Market DemandQAt a pric

20、e of p” the firm faces the entire market demand.From Market Demand Curve to the demand curve faced by the firmMarket SupplyPPP*P*AR=MR=P*Market DemandqFirms Demand CurveQ33Marginal Revenue in the competitive firmn A price taker is a firm or individual whose decisions regarding buying or selling have

21、 no effect on the prevailing market price of a good or service.n For a price taking firmAR=MR = P.34Marginal Revenue, Marginal Cost, and Profit ization in the competitive firmn The competitive firms demandn P = D = MR = AR35Chapter Five includes:36Choosing Output in the Short Runn We will combine pr

22、oduction and cost analysis with demand to determine output and profitability.37Max. Profit When the Firm is a price-takerF.O.C.P(q)S.O.C.Max. Profit When the Firm is a price-takerThe first-orderum profit condition isThat is,So at a profitum with q* > 0, themarket price p equals the marginal cost

23、of production at q = q*.p=MCd P(q) = p - MC(q) = 0dqChoosing Optimal Output in the Short Run: TR and TCTRTCTR,TCProfit0qq0q*MCMR = P0q40MC > MRMC < MRMC = MRMC > MRChoosing Optimal Output in the Short Run: MR and MCSMCPrice60($ per unit)50Lost profit forLost profit forq2 > q*< q*ADAR=

24、MR=P40SACCBSAVC30q : MR > SMC and1q2: SMC > MR andq0: SMC = MR but SMC falling(Porx101q001234q15q*6q27891Output41The Firms Optimal Decision and its Excess Profit42P1>SACp>0 (Excess ProfitPrice超额利润)SMCSACAMR = PP1C043q1SAVCqBP2=SACp=0 (but there is normal profit)PriceSACSMCAAR=MR = PP2SAV

25、Cq044q2SAVC<P3<SACp<0 (there is loss, but P3 can cover all average variable cost and aPricepart of FC, So the firm will continue)SMCSACBSAVCCP3P045q3P4=SAVCp<0 (A point is shutdown(停工))PriceSMCSACBCSAVCLossAMR = PP4q046q4P5<SAVCp<0 (there is great loss, and P5 can not cover a part

26、of average variable cost and all FC, So the firm will produce no output)PriceSMCSACBCSAVCLossMR = PP5Aq0q547The Shutdown Decision(停工决策): An Algebra Methodn STC=SFC+STVCn Profits are given byp = TR - STC = pq - SFC - STVCn If q=0,STVC and Total Revenues are 0, Son p=-SFCn The firm will produce someth

27、ing only if p>- SFC, But that means that48The Shutdown Decisionn The firm will opt for q > 0 providingP × q ³STVCor, dividing by q, STVCP ³=SAVC .qn The price must exceed average variable cost.49The Shutdown Decisionn The shutdown price is the price below which the firm will cho

28、ose to produce no output in the short-run. It is equal to minimum average variable costs.50Summary:Choosing Output in the Short Runized when SMC = MRn Profit isn If P > SAC the firm is making profits.n If SAVC < P < SAC the firm should produce at a loss.n If P < SAVC < SAC the firm sh

29、ould shut- down.51The Conditions for Choosing Optimal Output in the Short Run52PriceSMCSACP1SAVCP2P3P4Shut Down Pointq053A Competitive Firms Short-Run Supply Curven Observations:n P = MRn MR = MCMAX pn P = MC®P=MC(q)短期供给曲线n Supply is the amount of output for every possible price. Therefore:n If

30、 P = P1, then q = q1; If P = P2, then q = q2n If P = P3, then q = q3; If P = P4, then q = q454PriceFirms SupplySMCSACP1SAVCP2P3P4Shut Down Pointq055A Competitive Firms Short-Run Supply Curven In above Figure, the shutdown price is P4.n For all P ³ P4 ,the firm will follow the P= MC rule, so the

31、 supply curve will be the short-run marginal cost curve.56The Firms Short-Run Supply Curve _Summaryn The firms short-run supply curve is the relationship between price and quantity supplied by a firm in the short-run.n For a price-taking firm, this is the positively sloped portion of the short-run m

32、arginal cost curve.n For all possible prices, the marginal cost curve shows how much output the firm should supply.57A Competitive Firms Short-Run Supply Curven Observations:n Supply is upward sloping due to diminishing returnsn Higher price compensates the firm for higher cost of additional output

33、and increases total profit because it applies to all units.58How to get Supply Function: An Examplen Assume a firms cost function isSTC = 0.1+ 15q + 102n What is this firms SR supply curveì 4+12 P-2S = ï,P³5íïî 00.6P<559From the SR individual Supply Curve to SR Marke

34、t Supply Curven The short-run market supply curve shows the amount of output that the industry will produce in the short-run for every possible price.60SR Market Supply Curve: Hold Input Price constant when output increases61Short Run perfectly CompetitiveequilibriumS ( P * ) + S( P* ) + . + S( P* ) = S ( P* )12nPPP*q*qQ(P*)Q62SAVCSDThe Short-Run Market Supply Curven Elasticity of Market Supply(Zhang,P45-49)DQ= DQS · p Q=eDps, pDpQsp= lim æ DQS&

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