Week 3 Part 1_Competitive Market in Long Run PDF

MGMG506 Thai Economy in Global Context Slide: 3-2 Competitive Market in long run  Book Chapter 14: Firms in Competitive Markets...

MGMG506 Thai Economy in Global Context Slide: 3-2 Competitive Market in long run  Book Chapter 14: Firms in Competitive Markets PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 2 product or service or otherwise on a password-protected website for classroom use.  Profit Maximization Rules for profit maximization: – If MR > MC – firm should increase output – If MC > MR – firm should decrease output – If MR = MC – profit-maximizing level of output (ผลิตที่เสน MR ตัดกับ MC) Marginal-cost curve – Determines the quantity of the good the firm is willing to supply at any price – Is the supply curve (เสน MC คือเสน Supply) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 3 product or service or otherwise on a password-protected website for classroom use.  Profit Maximization Firm’s long-run decision – Exit the market if (firm ออกจากตลาด ถา P < ATC) Total revenue < total costs; TR < TC – Same as: P < ATC – Enter the market if (firm เขามาในตลาด ถา P > ATC) Total revenue > total costs; TR > TC – Same as: P > ATC Competitive firm’s long-run supply curve – The portion of its marginal-cost curve that lies above average total cost (เสน Supply คือเสน MC ที่อยูเหนือเสน ATC) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 4 product or service or otherwise on a password-protected website for classroom use.  Profit Maximization Measuring profit – If P > ATC (ราคาสูงกวา ATC จะมีกําไรเปนบวก) Profit = TR – TC = (P – ATC) x Q = Positive profit – If P < ATC (ราคาต่ํากวา ATC จะมีกําไรเปนลบ) Loss = TC - TR = (ATC – P) x Q = Negative profit © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 5 product or service or otherwise on a password-protected website for classroom use. Figure 5 Profit as the Area between Price and Average Total Cost (a) A firm with profits (b) A firm with losses Price Price MC MC Profit ATC ATC Loss P ATC P=AR=MR ATC P P=AR=MR 0 Q Quantity 0 Q Quantity (profit-maximizing quantity) (loss-minimizing quantity) The area of the shaded box between price and average total cost represents the firm’s profit. The height of this box is price minus average total cost (P – ATC), and the width of the box is the quantity of output (Q). In panel (a), price is above average total cost, so the firm has positive profit. In panel (b), price is less than average total cost, so the firm has losses. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 6 product or service or otherwise on a password-protected website for classroom use. Figure 4 The Competitive Firm’s Long-Run Supply Curve Costs 1. In the long run, the firm produces on the MC curve MC if P>ATC,... ATC 2....but exits if P ATC – firms make positive profit New firms enter the market Higher supply leading to lower price – If P < ATC – firms make negative profit Firms exit the market Lower supply leading to higher price © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 8 product or service or otherwise on a password-protected website for classroom use.  Supply Curve Long run – Process of entry and exit ends when Firms still in market make zero economic profit (P = ATC) Because MC = ATC: Efficient scale (ที่ MC = ATC ไดตนทุนตอ หนวยต่ําสุด เปน efficient) – Long run supply curve – perfectly elastic Horizontal at minimum ATC (ในระยะยาว เสน Supply ของตลาดจะ เปนเสนตรงขนานกับแกนนอน สัมผัสที่จุดต่ําสุดของ ATC) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 9 product or service or otherwise on a password-protected website for classroom use. Figure 7 Long-Run Market Supply (a) Firm’s Zero-Profit Condition (b) Market supply Price Price MC ATC P= minimum Supply ATC 0 Quantity 0 Quantity (firm) (market) In the long run, firms will enter or exit the market until profit is driven to zero. As a result, price equals the minimum of average total cost, as shown in panel (a). The number of firms adjusts to ensure that all demand is satisfied at this price. The long- run market supply curve is horizontal at this price, as shown in panel (b). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 10 product or service or otherwise on a password-protected website for classroom use.  Supply Curve Why do competitive firms stay in business if they make zero profit? – Profit = total revenue – total cost – Total cost – includes all opportunity costs (ตนทุนรวมในทาง เศรษฐศาสตรรวมตนทุนคาเสียโอกาส) – Zero-profit equilibrium Economic profit is zero (กําไรทางเศรษฐกิจเปนศูนย) Accounting profit is positive (กําไรทางบัญชียังเปนบวก) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 11 product or service or otherwise on a password-protected website for classroom use.  Supply Curve Market – in long run equilibrium – P = minimum ATC – Zero economic profit Increase in demand – Demand curve – shifts outward – Short run Higher quantity Higher price: P > ATC – positive economic profit © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 12 product or service or otherwise on a password-protected website for classroom use.  Supply Curve Positive economic profit in short run – Long run – firms enter the market – Short run supply curve – shifts right – Price – decreases back to minimum ATC – Quantity – increases Because there are more firms in the market – Efficient scale © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 13 product or service or otherwise on a password-protected website for classroom use. Figure 8 An Increase in Demand in the Short Run and Long Run (a) (a) Initial Condition Market Firm Price Price 1. A market begins in 2. …with the firm long-run equilibrium… earning zero profit. Short-run supply, S1 MC ATC A Long-run P1 P1 supply Demand, D1 0 Q1 Quantity 0 Quantity (market) (firm) The market starts in a long-run equilibrium, shown as point A in panel (a). In this equilibrium, each firm makes zero profit, and the price equals the minimum average total cost. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 14 product or service or otherwise on a password-protected website for classroom use. Figure 8 An Increase in Demand in the Short Run and Long Run (b) (b) Short-Run Response Market Firm Price Price 3. But then an increase in 4. …leading to demand raises the price… short-run profits. S1 MC ATC B P2 P2 A Long-run P1 P1 supply D2 D1 0 Q1 Q2 Quantity 0 Quantity (market) (firm) Panel (b) shows what happens in the short run when demand rises from D1 to D2. The equilibrium goes from point A to point B, price rises from P1 to P2, and the quantity sold in the market rises from Q1 to Q2. Because price now exceeds average total cost, firms make profits, which over time encourage new firms to enter the market. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 15 product or service or otherwise on a password-protected website for classroom use. Figure 8 An Increase in Demand in the Short Run and Long Run (c) (c) Long-Run Response Market Firm Price Price 6. …restoring long-run 5. When profits induce entry, supply increases and the price falls,… equilibrium. S1 MC S2 ATC B P2 A C Long-run P1 P1 supply D2 D1 0 Q1 Q2 Q3 Quantity 0 Quantity (market) (firm) This entry shifts the short-run supply curve to the right from S1 to S2, as shown in panel (c). In the new long-run equilibrium, point C, price has returned to P1 but the quantity sold has increased to Q3. Profits are again zero, price is back to the minimum of average total cost, but the market has more firms to satisfy the greater demand. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 16 product or service or otherwise on a password-protected website for classroom use.  Supply Curve Long-run supply curve might slope upward – Some resource used in production may be available only in limited quantities Increase in quantity supplied – increase in costs – increase in price – Firms may have different costs Some firms earn profit even in the long run Long-run supply curve (เสน Supply ในระยะยาว จะมีคาความ ยืดหยุนมากกวาเสน Supply ในระยะสั้น) – More elastic than short-run supply curve 17