课件老师lecture8analysis of perfectly competitive market王老师

1、Chapter 8Analysis of Perfectly Competitive MarketHui Wang, Dept. of Applied Economics, GSM, Peking UniversityOutlineSupply Behavior of the Competitive Firm1.1.11.21.3Features Demand CurveOutput Decision Rules (Short-run)2.Supply Behavior in Competitive Industries2.12.2Market SupplyShort-run v.s. Lon

2、g-run3.4.Special Cases ofCompetitive MarketEfficiency v.s. EqualityHui Wang, Dept. of Applied Economics, GSM, Peking UniversityOutlineSupply Behavior of the Competitive Firm1.Hui Wang, Dept. of Applied Economics, GSM, Peking University1.1 Features of a Perfectly Competition Market1.There are many se

3、llers/firms (and buyers).They are “small” relative to the market.Every firm produces homogenous (identical) productPerfect information (Prices and quality of products are assumed to be known to all consumers and producers)2.3.4.5.No tranion costentry and exitHui Wang, Dept. of Applied Economics, GSM

4、, Peking Universityd ExamplesZhongguan CunVillage FairHui Wang, Dept. of Applied Economics, GSM, Peking UniversityUnrealistic?Many small business are actually “price taker”. Their similarrule ared to those in the perfectly competitive marketThe perfectly competitive is a “Benchmark” mthe market comp

5、etitionof studyingFor welfare analysis: Once we understand the marketefficiency, we can then understand the importance of restricting market powerFor managers: A price-taking firm can only maintain a minimum level of profit (product differentiation)Hui Wang, Dept. of Applied Economics, GSM, Peking U

6、niversity1.2 Demand Curve Faced by a Perfectly Competitive FirmThe perfect competitive firm (price taker) faces a completely horizontal demand (or dd) curveA perfectly elastic demand curveHypothetically, if the firm manage to sell the product a price lower than the competitive level (Pe), then it ca

7、n take over the whole marketIf the firm increase the price by a little bit, it will lose all its business$S$PeddDQqFirmIndustryObjective of the FirmProfitization Profit: net earning or take-home pay of a business Firmsize profits because thatizesthe economic benefit to the owners of the firm Profiti

8、zation requires the firm To choose the optimal level of input and output Make sure the output is produced efficiently (prevent waste, encourage worker morale, etc)Hui Wang, Dept. of Applied Economics, GSM, Peking UniversityCost and Production Schedule11110101010363301053.3513350103.83.3716170104.410

9、816080105-61526010454104401042.523220106.75(1)(2)(3)(4)(5)(6)(7)WorkersOutputMarginalVariable CostVCAverageMarginal Cost(L)(q)Output(VC=wL)Variable Cost(MC= (MP=Q)(AVC=VC/q)VC/Q)1.3 Output Decision (Short-run)Review of the total cost curveTotal Revenue: TR=P×qMarginal Revenue (MR): Change in re

10、venue that is generated by an additional unit of salesFor a price taking firm, MR=PProfit = TR-TC. For a given output, the vertical difference between R and TC is the profitDecision process in firm output$TCR=P×qumProfitSlope of the TotalSlope of the Revenue Line=MR=PCost Curve=MCAs long as MR&

11、gt;MC, increase inoutput leads to increase in profit As output increases, MR stays the same; MC increasesWhen q=q*, MR=MC, profit is izedWith further increase in output, MR<MC, which decreases the profitq*qOptimal Decision Rule: MC=MR=PCost Curves and Firm Profit- ATC) ´ q*>0MC= (PeProfit

12、$ATCPePe= MRATCqq*Hui Wang, Dept. of Applied Economics, GSM, Peking UniversityZero-profit pointMC$ATC- AC) ´ q*=0= (PeProfitATC= PePe= MRqq*Hui Wang, Dept. of Applied Economics, GSM, Peking UniversityLoss MinimizationShould the following firm shutdown or continue to operate?- ATC) ´ q*<

13、 0Profit = (PeATCMC$AVCATCPePe=MRqq* If the firm continue to operate, it will suffer a loss of area A What is the firms fixed cost? FC = (AC-AVC)·q If the firm shut down, it will suffer a loss of area B=fixed cost A<B: The firms should continue to operate in order to minimize its lossABShutd

14、own Point (1)Should the following firm shutdown or continue to operate?MCATC$ATCAVCLoss if shutdown(Fixed Cost)AVCPePe= MRLoss if operateq*qShutdown Point (2)Should the following firm shutdown or continue to operate?MCATC$AVCLoss if shutdown (Fixed Cost)ATCPeAVC= MRPeLoss if operateShutdown pointqq*

15、 The shutdown point comes where revenue just cover variable costs or where losses are equal to fixed cost Shutdown Rule: when price fall below average variable costs, the firm willprofits (minimizes its loss) by shutting downizeFirms Supply CurveA firms supply curve travels down the MC curve to the

16、shutdown point (minimum AVC)ATCMC$PPP P PPAVCZero-profit pointqq*q*q* q*q*q*Shutdown pointHui Wang, Dept. of Applied Economics, GSM, Peking UniversityOutlineSupply Behavior of the Competitive Firm1.1.11.21.3Features Demand CurveOutput Decision Rules (Short-run)2.Supply Behavior in Competitive Indust

17、riesHui Wang, Dept. of Applied Economics, GSM, Peking University2.1 Market Supplyty brought to market at a given priceTotal quwill be the sum of the individual qufirms supply at that priceties that allMarket SupplyFirm 1Firm 2PPPS1S2Sm155qq251843 Q2030102.2 Short-run and Long-run EquilibriumShort-ru

18、n equilibrium: Output changes must use the samefixed amount of capital Fixed cost cannot be easily adjusted in the short-run Firm can adjust other factor input such as labor in order to change its output levelLong-run equilibrium: Capital and all other factors are variableand there isindustryentry a

19、nd exit of firms into and from theEntry and Exit by Categories amongManufacturing FirmsFive categoriesChang in # of firms Net increase over time Entry and exit about one-fifthChange in compositionforProportion of private andforeign firms increase significantlyFrom 2002 onwards, private firms make up

20、 more than 50% of all entrantsFrom 2005 on wards, they also make up 50% of all exiting firmsAn Illustration: Effects ofa Positive Demand ShockMarketAn Individual Firm$SMCShort-run Profit$ACMRSRPSRACPMRDDQqq* qSRSmall increase in qutyMore Firms Enter the MarketMarketAn Individual Firm$MC$SACSMRSRMRPS

21、RPDDQq' qSRqLong-run EquilibriumMarketAn Individual Firm$MC$SACSSLRMR=MRLRP*=PLRDDZero-profit pointQqqLR=q*Large increase in qutySummaryShort-run positive profits induce more firms to enter Firms entry lead to1.2.3.4.Increase in total supplyDecrease in equilibrium priceDecrease in individual fir

22、ms demand curve Decrease in profit (despite of the profit- decisions)ization levelNo further entry when each individual firm in the market make zero profitsZero-profit long-run equilibrium:P = MC = minimum long-run AC = zero-profit priceHui Wang, Dept. of Applied Economics, GSM, Peking UniversityOut

23、lineSupply Behavior of the Competitive Firm1.1.11.21.3Features Demand CurveOutput Decision Rules (Short-run)2.Supply Behavior in Competitive Industries2.12.2Market SupplyShort-run v.s. Long-run3.Special Cases of Competitive MarketHui Wang, Dept. of Applied Economics, GSM, Peking University3.1 Consta

24、nt CostProduction can beexpanded by duplicating factor inputs (e.g. textile)Long-run supply curve is ahorizontal linePerfectly elasticIncrease in demand onlyincreases the quty,leaving the price unchanged3.2 Fixed SupplySome goods or productive factors arecompletely fixe in amount, regardless of pric

25、e.E.g., painting, natural Resources (Land),etcWhen supply is independent of priceThe supply curve is a vertical linePerfectly inelasticIncrease in demand leads to increasein price, but not qutyWhen the qutyd is constant atevery price, the payment for the use ofsuch a factor of production is called (

26、pure economic) rent3.3 Backward-Bending Supply CurveIn labor supply decision, agent being considered areindividual workersObjective:ize utility from consumption and leisureConstraint: time (24 hrs)Decision: allocate time between working and leisureBenefit of working: increase consumption at wagerate

27、 wCost of leisure: wage rateAs wage rate increasesSubstitution effect: leisure becomes relatively moreexpensive consume less leisure increase working hoursIncome effect: leisure (as a normal goods) should increase as income increases decrease working hoursW1 W2: Substitution effect> Income effect

28、W2 W3: Income effect> Substitution effect4. Efficiency and Equity of Competitive Markets4.1 Concept of EfficiencyPareto efficiency (or sometimes just efficiency) occurs when no possible reorganization of production or distribution can make anyone better off without making someone else worse off.V

29、ilfredo Pareto (15 July1848 19 August 1923):an Italian engineer, sociologist, economist, political scientist and philosopher.Hui Wang, Dept. of Applied Economics, GSM, Peking UniversityReview:Demand and Consumer SurplusDemand Curve Based on Reservation PriceWTP for the Ice Wine$50$45$40$35$30$25$20$

30、15$10$5$0Demand Curve Based on Reservation PriceWTP for the Ice Wine$50$45$40$35$30$25$20$15$10$5$01 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 337 38 39 40 447 48 49 50 557 58 59 60s in Our ClassDemand Curve Based on Reservation PriceWTP for the Ice Wine504540353

31、02520151050DemandFitted Line: 𝑷 = 𝟒𝟒. 𝟒 𝟎. 𝟒𝟓𝑸1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 337 38 39 40 447 48 49 50 557 58 59 60s in Our ClassDemand CurvePriceA to B: Increase inAquty demanded30B15D0

32、25Quty (1k)Price ($)Sales08,00057,000106,000155,000204,000253,000302,000351,000400Demand FunctionThe Demand Function describes the relationship between the amount of a good or service that consumers are willing to purchaseQ = a-bP, a>0, b>0Law of Demand：-b<0Inverse Demand Function：P = a/b -

33、 1/b QHui Wang, Dept. of Applied Economics, GSM, Peking UniversityFrom Individual to Market DemandMarket demand is the sum of individual demand at any given priceHui Wang, Dept. of Applied Economics, GSM, Peking UniversityPrice ($)ABCMarket40471150246Graphical RepresentationP54321Q051015202530DMarke

34、tDADBDC Sumall the curveshorizontally Notice the slope difference.Why?Outline1.Motivating Question: Housing Price2.Demand and Demand Function2.1 Demand Curve2.2 Demand Function2.3 Consumer SurplusA Related ConceptConsumer surplus is the monetary gain obtained by consumers becausethey are able to pur

35、chase a product for a price that is less than the highest price that they would be willing to pay The value consumers get from a good but do not have to pay forI got a great deal!Consumer surplus is largeI got a lousy deal!That car dealer drives a hard bargain!I almost decided not to buy it!They tri

36、ed to squeeze the very last cent from me! Consumer surplus is lowConsumer Surplus for Multiple ConsumersReservationPrice for a ride$140 + $110+ $80 + $20$180Consumer= $350Surplus$150$120$180-$40=$140$150-$40=$110$120-$40=$80$60-$40=$20$90$60p=$40$303rd4th5th1st2ndguyguyguyguyguyConsumer Surplus for Multiple ConsumersReservationPrice for a rideAreabetween price and RP curve$180Consumer =Surplus$150$120$90$60p=$40$303rd4th5th1st2ndguyguyguyguyguyConsumer Surplus for the MarketReservationPri