College Principles ofPhysics Economics Chapter # Chapter Title Chapter Perfect Competition PowerPoint Image Slideshow family farming Depending upon the competition and prices offered, a wheat farmer may choose to grow a different crop Characteristics of Perfect Competition A large number of firms in the market such that no one can influence the price The firm sells a good identical to those sold by other firms Firms have reliable sales and cost forecasts There is no legal or economic barrier to enter into or exit from the market Firm’s Objective Profit maximization – To make the largest amount of profit possible Total Revenue = Price*Quantity Total Cost = Average Cost*Quantity Total Profit = TR - TC Firm’s Objective Total revenue for a perfectly competitive firm is a straight line sloping up The slope is equal to the price of the good Total cost also slopes up, but with some curvature At higher levels of output, total cost begins to slope upward more steeply because of diminishing marginal returns The maximum profit will occur at the quantity where the gap of total revenue over total cost is largest Profit maximization Marginal Revenue-Marginal Cost Rule MR is a horizontal straight line because it is equal to the price of the good, which is determined by the market MC is U-shaped: division of labor causing MC to fall, but diminishing return forcing MC to rise Profit maximization requires MR = MC Since P = MR, then P = MC Figure 8.3 Market Equilibrium The equilibrium price of raspberries is determined through the interaction of market supply and market demand at $4.00 Firm’s profitability In panel (a), P = MC, but P > AC Thus TR > TC and firm makes profit In panel (b), P = MC, and P = AC Thus TR = TC and firm breaks even In panel (c), P = MC, but P < AC Thus TR < TC and firm operates with a loss Firm’s profitability Firm’s operation decision In panel (a), P = MC, but AVC < P < AC Firm operates with a loss < TFC It continues to operate, expecting price to rise In panel (b), P = MC, but P < AVC Firm operates with a loss > TFC It must shutdown Firm’s operation decision Firm’s operation decision Break-even point: P = MC and P = AC Firm operates with zero profit since TR = TC Shut-down point: P = MC, but P = AVC Firm operates with a loss = TFC It stays open if expects price to rise Firm’s operation decision Changing market conditions In panel (a), Increase in demand = Increase in supply: quantity increases, but price stays the same In panel (b), Increase in demand > Increase in supply: quantity increases and price rises In panel (c), Increase in demand < Increase in supply: quantity increases, but price falls Changing market conditions ... market Firm’s Objective Profit maximization – To make the largest amount of profit possible Total Revenue = Price*Quantity Total Cost = Average Cost*Quantity Total Profit = TR - TC Firm’s Objective... price of raspberries is determined through the interaction of market supply and market demand at $4.00 Firm’s profitability In panel (a), P = MC, but P > AC Thus TR > TC and firm makes profit... is equal to the price of the good Total cost also slopes up, but with some curvature At higher levels of output, total cost begins to slope upward more steeply because of diminishing marginal