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At Q 1 - My LIUC

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					Extremely Competitive Markets
   Part 1: Closed Economies
            Characteristics of
      Extremely Competitive Markets

 Many buyers and sellers, or
 “Easy” entry and exit in the presence of
   significant extranormal profits
 Little or no product differentiation




               Price takers
        Profit Maximization for a Firm in an
          Extremely Competitive Market


Price


                                      MC




                                        P = AR = MR




         0                Qc               Quantity
Why Qc is the Profit Maximizing Output Level



Price

                                      MC

   MC(Q2)
                                   At Q2: MC(Q2) > MR(Q2)

    Pc                                     P = AR = MR

                     At Q1: MC(Q1) < MR(Q1)
MC(Q1)




         0            Qc      Q2         Quantity
                 Q
The Marginal Cost Curve is the Competitive Firm’s Supply Curve
 Because it shows how much the firm is willing to produce at any given price




    Price

                                                          MC
       P2=MR2



      P1=MR1




               0                        Q1        Q2       Quantity
Measuring Profit for the Competitive Firm


  Price
                              MC
                Profit              ATC

      Pc                            P = AR = MR
   ATC




      0                  Qc        Quantity
        The Firm’s Short Run Supply Decision

          Price


                       If P > ATC,          MC
                       keep producing
                       In the longer run,
                       at a profit
                                            ATC
If P > AVC,
keep producing                              AVC
in the short run



If P < AVC,
shut down


                   0                         Quantity
The Firm’s Short Run & Long Run Supply Curves


    Price

                The firm’s LR supply curve
                                               MC


                                                ATC

                                             AVC

                                        The firm’s SR supply curve




            0                                          Quantity
       Individual Firm and Industry Supply

          Firm Type A            Firm Type B                     Firms Types A and B together

 P/Q                           P/Q            MCB
                 MCA                                          P/Q



$20                                                              $20

$15                                                             $15

                                                                $10
$10



       4 6 8       Q/t               2 3 4              Q/t             6   9   12   Q/t

                                Total Industry Supply
 Total industry =          P/Q

 50 firms type A         $20
 50 firms type B         $15


                         $10



                                      300 400 500 600          Q/t
Extremely Competitive Market Outcome



   Price

                                        Industry supply



    $20

    $15

    $10

                                 Market demand


           100 200 300 450 500 600      Quantity
            Industry LR Supply, all firms identical




Individual identical firms                        Industry


 $/Q                         MC   AC    $/Q   Industry Demand


                                                                LR Supply




                 q                Q/t                 Q=nq        Q/t
Industry LR Supply, all firms not identical



 Individual non-identical firms         Industry

 P/Q                   MC         AC2
                                                         LR Supply


                           AC1


                                          D1       D2     D3


             q1 q2           Q/t             Q1     Q2         Q/t
    Strategy: What Size Plant to Build

Avg. total cost
                   ATC with        ATC with          ATC with
                  small plant     medium plant      large plant




            0          Small plant Medium plant   Large plant     Output/day
 Strategy: Identifying Economies of Scale
Average
total cost




             Economies   Constant Returns   Diseconomies
              of scale       to scale          of scale

        0                                     Output per day
Strategy: Identifying Economies of Scope

   Cost of producing x alone = C(x)

   Cost of producing y alone = C(y)

   Cost of producing 2 goods together = C(x,y)

   Economies of scope are present if:
   C(x,y) < C(x) + C(y)

   Measure or degree of economies of scope:
   [C(x) + C(y)] – C(x,y)
         C(x,y)

				
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