Chapter 6 Production Decisions in a Perfectly Competitive Market
Production Decisions in a Perfectly Competitive Market Chapter 6
Chapter 6 ■ Production Cost a Production decisions in a perfectly competitive market
Chapter 6 ◼ Production ◼ Cost ◼ Production decisions in a perfectly competitive market
Production decisions in other market structures Monopoly Monopolistic competition Oligopoly
Production decisions in other market structures ◼ Monopoly ◼ Monopolistic Competition ◼ Oligopoly
Perfect Competition Perfectly competitive market: all participants are price-takers a Perfectly competitive industry: all producers are price-takers Price-taker: whose action has no effect on market prIce a Price-taking producer: market price does not change because of the quantity he sells a Price-taking consumer: market price does not change because of the amount he buys
Perfect Competition ◼ Perfectly competitive market: all participants are price-takers ◼ Perfectly competitive industry: all producers are price-takers ◼ Price-taker: whose action has no effect on market price ◼ Price-taking producer: market price does not change because of the quantity he sells. ◼ Price-taking consumer: market price does not change because of the amount he buys
Perfect Competition: Characteristics a Many buyers and sellers and each is so small that no one can affect price individually (for sellers, no one has large enough market share) All firms produce a homogeneous product (identical / standardized) at least consumers think so a Free entry and exit each firm has complete knowledge about production and cost; no regulation limit
Perfect Competition: Characteristics ◼ Many buyers and sellers and each is so small that no one can affect price individually (for sellers, no one has large enough market share) ◼ All firms produce a homogeneous product (identical / standardized) at least consumers think so ◼ Free entry and exit each firm has complete knowledge about production and cost；no regulation limit
Producer Decision- Making Goal: maximize profit π=TR=TC Tc〓TFc+TVc=WL+rK ATCETC/Q MC=△(Tc/AQ
Producer Decision-Making: Goal: Maximize Profit = TR – TC –TC = TFC + TVC = wL + rK –ATC = TC / Q –MC = Δ(TC)/ΔQ
Recall: Short-Run Costs-Summary at Q=0.Vc=0, but Fc>0 a when MC is declining, ATC and Avc both decline at an increasing rate a when MC starts increasing, ATC and AVC may both be decreasing but at a decreasing rate Mc intersects avc and atc at their minimum, respectively
Recall: Short-Run Costs - Summary ◼ at Q=0, VC=0, but FC>0 ◼ when MC is declining, ATC and AVC both decline at an increasing rate ◼ when MC starts increasing, ATC and AVC may both be decreasing but at a decreasing rate ◼ MC intersects AVC and ATC at their minimum, respectively
The Relationship Between the Average Total Cost and the marginal cost Curves Marginal average If marginal cost is MC costs (per unit) above average total MC ATO cost, average total cost is increasing A M MCL If marginal cost is below average total cost, average total cost is decreasing. Quantit
The Relationship Between the Average Total Cost and the Marginal Cost Curves
the four curves together Marginal, average costs of boots (per pa S250 MC 200 150 ATC AVC 100 50 ◆AFC 4 5 6 7 910 Quantity of boots(pairs) Minimum cost output
the four curves together:
More realistic cost curves Marginal average ATC costs (per unit) MC AVC
More Realistic Cost Curves