Microbusiness Competitive Markets Essay A competitive market is characterized by many buyers and sellers trading identical products, with little ability to

Microbusiness Competitive Markets Essay A competitive market is characterized by many buyers and sellers trading identical products, with little ability to influence market prices. With nearly identical products and no influence over market prices, how do businesses compete with each other?

Imagine that you are going to start your own small business. How will you maximize profits and stay competitive in the market? Describe your business and use the concepts from this module and earlier modules to discuss the following:

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Microbusiness Competitive Markets Essay A competitive market is characterized by many buyers and sellers trading identical products, with little ability to
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What fixed and variable costs would you incur?
How will you determine the price for your product?
How much product you would produce?
Provide an example of one situation that would cause you to shut down production temporarily. Explain your answer using an equation with sample numbers.
Provide an example of one situation that would cause you to exit the market permanently. Explain your answer using an equation with sample numbers.

USE APA REFERENCES

USE POWERPOINT ATTACHED FOR REFERENCES AS WELL N. GREGORY MANKIW
PRINCIPLES OF
MICROECONOMICS
Eight Edition
CHAPTER
14
Firms in
Competitive Markets
PowerPoint Slides prepared by:
V. Andreea CHIRITESCU
Eastern Illinois University
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
1
What is a Competitive Market?
• Competitive market
– Perfectly competitive market
– Market with many buyers and sellers
– Trading identical products
– Each buyer and seller is a price taker
– Firms can freely enter or exit the market
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
2
What is a Competitive Market?
• Firm in a competitive market
– Tries to maximize profit
• Profit
– Total revenue minus total cost
• Total revenue, TR = P ? Q
– Price times quantity
– Proportional to the amount of output
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
3
What is a Competitive Market?
• Average revenue, AR = TR / Q
– Total revenue divided by the quantity sold
• Marginal revenue, MR = ?TR / ?Q
– Change in total revenue from an additional
unit sold
• For competitive firms
– AR = P
– MR = P
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
4
Table 1
Total, Average, and Marginal Revenue for
a Competitive Firm
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
5
Profit Maximization
• Maximize profit
– Produce quantity where total revenue
minus total cost is greatest
– Compare marginal revenue with marginal
cost
• If MR > MC: increase production
• If MR < MC: decrease production • Maximize profit where MR = MC © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 6 Table 2 Profit Maximization: A Numerical Example © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 7 Profit Maximization • The marginal-cost curve and the firm’s supply decision – MC curve is upward sloping – ATC curve is U-shaped – MC curve crosses the ATC curve at the minimum of ATC curve – The price line is horizontal: P = AR = MR © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 8 Figure 1 Profit Maximization for a Competitive Firm Costs and Revenue The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue. MC ATC MC2 P=AR=MR P=MR1=MR2 AVC MC1 Q1 Q2 0 QMAX Quantity This figure shows the marginal-cost curve (MC), the average-total-cost curve (ATC), and the average-variable-cost curve (AVC). It also shows the market price (P), which for a competitive firm equals both marginal revenue (MR) and average revenue (AR). At the quantity Q1, MR1 > MC1, so raising production increases profit.
At the quantity Q2, MC2 > MR2, so reducing production increases profit.
The profit-maximizing quantity QMAX is found where the horizontal line representing the price
intersects the marginal-cost curve.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
9
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
• Marginal-cost curve
– Determines the quantity of the good the
firm is willing to supply at any price
– Is the supply curve
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
10
Figure 2 Marginal Cost as the Competitive Firm’s
Supply Curve
Price
MC
P2
ATC
P1
AVC
0
Q1
Q2
Quantity
An increase in the price from P1 to P2 leads to an increase in the firm’s profit-maximizing quantity
from Q1 to Q2. Because the marginal-cost curve shows the quantity supplied by the firm at any
given price, it is the firm’s supply curve.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
11
Profit Maximization
• Shutdown
– Short-run decision not to produce anything
– During a specific period of time
– Because of current market conditions
– Firm still has to pay fixed costs
• Exit
– Long-run decision to leave the market
– Firm doesn’t have to pay any costs
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
12
Profit Maximization
• The firm’s short-run decision to shut down
– TR = total revenue
– VC = variable costs
• Firm’s decision:
– Shut down if TR < VC (or P < AVC) • Competitive firm’s short-run supply curve – The portion of its marginal-cost curve – That lies above average variable cost © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 13 Figure 3 The Competitive Firm’s Short-Run Supply Curve 1. In the short run, the firm produces on the MC curve if P>AVC,…
Costs
MC
ATC
AVC
2. …but
shuts down
if P VC
Staying open can be profitable,
even with many tables empty.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
16
Near-empty restaurants & off-season miniature golf
• Operator of a miniature-golf course
– Ignore fixed costs
– Shut down if
• Revenue < variable costs – Stay open if • Revenue > variable costs
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
17
Profit Maximization
• Firm’s long-run decision
– Exit the market if
• Total revenue < total costs; TR < TC (same as: P < ATC) – Enter the market if • 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
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
18
Figure 4 The Competitive Firm’s Long-Run
Supply Curve
Costs
1. In the long run, the firm
produces on the MC curve
if P>ATC,…
MC
ATC
2. …but
exits if
P ATC
• Profit = TR – TC = (P – ATC) ? Q
– If P < ATC • Loss = TC - TR = (ATC – P) ? Q • = Negative profit © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 20 Figure 5 Profit as the Area between Price and Average Total Cost Price (a) A firm with profits Price (b) A firm with losses MC MC Profit ATC Loss ATC P P=AR=MR ATC ATC P P=AR=MR 0 Q Quantity (profit-maximizing quantity) 0 Q (loss-minimizing quantity) 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 incurs a loss. © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 21 Supply Curve • Short run: market supply with a fixed number of firms – Short run: number of firms is fixed – Each firm supplies quantity where P = MC • For P > AVC: supply curve is MC curve
– Market supply
• Add up quantity supplied by each firm
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
22
Figure 6 Short-Run Market Supply
(a) Individual firm supply
Price
(b) Market supply
MC
Price
$2.00
$2.00
1.00
1.00
0
100
200
Quantity
(firm)
Supply
0
100,000 200,000
Quantity
(market)
In the short run, the number of firms in the market is fixed. As a result, the market supply curve,
shown in panel (b), reflects the individual firms’ marginal-cost curves, shown in panel (a). Here,
in a market of 1,000 firms, the quantity of output supplied to the market is 1,000 times the
quantity supplied by each firm
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
23
Supply Curve
• Long run
– Firms can enter and exit the market
– If P > ATC, firms make positive profit
• New firms enter the market
– If P < ATC, firms make negative profit • Firms exit the market © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 24 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 – Long run supply curve is perfectly elastic • Horizontal at minimum ATC © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 25 Figure 7 Long-Run Market Supply (a) Firm’s Zero-Profit Condition Price (b) Market supply Price MC ATC P= minimum ATC 0 Supply Quantity (firm) 0 Quantity (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). © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 26 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 – Zero-profit equilibrium • Economic profit is zero • Accounting profit is positive “We’re a nonprofit organization - we don’t intend to be, but we are!” © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 27 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
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
28
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
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
29
Figure 8 An Increase in Demand in the Short Run
and Long Run (a)
(a) Initial Condition
Market
Price
1. A market begins in
long-run equilibrium…
Price
P1
Long-run
supply
2. …with the firm
earning zero profit.
MC
Short-run supply, S1
A
Firm
ATC
P1
Demand, D1
0
Q1
Quantity
(market)
0
Quantity
(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.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
30
Figure 8 An Increase in Demand in the Short Run
and Long Run (b)
(b) Short-Run Response
Market
Price
3. But then an increase in
demand raises the price…
Firm
Price
MC
S1
ATC
B
P2
P1
A
4. …leading to
short-run profits.
Long-run
supply
P2
P1
D2
D1
0
Q1 Q2
Quantity
(market)
0
Quantity
(firm)
Panel (b) shows what happens in the short run when demand rises from …
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