Chapter 10

Pure Compe**on in
the Short Run

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Four Market Models

Pure compe**on
Pure monopoly
Monopolis*c compe**on
Oligopoly
Pure
Compe**on

Monopolis*c
Compe**on

Oligopoly

Pure
Monopoly

Market Structure Con*nuum

LO1

10-2

Four Market Models

Characteris*cs of the Four Basic Market Models
Characteris*c

Pure
Compe**on

Monopolis*c Compe**on

Oligopoly

Monopoly

Number of rms

A very large
number

Many

Few

One

Type of product

Standardized

DierenGated

Standardized or
dierenGated

Unique; no
close subs.

Control over price

None

Some, but within rather

narrow limits

Limited by mutual
inter-dependence;
considerable with
collusion

Considerable

CondiGons of entry Very easy, no

obstacles

RelaGvely easy

Signicant obstacles

Blocked

Nonprice
CompeGGon

None

Considerable emphasis on
adverGsing, brand names,
trademarks

Typically a great
deal, parGcularly
with product
dierenGaGon

Mostly public
relaGon
adverGsing

Examples

Agriculture

Retail trade, dresses, shoes

Steel, auto, farm

implements

Local uGliGes
10-3

Pure Competition: Characteristics

LO2

Very large numbers of sellers

Standardized product
Price takers
Easy entry and exit

10-4

Purely Competitive Demand

Perfectly elasGc demand
Firm produces as much or liXle as they wish
at the market price
Demand graphs as horizontal line

LO3

10-5

Average, Total, and Marginal

Revenue
Average revenue
Revenue per unit
AR = TR/Q = P
Total revenue
TR = P X Q
Marginal revenue
Extra revenue from 1 more unit
MR = TR/Q
LO3

10-6

Average, Total, and Marginal

Revenue

QD

Firms
Revenue
Data

TR

0 $131
$0
]
1 131 131
]
2 131 262
]
3 131 393
]
4 131 524
]
5 131 655
]
6 131 786
]
7 131 917
]
8 131 1048
]
9 131 1179
]
10 131 1310

MR
$131
131
131
131
131
131
131
131
131
131

$1179

TR

1048
Price and revenue

Firms
Demand
Schedule
(Average
Revenue)

917
786
655
524
393
262

D = MR = AR

131
2

10

12

Quan*ty demanded (sold)

10-7

Profit Maximization: TR TC
Approach
The compeGGve producer will ask three
quesGons
Should the rm produce?
If so, in what amount?
What economic prot (loss) will be
realized?

LO4

10-8

Profit Maximization: TR-TC Approach

The Prot-Maximizing Output for a Purely Compe**ve Firm: Total Revenue Total Cost
Approach (Price = $131)
(1)
Total Product
(Output) (Q)

(2)
Total Fixed Cost
(TFC)

(3)
Total Variable
Costs (TVC)

(4)
Total Cost
(TC)

(5)
Total Revenue
(TR)

(6)
Prot (+)
or Loss (-)

$100

$0

$100

$0

$-100

100

90

190

131

-59

100

170

270

262

-8

100

240

340

393

+53

100

300

400

524

+124

100

370

470

655

+185

100

450

550

786

+236

100

540

640

917

+277

100

650

750

1048

+298

100

780

880

1179

+299

10

100

930

1030

1310

+280

LO3

10-9

Total economic
prot

Total revenue and total cost

Profit Maximization: TRTC Approach

LO4

$1800
1700
1600 Total revenue, (TR)
1500
Maximum
1400
economic
1300
prot
1200
$299
1100
1000
900
P=$131
800
700
600
Break-even point
500
(Normal prot)
400
300
200
100
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Quan*ty demanded (sold)
$299
$500 Total
400 economic
300 prot
200
100
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Quan*ty demanded (sold)

Break-even point
(Normal prot)

Total cost,
(TC)

10-10

Profit Maximization: MR-MC Approach

The Prot-Maximizing Output for a Purely Compe**ve Firm: Marginal Revenue Marginal Cost
Approach (Price = $131)
(1)
Total
Product
(Output)

(2)
Average Fixed
Cost (AFC)

(3)
Average
Variable Costs
(AVC)

(4)
Average Total
Cost
(ATC)

(5)
Marginal Cost
(MC)

(5)
Price =
Marginal
Revenue
(MR)

LO3

(6)
Total
Economic
Prot (+)
or Loss (-)
$-100

$100.00

$90.00

$190

$90

$131

-59

50.00

85.00

135

80

131

-8

33.33

80.00

113.33

70

131

+53

25.00

75.00

100.00

60

131

+124

20.00

74.00

94.00

70

131

+185

16.67

75.00

91.67

80

131

+236

14.29

77.14

91.43

90

131

+277

12.50

81.25

93.75

110

131

+298

11.11

86.67

97.78

130

131

+299

10

10.00

93.00

103.00

150

131

+280
10-11

Profit Maximization: MR-MC Approach

Cost and revenue

$200

MR = MC

150
P=$131

Economic prot

MC
MR = P
ATC

100

AVC

A=$97.78
50

LO5

Output

10

10-12

Loss-Minimizing Case

LO5

Loss minimizaGon
SGll produce because MR > minimum AVC
Losses at a minimum where MR = MC
Producing adds more to revenue than to costs

10-13

Loss-Minimizing Case

Cost and revenue

$200

MC

150

Loss

A=$91.67

ATC
AVC

100
P=$81

50

MR = P
V = $75

10

Output
LO5

10-14

Shutdown Case
$200

MC

Cost and revenue

150

100

ATC
AVC

V = $74

MR = P

P=$71
50

Short-run shut down point

P < minimum AVC
$71 < $74
1

10

Output
LO5

10-15

Marginal Cost and Short Run

Supply
The Supply Schedule of a Compe**ve Firm Confronted with Cost Data from Table

LO6

Price

Quan*ty
Supplied

Maximum Prot (+)

Minimum Loss (-)

$151

10

$+480

131

+299

111

+138

91

-3

81

-64

71

-100

61

-100

10-16

Cost and revenues (dollars)

Marginal Cost and Short-Run Supply

MC

P4
P3
P2
P1

LO6

P5

ATC

AVC

b
a

Q2

Q3

MR5

Q4

MR4
MR3
MR2
MR1

Q5

Quan*ty supplied
10-17

Cost and revenues (dollars)

Marginal Cost and Short-Run Supply

S
e

P5

P4
P3
P2
P1

MC
MR5
ATC

AVC

b
a

MR4
MR3
MR2
MR1

Shut-down point
(If P is below)
0

Q2

Q3

Q4

Q5

Quan*ty supplied
LO6

10-18

3 Production Questions
Output Determina*on in Pure Compe**on in the Short Run
Ques*on

Answer

Should this rm produce?

Yes, if price is equal to, or greater than,

minimum average variable cost. This means
that the rm is protable or that its losses are
less than its xed cost.

What quanGty should this rm produce?

Produce where MR (=P) = MC; there, prot is

maximized (TR exceeds TC by a maximum
amount) or loss is minimized.

Will producGon result in economic prot?

Yes, if price exceeds average total cost (TR will

exceed TC). No, if average total cost exceeds
price (TC will exceed TR).

LO6

LO3

10-19

Firm and Industry: Equilibrium

Firm and Market Supply and Market Demand

LO6

LO4

(1)
Quan*ty
Supplied,
Single
Firm

(2)
Total
Quan*ty
Supplied,
1000 Firms

(3)
Product
Price

(4)
Total
Quan*ty
Demanded

10

10,000

$151

4000

9000

131

6000

8000

111

8000

7000

91

9000

6000

81

11,000

71

13,000

61

16,000
10-20

Firm versus Industry: Equilibrium

S = MCs
s = MC
Economic
prot

ATC
d

$111

$111

AVC
D

8
LO6

8000
10-21

Fixed Costs: Digging Out of a Hole

Shukng down in the short run does not mean
shukng down forever
Low prices can be temporary
Some rms switch producGon on and o
depending on the market price
Examples: oil producers, resorts, and rms
that shut down during a recession

10-22