Four Market Models

Demand as seen by a Pu
rely Competitive Seller
Short-Run Profit Maxi
mization
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
23 CHAPTER

Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency

Pure
Key Terms

Previous
Slide
End
Next
Slide Competition
Show
23 - 1
Copyright McGraw-Hill/Irwin, 2002
 FOUR MARKET MODELS
Four Market Models
Demand as seen by a Pu
rely Competitive Seller
Short-Run Profit Maxi
mization Pure Competition
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms

Previous Next
Slide Slide
End Market Structure Continuum
Show
23 - 2
Copyright McGraw-Hill/Irwin, 2002
 FOUR MARKET MODELS
Four Market Models
Demand as seen by a Pu
rely Competitive Seller
Short-Run Profit Maxi
mization Pure Monopoly
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms

Pure
Competition

Previous Next
Slide Slide
End Market Structure Continuum
Show
23 - 3
Copyright McGraw-Hill/Irwin, 2002
 FOUR MARKET MODELS
Four Market Models
Demand as seen by a Pu
rely Competitive Seller
Short-Run Profit Maxi
mization Imperfect Competition
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms

Pure Pure
Competition Monopoly

Previous Next
Slide Slide
End Market Structure Continuum
Show
23 - 4
Copyright McGraw-Hill/Irwin, 2002
 FOUR MARKET MODELS
Four Market Models
Demand as seen by a Pu
rely Competitive Seller
Short-Run Profit Maxi
mization Monopolistic Competition
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms

Pure Pure
Competition Monopoly

Previous Next
Slide Slide
End Market Structure Continuum
Show
23 - 5
Copyright McGraw-Hill/Irwin, 2002
 FOUR MARKET MODELS
Four Market Models
Demand as seen by a Pu
rely Competitive Seller
Short-Run Profit Maxi
mization Oligopoly
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms

Pure Monopolistic Pure

Competition Competition Monopoly

Previous Next
Slide Slide
End Market Structure Continuum
Show
23 - 6
Copyright McGraw-Hill/Irwin, 2002
 FOUR MARKET MODELS
Four Market Models
Demand as seen by a Pu
Pure Competition:
rely Competitive Seller
Short-Run Profit Maxi
mization
• Very Large Numbers
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive
Equilibrium
• Standardized Product
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
• “Price Takers”
Pure Competition and
Efficiency
Key Terms
• Free Entry and Exit
Pure Monopolistic Pure
Competition Competition Oligopoly Monopoly

Previous Next
Slide Slide
End Market Structure Continuum
Show
23 - 7
Copyright McGraw-Hill/Irwin, 2002
 DEMAND AS SEEN BY A
Four Market Models
PURELY COMPETITIVE SELLER
Demand as seen by a Pu

Perfectly Elastic Demand

rely Competitive Seller
Short-Run Profit Maxi
mization

Price Taker Role

Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Total Revenue
Average Revenue
Efficiency
Key Terms

Previous Next
Marginal Revenue
Slide Slide
End
Show
23 - 8
Copyright McGraw-Hill/Irwin, 2002
For example...
 DEMAND AS SEEN BY A
Four Market Models
PURELY COMPETITIVE SELLER
Demand as seen by a Pu
rely Competitive Seller Product Price (P) Quantity Total Marginal
Short-Run Profit Maxi (Average Revenue) Demanded (Q) Revenue (TR) Revenue (MR)
mization
Marginal Revenue – Ma
rginal Cost Approach $131 0 $ 0
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms

Previous Next
Slide Slide
End
Show
23 - 9
Copyright McGraw-Hill/Irwin, 2002
 DEMAND AS SEEN BY A
Four Market Models
PURELY COMPETITIVE SELLER
Demand as seen by a Pu
rely Competitive Seller Product Price (P) Quantity Total Marginal
Short-Run Profit Maxi (Average Revenue) Demanded (Q) Revenue (TR) Revenue (MR)
mization
Marginal Revenue – Ma
rginal Cost Approach $131 0 $ 0
Short-Run Competitive ] $131
Equilibrium 131 1 131
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms

Previous Next
Slide Slide
End
Show
23 - 10
Copyright McGraw-Hill/Irwin, 2002
 DEMAND AS SEEN BY A
Four Market Models
PURELY COMPETITIVE SELLER
Demand as seen by a Pu
rely Competitive Seller Product Price (P) Quantity Total Marginal
Short-Run Profit Maxi (Average Revenue) Demanded (Q) Revenue (TR) Revenue (MR)
mization
Marginal Revenue – Ma
rginal Cost Approach $131 0 $ 0
Short-Run Competitive ] $131
131 1 131
]
Equilibrium
131
Long-Run Supply
Long-Run Equilibrium
131 2 262
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms

Previous Next
Slide Slide
End
Show
23 - 11
Copyright McGraw-Hill/Irwin, 2002
 DEMAND AS SEEN BY A
Four Market Models
PURELY COMPETITIVE SELLER
Demand as seen by a Pu
rely Competitive Seller Product Price (P) Quantity Total Marginal
Short-Run Profit Maxi (Average Revenue) Demanded (Q) Revenue (TR) Revenue (MR)
mization
Marginal Revenue – Ma
rginal Cost Approach $131 0 $ 0
Short-Run Competitive ] $131
131 1 131
]
Equilibrium
131
Long-Run Supply
131 2 262 ]
Long-Run Equilibrium 131
for a Competitive Firm
131 3 393
Pure Competition and
Efficiency
Key Terms

Previous Next
Slide Slide
End
Show
23 - 12
Copyright McGraw-Hill/Irwin, 2002
 DEMAND AS SEEN BY A
Four Market Models
PURELY COMPETITIVE SELLER
Demand as seen by a Pu
rely Competitive Seller Product Price (P) Quantity Total Marginal
Short-Run Profit Maxi (Average Revenue) Demanded (Q) Revenue (TR) Revenue (MR)
mization
Marginal Revenue – Ma
rginal Cost Approach $131 0 $ 0
Short-Run Competitive ] $131
131 1 131
]
Equilibrium
131
Long-Run Supply
131 2 262 ]
Long-Run Equilibrium 131
for a Competitive Firm
131 3 393 ]
Pure Competition and 131
Efficiency 131 4 524
Key Terms

Previous Next
Slide Slide
End
Show
23 - 13
Copyright McGraw-Hill/Irwin, 2002
 DEMAND AS SEEN BY A
Four Market Models
PURELY COMPETITIVE SELLER
Demand as seen by a Pu
rely Competitive Seller Product Price (P) Quantity Total Marginal
Short-Run Profit Maxi (Average Revenue) Demanded (Q) Revenue (TR) Revenue (MR)
mization
Marginal Revenue – Ma
rginal Cost Approach $131 0 $ 0
Short-Run Competitive ] $131
131 1 131
]
Equilibrium
131
Long-Run Supply
131 2 262 ]
Long-Run Equilibrium 131
for a Competitive Firm
131 3 393 ]
Pure Competition and 131
Efficiency 131 4 524 ]
131
Key Terms
131 5 655 ]
131
131 6 786 ]
131
131 7 917 ]
131
Previous Next
131 8 1048 ]
Slide Slide
131
End 131 9 1179 ]
Show 131
23 - 14 131 10 1310
Copyright McGraw-Hill/Irwin, 2002
 DEMAND AS SEEN BY A
Four Market Models
PURELY COMPETITIVE SELLER
Demand as seen by a Pu
rely Competitive Seller Product Price (P) Quantity Total Marginal
Short-Run Profit Maxi (Average Revenue) Demanded (Q) Revenue (TR) Revenue (MR)
mization
Marginal Revenue – Ma
rginal Cost Approach $131 0 $ 0
Short-Run Competitive ] $131
131 1 131
]
Equilibrium
131
131
Graphically2 262 ]
Long-Run Supply
Long-Run Equilibrium 131
for a Competitive Firm
131 3 393 ]
131
Presented…
Pure Competition and
Efficiency 131 4 524 ]
131
Key Terms
131 5 655 ]
131
131 6 786 ]
131
131 7 917 ]
131
Previous Next
131 8 1048 ]
Slide Slide
131
End 131 9 1179 ]
Show 131
23 - 15 131 10 1310
Copyright McGraw-Hill/Irwin, 2002
 DEMAND, MARGINAL REVENUE, AND TOTAL
REVENUE IN PURE COMPETITION
Four Market Models
Demand as seen by a Pu
rely Competitive Seller
1179
TR
Short-Run Profit Maxi
mization 1048
Marginal Revenue – Ma Price and revenue
rginal Cost Approach 917
Short-Run Competitive
Equilibrium
786
Long-Run Supply
Long-Run Equilibrium 655
for a Competitive Firm
Pure Competition and 524
Efficiency
Key Terms 393

262

131
D = MR
Previous Next
Slide Slide
0
End 1 2 3 4 5 6 7 8 9 10
Show Quantity Demanded (sold)
23 - 16
Copyright McGraw-Hill/Irwin, 2002
 SHORT RUN PROFIT MAXIMIZATION
Four Market Models
Two Approaches...
Demand as seen by a Pu
rely Competitive Seller
First:
Short-Run Profit Maxi
mization Total-Revenue -Total Cost Approach
Marginal Revenue – Ma
rginal Cost Approach The Decision Process:
Short-Run Competitive
Equilibrium •Should the firm produce?
Long-Run Supply
Long-Run Equilibrium •What quantity should be produced?
for a Competitive Firm
Pure Competition and
Efficiency
•What profit or loss will be realized?
Key Terms
The Decision Rule:
Produce in the short-run if it can
Previous Next
realize
Slide Slide
1- A profit (or)
End
Show
23 - 17
2- A loss less than its fixed costs
Copyright McGraw-Hill/Irwin, 2002
 SHORT RUN PROFIT MAXIMIZATION
Four Market Models
Two Approaches...
Demand as seen by a Pu
rely Competitive Seller
First:
Short-Run Profit Maxi
mization Total-Revenue -Total Cost Approach
Marginal Revenue – Ma
The Decision Process:
Applied
rginal Cost Approach
Short-Run Competitive
Equilibrium •Should the firm produce?
Long-Run Supply
•What quantity should be produced?
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Graphically…
•What profit or loss will be realized?
Efficiency
Key Terms
The Decision Rule:
Produce in the short-run if it can
Previous Next
realize
Slide Slide
1- A profit (or)
End
Show
23 - 18
2- A loss less than its fixed costs
Copyright McGraw-Hill/Irwin, 2002
 TOTAL REVENUE-TOTAL COST APPROACH

Four Market Models

Total Total Price: $131
Demand as seen by a Pu Total Fixed
e Variable Total Total
rely Competitive Seller
h n? Cost Cost
Producte tCost Revenue Profit
o
Short-Run Profit Maxi
mization
s e ati
Marginal Revenue – Ma
rginal Cost Approach
o u0 i$z 100 $ 0 $ 100 $ 0 - $100
y x im 100
Equilibrium
a n a1
Short-Run Competitive
90 190 131 - 59
C tm2
Long-Run Supply
100 170 270 262 -8
f i
r o
Long-Run Equilibrium
3 100 240 340 393 + 53
p
for a Competitive Firm
Pure Competition and
Efficiency 4 100 300 400 524 + 124
Key Terms
5 100 370 470 655 + 185
6 100 450 550 786 + 236
7 100 540 640 917 + 277
Previous
Slide
Next
Slide 8 100 650 750 1048 + 298
End 9 100 780 880 1179 + 299
Show
23 - 19 10 100 930 1030 1310 + 280
Copyright McGraw-Hill/Irwin, 2002
 TOTAL REVENUE-TOTAL COST APPROACH

Four Market Models

Total Total Price: $131
Demand as seen by a Pu Total Fixedl Variable Total Total
rely Competitive Seller
Short-Run Profit Maxi
a
ProductTotCoste Cost Cost Revenue Profit
mization
g n u
Marginal Revenue – Ma

hi n
0 v
$e100 $ 0 $ 100 $ 0 - $100
e
rginal Cost Approach

ap 1R 100
Short-Run Competitive
Equilibrium
r
G st 2 & 90 190 131 - 59
Long-Run Supply
o 100 170 270 262 -8
C
Long-Run Equilibrium
for a Competitive Firm
3 100 240 340 393 + 53
Pure Competition and
Efficiency 4 100 300 400 524 + 124
Key Terms
5 100 370 470 655 + 185
6 100 450 550 786 + 236
7 100 540 640 917 + 277
Previous
Slide
Next
Slide 8 100 650 750 1048 + 298
End 9 100 780 880 1179 + 299
Show
23 - 20 10 100 930 1030 1310 + 280
Copyright McGraw-Hill/Irwin, 2002
 TOTAL REVENUE-TOTAL COST APPROACH

Four Market Models

$1,800 Break-Even Point
Demand as seen by a Pu
1,700 (Normal Profit)
rely Competitive Seller 1,600
Short-Run Profit Maxi 1,500
mization

Total revenue and total cost

1,400
Marginal Revenue – Ma
rginal Cost Approach 1,300 Total
Short-Run Competitive 1,200 Maximum
Equilibrium
Long-Run Supply
1,100 Revenue Economic
1,000
Long-Run Equilibrium
for a Competitive Firm 900
Profits
Pure Competition and 800 $299
Efficiency
Key Terms
700
600
Total
500 Cost
400
300
Previous Next 200
Break-Even Point
Slide Slide
100
(Normal Profit)
End 0
Show 1 2 3 4 5 6 7 8 9 10 11 12 13 14
23 - 21
Copyright McGraw-Hill/Irwin, 2002
 SHORT RUN PROFIT MAXIMIZATION
Four Market Models
Two Approaches...
Demand as seen by a Pu
rely Competitive Seller
First:
Short-Run Profit Maxi
mization Total-Revenue -Total Cost Approach
Marginal Revenue – Ma
rginal Cost Approach
Second:
Short-Run Competitive
Equilibrium
Marginal-Revenue -Marginal Cost
Long-Run Supply
Long-Run Equilibrium
Approach
for a Competitive Firm
Pure Competition and
Efficiency
MR = MC Rule
Key Terms Three Characteristics:
• The rule applies only if producing
is preferred to shutting down
Previous Next
Slide Slide • Rule applies to all markets
End
Show • Rule can be restated P=MC
23 - 22
Copyright McGraw-Hill/Irwin, 2002
 MARGINAL REVENUE-MARGINAL COST APPROACH

Four Market Models

AverageAverage Average Price = Total
Demand as seen by a Pu Total Fixed Variable Total Marginal
MarginalEconomic
rely Competitive Seller
Short-Run Profit Maxi Product Cost Cost Cost Cost Revenue Profit/Loss
mization
Marginal Revenue – Ma
rginal Cost Approach 0 The - $100
Short-Run Competitive
1 $100.00 $90.00 $190.00 90 $ 131 - 59
same profit
Equilibrium
Long-Run Supply 2 50.00 85.00 135.00 80 131 -8
Long-Run Equilibrium
3 33.33 80.00 113.33 70 131 + 53
for a Competitive Firm
Pure Competition and
Efficiency 4 maximizing
25.00 75.00 100.00 60 131 + 124
Key Terms 5
6
result!
20.00 74.00
16.67 75.00
94.00
91.67
70
80
131
131
+ 185
+ 236
7 14.29 77.14 91.43 90 131 + 277
Previous
Slide
Next
Slide
8 12.50 81.25 93.75 110 131 + 298
End
9 11.11 86.67 97.78 130 131 + 299
Show 10 10.00 93.00 103.00 150 131 + 280
23 - 23
Copyright McGraw-Hill/Irwin, 2002
 MARGINAL REVENUE-MARGINAL COST APPROACH

Four Market Models

AverageAverage Average Price = Total
Demand as seen by a Pu Total Fixed Variable Total Marginal
MarginalEconomic
rely Competitive Seller
Short-Run Profit Maxi Product Cost Cost Cost Cost Revenue Profit/Loss
mization
Marginal Revenue – Ma
rginal Cost Approach 0 - $100
Short-Run Competitive
Equilibrium 1 $100.00 $90.00 $190.00 90 $ 131 - 59
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
2
3 Graphically
50.00 85.00 135.00 80
33.33 80.00 113.33 70
131
131
-8
+ 53
Pure Competition and
Efficiency 4 25.00 75.00 100.00 60 131 + 124
Key Terms 5 20.00 74.00 94.00 70 131 + 185
6 16.67 75.00 91.67 80 131 + 236
7 14.29 77.14 91.43 90 131 + 277
Previous
Slide
Next
Slide
8 12.50 81.25 93.75 110 131 + 298
End
9 11.11 86.67 97.78 130 131 + 299
Show 10 10.00 93.00 103.00 150 131 + 280
23 - 24
Copyright McGraw-Hill/Irwin, 2002
 MARGINAL REVENUE-MARGINAL COST APPROACH

Four Market Models

Profit Maximization Position
Demand as seen by a Pu
rely Competitive Seller $200
Short-Run Profit Maxi
mization
Cost and Revenue
Economic Profit MC
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive 150
Equilibrium
Long-Run Supply
$131.00 MR
Long-Run Equilibrium
for a Competitive Firm
ATC
Pure Competition and 100 AVC
Efficiency $97.78
Key Terms

50
Previous Next
Slide Slide
End 0
Show
23 - 25
1 2 3 4 5 6 7 8 9 10
Copyright McGraw-Hill/Irwin, 2002
 MARGINAL REVENUE-MARGINAL COST APPROACH

Four Market Models

Profit Maximization Position
Demand as seen by a Pu
rely Competitive Seller $200
Short-Run Profit Maxi
mization
Cost and Revenue
Economic Profit MC
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive 150
Equilibrium
Long-Run Supply
$131.00 MR
Long-Run Equilibrium
for a Competitive Firm
MR = MC ATC
100 AVC
Optimum
Pure Competition and
Efficiency $97.78
Key Terms

Solution
50
Previous Next
Slide Slide
End 0
Show
23 - 26
1 2 3 4 5 6 7 8 9 10
Copyright McGraw-Hill/Irwin, 2002
 MARGINAL REVENUE-MARGINAL COST APPROACH

Four Market Models

Loss Minimization Position
Demand as seen by a Pu

If the price is lowered

rely Competitive Seller
Short-Run Profit Maxi
mization

from $131 to $81

Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
The MR=MC rule still applies
Efficiency
Key Terms

…But the MR = MC point

Previous
Slide
Next
Slide
changes
End
Show
23 - 27
Copyright McGraw-Hill/Irwin, 2002
 MARGINAL REVENUE-MARGINAL COST APPROACH

Four Market Models

Loss Minimization Position
Demand as seen by a Pu
rely Competitive Seller $200
Short-Run Profit Maxi
mization
Cost and Revenue
Economic Loss MC
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive 150
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
ATC
Pure Competition and 100 AVC
Efficiency $91.67
Key Terms $81.00 MR
50
Previous Next
Slide Slide
End 0
Show
23 - 28
1 2 3 4 5 6 7 8 9 10
Copyright McGraw-Hill/Irwin, 2002
 MARGINAL REVENUE-MARGINAL COST APPROACH

Four Market Models

Short-Run Shut Down Point
Demand as seen by a Pu
rely Competitive Seller $200
Short-Run Profit Maxi
mization
Cost and Revenue MC
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive 150
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
ATC
Pure Competition and 100 AVC
Efficiency
Key Terms
$71.00 MR
50 Minimum AVC
Previous Next
is the Shut-Down
Slide Slide
Point
End 0
Show
23 - 29
1 2 3 4 5 6 7 8 9 10
Copyright McGraw-Hill/Irwin, 2002
 MARGINAL REVENUE-MARGINAL COST APPROACH

Four Market Models

Marginal Cost & Short-Run Supply
Observe the impact upon
Demand as seen by a Pu
rely Competitive Seller
Short-Run Profit Maxi
mization
Marginal Revenue – Ma
profitability as price is changed
rginal Cost Approach
Short-Run Competitive
Quantity Maximum Profit (+)
Equilibrium
Price Supplied Or Minimum Loss (-)
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
$151 10 $+480
Pure Competition and
Efficiency
131 9 +299
Key Terms
111 8 +138
91 7 -3
Previous Next
81 6 -64
Slide
End
Slide
71 0 -100
Show
23 - 30
61 0 -100
Copyright McGraw-Hill/Irwin, 2002
 MARGINAL REVENUE-MARGINAL COST APPROACH

Four Market Models

Marginal Cost & Short-Run Supply
Demand as seen by a Pu
rely Competitive Seller

Cost and Revenue, (dollars)

Short-Run Profit Maxi
mization
MC
Marginal Revenue – Ma
rginal Cost Approach P5 MR5
Short-Run Competitive
Equilibrium
Long-Run Supply ATC
Long-Run Equilibrium P4 MR4
for a Competitive Firm
AVC
Pure Competition and
Efficiency
P3 MR3
Key Terms P2 MR2
P1 MR1
Do not
Produce –
Previous
Slide
Next
Slide
Below AVC
End Q2 Q3 Q 4 Q5
Show
23 - 31 Quantity Supplied
Copyright McGraw-Hill/Irwin, 2002
 MARGINAL REVENUE-MARGINAL COST APPROACH

Four Market Models

Marginal Cost & Short-Run Supply
Demand as seen by a Pu Yields the Supply
rely Competitive Seller

Cost and Revenue, (dollars)

Short-Run Profit Maxi Short-Run MC
mization
Marginal Revenue – Ma Supply Curve
rginal Cost Approach P5 MR5
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium P4 MR4
for a Competitive Firm
Pure Competition and
Efficiency
P3 MR3
Key Terms P2 MR2
P1 MR1
No
Production
Previous
Slide
Next
Slide
Below AVC
End Q2 Q3 Q 4 Q5
Show
23 - 32 Quantity Supplied
Copyright McGraw-Hill/Irwin, 2002
 MARGINAL REVENUE-MARGINAL COST APPROACH

Four Market Models

Marginal Cost & Short-Run Supply
Demand as seen by a Pu MC2
rely Competitive Seller
S2
Cost and Revenue, (dollars)
Short-Run Profit Maxi
mization MC1
Marginal Revenue – Ma
rginal Cost Approach
S1
Short-Run Competitive
Equilibrium
Long-Run Supply AVC2
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and AVC1
Efficiency
Key Terms

Higher Costs Move the

Previous
Slide
Next
Slide
Supply Curve to the Left
End
Show
23 - 33 Quantity Supplied
Copyright McGraw-Hill/Irwin, 2002
 MARGINAL REVENUE-MARGINAL COST APPROACH

Four Market Models

Marginal Cost & Short-Run Supply
Demand as seen by a Pu
rely Competitive Seller

Cost and Revenue, (dollars)

Short-Run Profit Maxi
mization Lower Costs Move MC1
Marginal Revenue – Ma S1
rginal Cost Approach
Short-Run Competitive
the Supply Curve
Equilibrium
to the Right MC2
Long-Run Supply S2
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and AVC1
Efficiency
Key Terms
AVC2

Previous Next
Slide Slide
End
Show
23 - 34 Quantity Supplied
Copyright McGraw-Hill/Irwin, 2002
 SHORT RUN COMPETITIVE EQUILIBRIUM
The Competitive Firm “Takes” it’s
Price from the Industry Equilibrium
Four Market Models
Demand as seen by a Pu
rely Competitive Seller
S= MC’s
Short-Run Profit Maxi
mization
P P
Marginal Revenue – Ma Economic
rginal Cost Approach
Short-Run Competitive ATC Profit S=MC
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm $111 D $111
Pure Competition and
Efficiency
Key Terms AVC
D
Previous Next 8 Q 8000 Q
Slide Slide
End
Firm Industry
Show (price taker)
23 - 35
Copyright McGraw-Hill/Irwin, 2002
 SHORT RUN COMPETITIVE EQUILIBRIUM
The Competitive Firm “Takes” it’s
Price from the Industry Equilibrium
Four Market Models
Demand as seen by a Pu
rely Competitive Seller
S= MC’s
Short-Run Profit Maxi
mization
P P
Marginal Revenue – Ma Economic
rginal Cost Approach
Short-Run Competitive ATC Profit S=MC
Equilibrium

How about the

Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm $111 D $111

long-run?
Pure Competition and
Efficiency
Key Terms AVC
D
Previous Next 8 Q 8000 Q
Slide Slide
End
Firm Industry
Show (price taker)
23 - 36
Copyright McGraw-Hill/Irwin, 2002
 PROFIT MAXIMIZATION IN THE LONG-RUN

Four Market Models

Demand as seen by a Pu
Assumptions...
rely Competitive Seller
Short-Run Profit Maxi
mization
Marginal Revenue – Ma
• Entry and Exit Only
• Identical Costs
rginal Cost Approach
Short-Run Competitive
Equilibrium

• Constant-Cost Industry
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm

Goal...
Pure Competition and
Efficiency
Key Terms

Price = Minimum ATC

Previous Next
Slide
End
Slide
Zero Economic Profit Model
Show
23 - 37
Copyright McGraw-Hill/Irwin, 2002
 PROFIT MAXIMIZATION IN THE LONG-RUN
Temporary Profits and the Reestablishment
Four Market Models
Demand as seen by a Pu
Of Long-Run Equilibrium
rely Competitive Seller S1
Short-Run Profit Maxi
mization
P P
Marginal Revenue – Ma
rginal Cost Approach
MC
Short-Run Competitive ATC
Equilibrium
Long-Run Supply
Long-Run Equilibrium $60 $60
for a Competitive Firm
50 50
Pure Competition and
Efficiency 40 MR 40
Key Terms

D1

Previous Next 100 Q 100,000 Q

Slide Slide
End
Firm Industry
Show (price taker)
23 - 38
Copyright McGraw-Hill/Irwin, 2002
 PROFIT MAXIMIZATION IN THE LONG-RUN
An increase in demand increases profits…
Four Market Models
Demand as seen by a Pu
rely Competitive Seller Economic S1
Short-Run Profit Maxi
mization
P Profits P
Marginal Revenue – Ma
rginal Cost Approach
MC
Short-Run Competitive ATC
Equilibrium
Long-Run Supply
Long-Run Equilibrium $60 $60
for a Competitive Firm
50 50
Pure Competition and
Efficiency 40 MR 40
Key Terms D2
D1

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End
Firm Industry
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23 - 39
Copyright McGraw-Hill/Irwin, 2002
 PROFIT MAXIMIZATION IN THE LONG-RUN
New Competitors increase supply and lower
Four Market Models
Demand as seen by a Pu
Prices decrease economic profits
P Zero Economic
rely Competitive Seller S1
Short-Run Profit Maxi P S2
mization
Profits
Marginal Revenue – Ma
rginal Cost Approach
MC
Short-Run Competitive ATC
Equilibrium
Long-Run Supply
Long-Run Equilibrium $60 $60
for a Competitive Firm
50 50
Pure Competition and
Efficiency 40 MR 40
Key Terms D2
D1

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End
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Copyright McGraw-Hill/Irwin, 2002
 PROFIT MAXIMIZATION IN THE LONG-RUN
Decreases in demand, Losses and the
Four Market Models
Demand as seen by a Pu
Reestablishment of Long-Run Equilibrium
rely Competitive Seller S1
Short-Run Profit Maxi
mization
P P
Marginal Revenue – Ma
rginal Cost Approach
MC
Short-Run Competitive ATC
Equilibrium
Long-Run Supply
Long-Run Equilibrium $60
for a Competitive Firm
50
MR $60
50
Pure Competition and
Efficiency 40 40
Key Terms

D1

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Copyright McGraw-Hill/Irwin, 2002
 PROFIT MAXIMIZATION IN THE LONG-RUN
A decrease in demand creates losses…
Four Market Models
Demand as seen by a Pu
rely Competitive Seller Economic S1
Short-Run Profit Maxi
mization
P Losses P
Marginal Revenue – Ma
rginal Cost Approach
MC
Short-Run Competitive ATC
Equilibrium
Long-Run Supply
Long-Run Equilibrium $60
for a Competitive Firm
50
MR $60
50
Pure Competition and
Efficiency 40 40
Key Terms

D1
D2
Previous Next 100 Q 100,000 Q
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End
Firm Industry
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Copyright McGraw-Hill/Irwin, 2002
 PROFIT MAXIMIZATION IN THE LONG-RUN
Competitors with losses decrease supply and
Four Market Models
prices return to zero economic profits S 3
Demand as seen by a Pu
rely Competitive Seller Return to Zero S1
Short-Run Profit Maxi
mization
P Economic Profits P
Marginal Revenue – Ma
rginal Cost Approach
MC
Short-Run Competitive ATC
Equilibrium
Long-Run Supply
Long-Run Equilibrium $60
for a Competitive Firm
50
MR $60
50
Pure Competition and
Efficiency 40 40
Key Terms

D1
D2
Previous Next 100 Q 100,000 Q
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End
Firm Industry
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23 - 43
Copyright McGraw-Hill/Irwin, 2002
 LONG-RUN SUPPLY IN A
Four Market Models CONSTANT COST INDUSTRY
Demand as seen by a Pu
rely Competitive Seller
Short-Run Profit Maxi

Constant Cost Industry

mization
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Perfectly Elastic
Long-Run Supply
Efficiency
Key Terms

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Copyright McGraw-Hill/Irwin, 2002
 LONG-RUN SUPPLY IN A
Four Market Models CONSTANT COST INDUSTRY
Demand as seen by a Pu
rely Competitive Seller
Short-Run Profit Maxi
P
mization
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive
Equilibrium
Long-Run Supply P1
Z3 Z1 Z2
Long-Run Equilibrium
for a Competitive Firm P2 =$50 S
Pure Competition and
Efficiency
P3
Key Terms

Previous Next D3 D1 D2
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End
Show
Q3 Q1 Q2 Q
23 - 45 90,000 100,000 110,000
Copyright McGraw-Hill/Irwin, 2002
 LONG-RUN SUPPLY IN A
Four Market Models CONSTANT COST INDUSTRY
Demand as seen by a Pu
rely Competitive Seller
Short-Run Profit Maxi
P
mization
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive

P1 How does an increasing

Equilibrium
Long-Run Supply
Z3 Z1 Z2
Long-Run Equilibrium
for a Competitive Firm cost industry differ?
P2 =$50 S
Pure Competition and
Efficiency
P3
Key Terms

Previous Next D3 D1 D2
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End
Show
Q3 Q1 Q2 Q
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Copyright McGraw-Hill/Irwin, 2002
 LONG-RUN SUPPLY IN AN
Four Market Models INCREASING COST INDUSTRY
Demand as seen by a Pu
rely Competitive Seller
Short-Run Profit Maxi
P
mization
Marginal Revenue – Ma
rginal Cost Approach
S
Short-Run Competitive
Equilibrium
P1 $55
Long-Run Supply
Long-Run Equilibrium P2 50 Y2
Y1
for a Competitive Firm
Pure Competition and
P3 45 Y3
Efficiency
Key Terms

Previous Next D3 D1 D2
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End
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Q3 Q1 Q2 Q
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 LONG-RUN SUPPLY IN AN
Four Market Models INCREASING COST INDUSTRY
Demand as seen by a Pu
rely Competitive Seller
Short-Run Profit Maxi
P
mization

How does a
Marginal Revenue – Ma
rginal Cost Approach
S
Short-Run Competitive
Equilibrium
P $55
1

Pdecreasing cost
Long-Run Supply
Long-Run Equilibrium P 50
2
Y2
for a Competitive Firm
45 Y1
Pure Competition and 3 Y3

industry differ?
Efficiency
Key Terms

Previous Next D3 D1 D2
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End
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Q3 Q1 Q2 Q
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Copyright McGraw-Hill/Irwin, 2002
 LONG-RUN SUPPLY IN AN
Four Market Models INCREASING COST INDUSTRY
Demand as seen by a Pu
rely Competitive Seller
Short-Run Profit Maxi
P
mization

What is the long-

Marginal Revenue – Ma
rginal Cost Approach
S
Short-Run Competitive
Equilibrium
P $55
1
Long-Run Supply

P run competitive
Long-Run Equilibrium P 50
2
Y2
for a Competitive Firm
45 Y1
Pure Competition and 3 Y3
Efficiency
Key Terms
equilibrium?
Previous Next D3 D1 D2
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End
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Q3 Q1 Q2 Q
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Copyright McGraw-Hill/Irwin, 2002
 LONG-RUN EQUILIBRIUM
Four Market Models FOR A COMPETITIVE FIRM
Demand as seen by a Pu
rely Competitive Seller
Short-Run Profit Maxi
mization
Marginal Revenue – Ma
MC
rginal Cost Approach ATC
Short-Run Competitive
Equilibrium
Price

Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
P MR
Efficiency
Key Terms

Price = MC = Minimum ATC

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(normal profit)
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End Q
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Quantity
Copyright McGraw-Hill/Irwin, 2002
 PURE COMPETITION AND EFFICIENCY

Four Market Models

Demand as seen by a Pu
Productive Efficiency
rely Competitive Seller
Short-Run Profit Maxi
mization Price = Minimum ATC
Marginal Revenue – Ma

Allocative Efficiency
rginal Cost Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm Price = MC
Pure Competition and

Underallocation
Efficiency
Key Terms

Price > MC
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End
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Price < MC
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Copyright McGraw-Hill/Irwin, 2002
 PURE COMPETITION AND EFFICIENCY

Four Market Models

Demand as seen by a Pu
Productive Efficiency
rely Competitive Seller
Short-Run Profit Maxi
mization Price = Minimum ATC
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive
Resources are
Allocative Efficiency
efficiently allocated
Equilibrium
Long-Run Supply
Long-Run Equilibrium
Price = MC
for a Competitive Firm
Pure Competition and under competition
Underallocation
Efficiency
Key Terms

Price > MC
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Next
Slide Overallocation
End
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Price < MC
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 PURE COMPETITION AND EFFICIENCY

Four Market Models

Demand as seen by a Pu
Productive Efficiency
rely Competitive Seller
Short-Run Profit Maxi
mization Price = Minimum ATC
Marginal Revenue – Ma

Allocative Efficiency
rginal Cost Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Consumer
Price = MC
Surplus
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and

Underallocation
Efficiency
Key Terms

Price > MC
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Next
Slide Overallocation
End
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Price < MC
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Copyright McGraw-Hill/Irwin, 2002
 PURE COMPETITION AND EFFICIENCY

Four Market Models

Demand as seen by a Pu
Productive Efficiency
rely Competitive Seller
Short-Run Profit Maxi
mization Price = Minimum ATC
Chapter
Marginal Revenue – Ma

Allocative Efficiency
rginal Cost Approach
Short-Run Competitive
Equilibrium
Long-Run Supply

Price = MC
Conclusions
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and

Underallocation
Efficiency
Key Terms

Price > MC
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Next
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End
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Price < MC
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Copyright McGraw-Hill/Irwin, 2002
pure competition break-even point
pure monopoly MR = MC rule
monopolistic short-run supply curve
competition long-run supply curve
oligopoly constant-cost industry
imperfect competition increasing-cost industry
price taker decreasing-cost industry
average revenue productive efficiency
total revenue allocative efficiency
marginal revenue
Copyright McGraw-Hill/Irwin 2002 BACK END
Four Market Models
Demand as seen by a Pu
Coming Next...
rely Competitive Seller

Pure Monopoly
Short-Run Profit Maxi
mization
Marginal Revenue – Ma
rginal Cost Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms

Previous Next
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End
Slide
Chapter 24
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Copyright McGraw-Hill/Irwin, 2002