牛津大学：《微观经济学现代观点》教学资源（英文版）micpre 8

Production- Perfeet Cornpetition Market Structu There are many different types of market structure. The main ones are 1. Perfect Competition: Many small price-taking firms in an industry with free-entry 2. Monopoly: One large price-setting firm in an industry with barriers to entry 3. Duopoly: Two large price-setting firms in an industry with barriers to entry 1. Oligopoly: A small number of large price-setting firms in an industry with barriers to entry 5. Monopolistic Competition: A large number of price-setting firms in an industry with free en The industry of interest dictates appropriate model choice. The models have very different properties. letion-Perfeer Competition Perfect Competition An industry is said to be perfectly competitive if there are a large number of small price-taking firms which can enter and leave the industry at will. In a perfectly competitive market an individual firm has no impact upon prices. The demand curve they face is therefore a straight line at the current market price, p 、 Market demand If the firm charges above p*demand is zero, and if it charges below the firm faces the market demand curve

Production — Perfect Competition 1 Market Structure • There are many different types of market structure. The main ones are: 1. Perfect Competition: Many small price-taking firms in an industry with free-entry. 2. Monopoly: One large price-setting firm in an industry with barriers to entry. 3. Duopoly: Two large price-setting firms in an industry with barriers to entry. 4. Oligopoly: A small number of large price-setting firms in an industry with barriers to entry. 5. Monopolistic Competition: A large number of price-setting firms in an industry with free entry. • The industry of interest dictates appropriate model choice. The models have very different properties. Production — Perfect Competition 2 Perfect Competition • An industry is said to be perfectly competitive if there are a large number of small price-taking firms which can enter and leave the industry at will. • In a perfectly competitive market an individual firm has no impact upon prices. • The demand curve they face is therefore a straight line at the current market price, p ∗ . ................................................................................................................................................................................................................................................................................ ............................................................................................................................................................................................... 0 p y p ∗ Market demand Firm demand . . . . . • If the firm charges above p ∗ demand is zero, and if it charges below the firm faces the market demand curve

Production- Perfeet Cornpetition The Supply Decision The firm wishes to choose output ise profits. Profits are given by the following equation The firm will keep increasing output until profits start to decline. If A/Ay0 an increase in output would increase profit. Hence the firm sets y so that Ax/Ay=0. Or maximisation can be achieved by setting d/dy=0 in the standard way △霄’-霄 ={p(y-y)-(c(y)-c(y)}/△y= △c(y) △c(y) Simply put p= MC(y) at the optimum. The competitive firm operates at price equals marginal cost. The supply curve for the mply the marg letion-Perfeer Competition The Supply Curve The firms supply curve is not the whole of the marginal cost curve. There are two exception MC MO lVC The firm would never operate at yL since more profit could be made at yH. Since C is downward sloping at yL the cost of producing an extra unit is falling(and below p")and it will always be profitable to produce more Moreover the firm would never UN. Profits(excluding fixed costs) are negative since the variable cost per unit is greater than the price received per unit. The firm would rather Hence the(short run) supply curve is zero until MC >AVC and then supply is the marginal cost curv

Production — Perfect Competition 3 The Supply Decision • The firm wishes to choose output to maximise profits. Profits are given by the following equation: π = py − c(y) =⇒ max y π = max y py − c(y) • The firm will keep increasing output until profits start to decline. If ∆π/∆y 0 an increase in output would increase profit. Hence the firm sets y so that ∆π/∆y = 0. • Or maximisation can be achieved by setting dπ/dy = 0 in the standard way. ∆π ∆y = π 0 − π ∆y = {p(y 0 − y) − (c(y 0 ) − c(y))} /∆y = p − ∆c(y) ∆y = 0 =⇒ p = ∆c(y) ∆y • Simply put p = MC(y) at the optimum. The competitive firm operates at price equals marginal cost. • The supply curve for the firm is simply the marginal cost curve. Well, not quite. Production — Perfect Competition 4 The Supply Curve • The firm’s supply curve is not the whole of the marginal cost curve. There are two exceptions. . . . . . . . . . . . . ................................................................................................................................................................................................................................................................................ .................................................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................... .................................................................................................................................................................................................................................................... 0 p y p ∗ 0 p y p ∗ MC MC yL yH AV C yN ....................................... . ............................................................... ................................................................................................................ • The firm would never operate at yL since more profit could be made at yH. Since MC is downward sloping at yL, the cost of producing an extra unit is falling (and below p ∗ ) and it will always be profitable to produce more. • Moreover, the firm would never produce at yN . Profits (excluding fixed costs) are negative since the variable cost per unit is greater than the price received per unit. The firm would rather produce nothing at all. • Hence the (short run) supply curve is zero until MC > AV C and then supply is the marginal cost curve

Production- Perfeet Cornpetition The diagrams can be used to illustrate the firms total profits. The price per unit is pand the cost per unit is Ae Hence the area in the box bounded by price abowe and AC(y)below is profit. MC AC Avc y The first graph shows profit, T. The second shows producer surplus, P. Producer surplus. the area behind the supply curve, is also given by the area of the box between price and AVC. It is profits excluding the fixed costs-revenue minus variable costs letion-Perfeer Competition Long Run Supply The long run supply curve is given by the upward sloping part of the long run marginal cost In the long run all factors are variable- the firm can shut down if it is unprofitable Hence long pply is long run marginal cost where it is above the long run average cost curve. Supply= LRMC Short run supply LRAC The long run supply curve is likely to be fatter- more elastic -than in the short run. Why?

Production — Perfect Competition 5 Profits • The diagrams can be used to illustrate the firms total profits. The price per unit is p ∗ and the cost per unit is AC. Hence the area in the box bounded by price above and AC(y ∗ ) below is profit. .................. . ...... .. ............................ ............................ ................................................................................................................................................................................................................................................................................ .................................................................................................................................................................................................................................................................................. .......................................................................................................................................................... .......................................................................................................................................................... ........................................................................................................................................................... ........................................................................................................................................................... . . . . . . . . . 0 p y 0 y MC AC MC AV C p π P p ∗ p ∗ y ∗ y ∗ • The first graph shows profit, π. The second shows producer surplus, P. • Producer surplus, the area behind the supply curve, is also given by the area of the box between price and AV C. It is profits excluding the fixed costs — revenue minus variable costs. Production — Perfect Competition 6 Long Run Supply • The long run supply curve is given by the upward sloping part of the long run marginal cost curve. • In the long run all factors are variable — the firm can shut down if it is unprofitable. • Hence long run supply is long run marginal cost where it is above the long run average cost curve. .. ............................ ................................................................................................................................................................................................................................................................................ .................................................................................................................................................................................................................................................................................. ........................................................................................................................................ ................................................................................................................................................................................................................................ . . . . . . 0 p y 0 y Supply = LRMC LRAC p y ∗ Short run supply Long run supply • The long run supply curve is likely to be flatter — more elastic — than in the short run. Why?

Production- Perfeet Cornpetition Short Run Industry Supply Industry supply in the short run is given by simply adding up the supply curves for each individual firm. S(p)=∑S( Geometrically, just like with demand, the supply functions are summed horizontally. The intersection with market demand gives p. Returning to the firm with this yields short run equilibrium. letion-Perfeer Competition Perfect Competition in the Short Run In the short run, perfectly competitive firms can make profits or losses. P P MC AC p In the first graph, the firm makes a profit, z. Average cost lies below average revenue(price) In the second graph, the firm makes a loss. Average cost lies above average revenue(price) Even when making a loss a firm may wish to produce positive amounts - as long as revenue exceeds variable costs

Production — Perfect Competition 7 Short Run Industry Supply • Industry supply in the short run is given by simply adding up the supply curves for each individual firm. S(p) = Xn i=1 Si(p) ................................................................................................................................................................................................................................................................................ . . ........................................................................................................................................... . 0 p y S1 S2 S1 + S2 ............. ............. • Geometrically, just like with demand, the supply functions are summed horizontally. • The intersection with market demand gives p ∗ . Returning to the firm with this yields short run equilibrium. Production — Perfect Competition 8 Perfect Competition in the Short Run • In the short run, perfectly competitive firms can make profits or losses. .................. . ...... .................. . ...... ............................ ............................ ................................................................................................................................................................................................................................................................................ .................................................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................... ........................................................................................................................................................... ..................................................................................................................................................................................................................................................... ............................................................................................... . . . . . . . . 0 p y 0 y MC AC MC AC p π > 0 π < 0 p ∗ p ∗ y ∗ y ∗ • In the first graph, the firm makes a profit, π. Average cost lies below average revenue (price). • In the second graph, the firm makes a loss. Average cost lies above average revenue (price). • Even when making a loss a firm may wish to produce positive amounts — as long as revenue exceeds variable costs

Production- Perfeet Cornpetition Free Entry However, a firm making a loss in the short run will shut down in the long run(and make zero profits). Alternatively. if a firm is making positive profits, other firms will enter the market in the long run. The free entry assumption allows firms to enter when they see such profitable opportunities S The graph shows the case when a firm is making a loss. That firm (and possibly others)will leave the market in the long run, decreasing supply from S to S. Market price rises to p from p. A similar graph could be drawn for firms entering the market. Price would fall. letion-Perfeer Competition Perfect Competition in the Long Run Firms making a loss continue to leave causing price to rise until the remaining firms are making no profits at all. In the case when firms are making a profit, new firms continue to enter, forcing market price down until all the profits. The competitive firm in the long run makes zero profits. This is illustrated below MC AC Notice that(AR=)p=MC= AC in equilibrium. This implies all kinds of efficiency, returned to next lecture

Production — Perfect Competition 9 Free Entry • However, a firm making a loss in the short run will shut down in the long run (and make zero profits). • Alternatively, if a firm is making positive profits, other firms will enter the market in the long run. • The free entry assumption allows firms to enter when they see such profitable opportunities. ................................................................................................................................................................................................................................................................................ . . . ....................................................................... ............... ..................... 0 p y D S S 0 p 0 y 0 p y . . . . . ............. ............. ............. ............. ............. ............. ............. . . . . . . . ............. ............. ............. ............. ......... • The graph shows the case when a firm is making a loss. That firm (and possibly others) will leave the market in the long run, decreasing supply from S to S 0 . Market price rises to p 0 from p. • A similar graph could be drawn for firms entering the market. Price would fall. Production — Perfect Competition 10 Perfect Competition in the Long Run • Firms making a loss continue to leave causing price to rise until the remaining firms are making no profits at all. • In the case when firms are making a profit, new firms continue to enter, forcing market price down until all the firms receive zero profits. The competitive firm in the long run makes zero profits. This is illustrated below. .................. . . .... ............................. ................................................................................................................................................................................................................................................................................ ..................................................................................................................................................................................................................................................... . . . 0 p y MC AC p ∗ y ∗ • Notice that (AR =)p ∗ = MC = AC in equilibrium. This implies all kinds of efficiency, returned to next lecture

Production- Perfeet Cornpetition Industry Supply in the Long run operate at p min AC. Suppose there are enough firms in the market to make the discreteness of firms unimportant. Long run supply min Ac The long run supply curve is well approximated by a straight line at p= min AC letion-Perfeer Competition Economic rent The economic rent paid to a factor is the payment in excess of the minimum required to have that factor supplied If there is a fixed supply of some factor(land is a good example) then when price rises above the actual value, other firms would like to supply more land but they cant- there isn't any left The profits attributable to this factor are called economic rent. Rent is the amount required to drive profits to zer AvC Rent is the area between Ac (average costs including the fixed factor) and AvC (average costs excluding the fixed ctor). Notice this is exactly the producer surplus. Equilibrium price adjusts causing rent to change until profits are zer

Production — Perfect Competition 11 Industry Supply in the Long Run • In the long run firms will never operate at p ∗ min AC. • Suppose there are enough firms in the market to make the discreteness of firms unimportant. ................................................................................................................................................................................................................................................................................ ................................................................................................................................................................................................................................................................................ 0 p y Long run supply = min AC p ∗ • The long run supply curve is well approximated by a straight line at p ∗ = min AC. Production — Perfect Competition 12 Economic Rent • The economic rent paid to a factor is the payment in excess of the minimum required to have that factor supplied. • If there is a fixed supply of some factor (land is a good example) then when price rises above the actual value, other firms would like to supply more land but they can’t — there isn’t any left. • The profits attributable to this factor are called economic rent. Rent is the amount required to drive profits to zero. ............................ ................................................................................................. ................................................................................................................................................................................................................................................................................ .......................................................................................................................................................... ............................................................................................................................................................ . . . 0 p y MC AV C AC Rent p ∗ y ∗ • Rent is the area between AC (average costs including the fixed factor) and AV C (average costs excluding the fixed factor). Notice this is exactly the producer surplus. • Equilibrium price adjusts causing rent to change until profits are zero