Ch 9 : Price and Output under

Perfect Competition
 Different Market Structures
• PERFECT COMPETITION
• Many firms
• Identical products
• Full knowledge
• No barriers to entry of firms
• MONOPOLY
• 1 firm in market
• Firm market share 100%
• Unique product
• Complete barriers to entry
• Significant Market power
• Control over price
• MONOPOLISTIC COMPETITION
• Many firms
• Firm size small
• Product differentiation limited
• Easy entry and exit of firms
• OLIGOPOLY
• Few firms in the market
• Large market shares
• Significant product differentiation
possible
• Difficult to enter market
Cost and price PROFIT MAXIMIZING POINT
($ per unit) Marginal cost

Average cost

600 Demand = Price = MR

Profit = (P-AC)Q
420
385 Profit = TR - TC
= PQ - AC(Q)
= (P - AC)Q
= (600-420)58
0 1 2 3 4 5 6 7 8 =10,440
Output (tens of units per day)

A profit-maximizing firm adjusts output until marginal cost

increases to marginal revenue; and P = MC in equilibrium.
3
 Firms don’t earn profits if market price falls
below minimum possible average cost.
Cost and price Marginal cost
($ per unit)

Losses Average cost

Average variable cost

385
PRICE= 300 Demand = Price = MR
260 Profit = TR - TC
= PQ - AC(Q)
= (P - AC)Q
1 2 3 4 5 6 7 8 = (300-385)40
0
Output (tens of units per day) = -3,400
BUT IF FIRMS DO NOTPRODUCE THEN LOSS= FIXED COSTS
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(Profit = TR – TVC – TFC = 0 – 0 – 4800 = – 4800; TFC = (ATC-AVC )* Q
 Shutdown Point: When price falls below
minimum possible AVC.

Cost and price Marginal cost

($ per unit)

Losses=FC Average cost

Average variable cost

400
Example: At price $220 if 30
240
units produced, LOSS is $180
PRICE = 220 per unit x 30 units = $5400
Fixed Costs = (ATC-AVC)*Q
= $180x30
0 1 2 3 4 5 6 7 8 = $4800
Output (tens of units per day)
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Consumers’ and Producers’ Surplus
Welfare Effects of an Excise Tax