Competition,Conclusions of Chapter 5,Conclusions,Supply decisions are constrained by the capacity to produce and the costs of using that capacity. In the short run, some inputs (e.g., land and capital) are fixed in quantity. Increases in (short-run) output result from more use of variable inputs (e.g., labor).,Conclusions,A production function indicates how much output can be produced from available facilities, using different amounts of variable inputs. Every point on the production function represents efficient production. Capacity output refers to the maximum quantity that can be produced from a given facility.,Conclusions,Output tends to increase at a diminishing rate when more labor is employed in a given facility. Additional workers crowed existing facilities. The costs of production include both fixed and variable costs. Fixed costs (e.g., space and equipment leases) are incurred even if no output is produced. Variable costs (e.g., labor and material) are incurred when plant and equipment are put to use.,Conclusions,Average cost is total cost divided by the quantity produced. The ATC curve is typically U-shaped. Marginal cost is the increase in total cost that results when one more unit of output is produced. Marginal costs increase because of diminishing returns in production.,Conclusions,The production decision is the short-run choice of how much output to produce with existing facilities. At a minimum, a producer will be willing to supply output only if price at least covers marginal cost.,Conclusions,The long run is characterized by an absence of fixed costs. The investment decision entails the choice of whether to acquire fixed costs, that is, whether to build, buy or lease plant and equipment.,Conclusions,The economic costs of production include the value of all resources used. Accounting costs typically include only those dollar costs actually paid (explicit costs).,Market Structure,The number and relative size of firms in an industry.,Market Structure,Not all businesses have the same opportunity to pursue profits Small businesses Larger firms - Raise prices - Change consumer tastes - Prevent competitors from entering,Duopoly,Monopoly,Oligopoly,Imperfect competition,Market Structures,Competitive Firm,A perfectly competitive firm is one without market power. It is not able to alter the market price of the good it produces.,Competitive Market,A competitive market is one in which no buyer or seller has market power. No single producer or consumer has any control over the price or quantity of the product. High tech electronics and agricultural goods are sold in competitive markets.,Monopoly,A monopoly firm is one that produces the entire market supply of a particular good or service. Your local cable TV company is an example of a monopoly firm. Microsoft: computer operating systems. Geographical areas and market segments: IBM,Market Power,Market power is the ability to alter the market price of a good or service. The campus book store has market power.,Imperfect Competition,Imperfect competition is between the extremes of monopoly and perfect competition.,Imperfect Competition,In duopoly only two firms supply a particular product.,In oligopoly a few large firms supply all or most of a particular product.,Imperfect Competition,In monopolistic competition many firms supply essentially the same product but each has brand loyalty. The quality of products may also depend on the degree of competition in the market place. - US Dept. Justice claims on Microsoft,Perfect Competition,How perfectly competitive firms make supply decisions. Perfectly competitive firms are pretty much faceless. They have no brand image, no real market recognition.,Perfect Competition,A perfectly competitive firm is one . . .,. . . whose output is so small in relation to market volume, . . . that its output decisions have no perceptible impact on price, . . . that sells all its output at the prevailing market price, . . . that will not sell anything if it charges a higher price.,Price Takers,A perfectly competitive firm is a price taker. Individual firms output decisions do not affect the market price.,Price Takers,Individual firms must take the market price and do the best they can within these constraints. Hollingsworths catfish raising pond vs. Ford Motor. The output is so small relative to the market supply that it has no significant effect on the total quantity or price in the market.,Market Demand vs. Firm Demand,You must distinguish between the market demand curve and the demand curve confronting a particular firm.,Market Demand vs. Firm Demand,The market demand curve is always downward sloping.,The demand curve facing a perfectly competitive firm is horizontal. The horizontal demand curve is the distinguishing feature of perfectly competitive firms. If a firm can raise its price without losing all its customers, it is not a perfectly competitive firm.,pe,Demand facing single farmer,pe,Equilibrium price,M