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1. Many buyers and sellers in the market

wheat. memory. modules. Competitive Markets. Characteristics of Perfectly Competitive Markets. 1. Many buyers and sellers in the market. 2. Buying and selling nearly identical goods. and services. 3. Firms can freely enter and exit the market. dowels. direct cremations.

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1. Many buyers and sellers in the market

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  1. wheat memory modules Competitive Markets Characteristics of Perfectly Competitive Markets 1. Many buyers and sellers in the market 2. Buying and selling nearly identical goods and services 3. Firms can freely enter and exit the market dowels direct cremations

  2. Demand for Western Digital Memory Modules Market for Memory Modules PMM PMM S Individual firms are price-takers P=75 DWD Pe=75  Too small to ΔS  Consumers would D quickly switch if  P Qe QMM QMM (thou. per year) (millions per year)

  3. Western Digital Memory Modules Being a price-taker, WD can’t change Total Revenue (TR) = Price (P) * Quantity (Q) Hence, ΔTR = P * ΔQ Dividing both sides by ΔQ yields Marginal revenue (MR)—the additional revenue from selling one additional unit ΔTR  ΔQ = P For perfectly competitive firms, MR equals price (not true for firms in less than competitive markets).

  4. Cost Curves of Parsons’ Mill Cost ($ per bundle) MC ATC reaches its minimum where MC=ATC Dist=AFC, which is larger at lower Q ATC 2.80 AVC 1.25 125 142 Quantity (bundles of dowels per day)

  5. PD S Cost If ,what is QπMax ? $4 ($ per bundle) D MC QD Δπ from Q from Q=142 toQπMax 4.00 ATC 2.80 AVC 1.25 MR=P>MC(Q’) 125 QπMax 142 Q’ Quantity (bundles of dowels per day)

  6. (=P for perfectly competitive firms) If MR > MC then firms can econ π by Q If MR < MC then firms can econ π by Q (=P for perfectly competitive firms) Hence, the profit maximizing output level (QπMax) occurs where MR=MC. For perfectly competitive firms, QπMax occurs where MR=P=MC.

  7. To find QπMax for perfectly competitive firms, go from PMKT over to the MC curve and down. Cost ($ per bundle) MC PMKT=4.00 ATC 2.80 AVC 1.25 125 142 QπMax≈ 155 Quantity (bundles of dowels per day)

  8. To find average total cost, go from QπMax up to the ATC curve and over to the vertical axis Cost ($ per bundle) MC PMKT=4.00 ATC ATC(Q=155) AVC QπMax≈ 155 Quantity (bundles of dowels per day)

  9. Height of rectangle A+B Cost Base of rectangle A+B Total Revenue = PMKT* QπMax = area A+B ($ per bundle) Total Cost = ATC(Q=155) * QπMax = area B Econ π = TR − TC = area A MC PMKT=4.00 A ATC ATC(Q=155) AVC B QπMax≈ 155 Quantity (bundles of dowels per day)

  10. Suppose PMKT=$2 If Parsons’ Mill is suffering econ losses, why does it produce in the short-run? Cost TR=B+C ($ per bundle) TC=A+B+C Econ Losses= A Because TR=B+C > TVC=C by B, which can be applied against the TFC of A+B. Shutting down would produce econ losses = TFC MC ATC ATC(QπMax) A AFC(QπMax) PMKT=2 AVC B AVC(QπMax) C QπMax Quantity (bundles of dowels per day)

  11. Supply curve of a perfectly competitive firm equals the MC curve above the shutdown price. Cost ($ per bundle) MC SShort-run P>PSD Produce where P=MC ATC AVC PSD=1.25 P<PSD shutdown TR<TVC at all Q>0 125 Quantity (bundles of dowels per day)

  12. “A year after Lewontin was fired, Parsons closed the mill.” North Waterford, Maine Josh Saunders with dowels Market for Wooden Dowels PD Parsons’ Mill MC S2 Short-run produce b/c P > min AVC S1 Long-run exit b/c econ losses Pe 2 ATC Pe 1 AVC D Qe Qe 2 1 QD QπMax QD (millions…) (thous…)

  13. Market for Wooden Dowels PD SLong-Run MC S2 Pe = min ATC 2 Pe ATC 2 AVC D Qe QD QπMax QD 2 (millions…) (thous…) Reaching Long-Run Equilibrium  P until Typical Mill’s econ π = 0 Typical Mill: Econ π < 0 Some Mills Exit in LR    Supply 

  14. SUPPLY CURVE IN A COMPETITIVE MARKET The Supply Curve of an Individual Firm Short-run: the MC curve above AVC Market Supply = ∑Individual Supply Curves Parsons’ Mill Saunders’ Brothers PD PD PD Market S S S P’ P’ P’ • • • QD QD QD QPM QSB (QPM+QSB+ • • •)

  15. Let’s call it a Premium Club (PC)

  16. Known within the health club industry as a (no-frills) keycard club (KC)

  17. Smaller Gyms Show Muscle Lower-cost chains may be financially fitter for expansion “You typically won't see space-intensive amenities such as pools, racquetball courts or steam rooms at [keycard clubs]. Some don't even have locker rooms. Instead what you'll find is a surplus of cardio machines in a small space and 24-hour access.” The “popularity” of the keycard clubs “is soaring as the recession drives people to spend less. And the newer gyms have emerged against a backdrop of shifts within the industry, including bankruptcy filings by some of the [premium gyms].

  18. Average Total Cost ($ per month) ATCPC ATCKC

  19. Pennsylvania Hospital University of Pennsylvania Hospital Point-to-Point Carrier Hub Carrier Hubs

  20. Suppose the markets for keycard clubs (KC) and premium clubs (PC) were in equilibrium prior to the recent recession. Illustrate the effect of the recession on these markets and describe the long-run adjustment process.

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