This course offers an introduction to the functions of individual decision-makers—both consumers and producers—within the larger economic system. Emphasis is on the nature and functions of product markets, the theory of the firm under varying conditions of competition and monopoly, and the role of government in promoting efficiency in the economy. Most people make the incorrect assumption that economics is ONLY the study of money. My primary goal in this course is to shatter this belief. During this course, we will be addressing the above questions as well as many more relating to: -the environment -love and marriage -crime -labor markets -education -politics -sports -business My main goal is to show you the way economists think and how to use this analytical system to answer questions related not only to these and other important human issues, but to anything you end up doing with your life after this class. After all, as you will quickly find out, I believe that everything is economics!
4.2. Long-run Competitive Output
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来自 University of Illinois at Urbana-Champaign 的课程
微观经济学原理
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从本节课中
Competitive Output
Welcome to your sixth week! This module we continue our discussion of the firm by focusing on those firms working in a perfectly competitive (or competitive) environment.
与讲师见面
Dr. José J. Vázquez-CognetClinical Professor
Department of Economics
[music] So we look at the situation in the short run, now we look at the situation in
the long run. Let's start, this section with, you know,
with a basic question, and try to answer intuitively, be, before I show you the
model that, that can get pretty complicated, especially the first time you
see it. So Mike is doing pretty well with his
barbeque sandwich place. There's a line at the door every na, every
day at every hour. So given that situation and assuming that
he works in a perfectly competitive environment, meaning that other firms can
enter into this market, with a major difficulty.
What to we expect is going to happen to the price of barbecue sandwiches, in the
area, let's say, in the area of Urbana, which is, where Mike has this,uh, store.
So why do we expect the price, of this barbecue sandwich to, to, to do in the, in
the, in the, long term? Well understand what's going to the, to
the price we need to understand a little bit of what's going to happen in the, in
the market. Right?
So you know that, the, Mike is doing really well, you know he's have a line out
the door people all the people are business entrepreneurs in Urbana and
Champaign have seeing that, they're going to his restaurant they like their
sandwiches, they have to wait 2 hours to get seated.
Mike, you know, move to a nice, to a, you know, let's say he moved to a new house,
bought a new car, things are going pretty well for him.
So everyone that wants to start restaurant in Champaign Urbana, and if you don't, you
know that, you know, whatever Mike is doing, he's doing it well, and he's
actually doing some pretty good money for himself.
So there's going to be an incentive for all the entrepreneurs to actually, try to
enter this market and compete with Mike on selling the barbecue sandwiches in the way
he's doing it. So in the long-termess companies have,
have enough time to buy the locales and find the places and com, and enter this
market, we would expect Mike to face more competition.
In fact, he's, that's one of the things he's considering, he's considering opening
a new store. That eventually is going to, you know
split his consumer base in two. Right?
So, so we would expect this market in the long term, as time goes by, to, to be more
competitive as more firms enter the market, to try to reap some of this
profits. So as more companies enter the market,
you, if you have you know, Sam or, or Anna has a new store or barbecue place, Anna's
barbecue place, and she just came into the area and has got to compete with Mike,
who's been there for awhile, she's going to have to charge a lower price.
Right, so as more in companies try to compete with Mike, there, there's going to
be a low, downward pressure on the price that you know, tomarrow it's going to
benefit consumer. And that pressure on the price to go down,
is going to continue as long as this, Barbecue sandwiches places continue to do
well, and other companies continue to enter.
The process will stop, when the profits are eliminated.
Okay? You remember profit is revenue minus cost,
and the per unit basis, is price minus average total cost, so you can except the,
the process of companies entering to stop, when he price equals the average total
cost. And if, this is a competitive industry,
and all the firms are the same then, that leaves those firms operating at a, at a,
the most efficient scale in the market. Now, that made sense to you intuitively,
but sometimes a model, you know, a diagramic model can help us understand
this better. So, here's the model we're going to use.
We have, the one side we have the typical firm in this competitive market, there's
no barriers to entry, so many firms can enter this market, all of them have the
same cost structure. And on the right hand side we have the
market, this is a market for, let's say, barbeque sandwiches, but could be a market
for anything, as long as it's competitive. The firm now in the, in the vertical axis
the market has, price as vertical axis, as we always do, and then quantity in the
market on the horizontal axis. The firm has the same price in the
horizontal, in the verticle axis, but firm quantity in the horizontal axis.
If you have 10 firms, the market quantity is whatever output each of those firms
make, which would be the same if they're the same firm, typical firm is the same at
the market. Right?
So the big queue is the maket quantaty, small queue Is the firm quantity that both
models are correct, they're through the price, which is the same.
Because the firm is going to take the price that is given by the market, and is
going to operate and do the same, the best way the can with that price.
Since this is a perfectly competitive market, this firm has to take the price
they're given from the market and it cannot change it.
Now furthermore, we said that a firm is going to maximize profit when marginal
revenue equals marginal cost, but for a perfectly competitive industry, marginal
revenue and price are the same. And this should also make sense, if, if
the price is always fixed. Right?
If total revenue is price times quantity, but the price is always fixed, every time
you increase your quantity by one, which is what marginal revenue is, your total
revenue is going to go up by the price. Right?
Every time you, if you sell your sandwiches at $8.00 dollars, how much your
revenue goes up when you sell one more sandwich is $8.00 dollars.
Right? And how much your revenue will go up when
you sell the second sandwich also, $8.00 Dollars.
So every time you sell one additional sandwich which is your marginal revenue,
your revenue goes up by exactly the price. So in the case of the perfectly
competitive firm, the marginal revenue and the price are the same.
And that means that marginal revenue equals price for the perfectly competitive
firm, means price equals marginal cost for the perfectly competitive firm.
The perfectly competitive firm will produce right here, which is where
marginal revenue, which is price for the perfectly competitive firms, equals
marginal cost. Now, at that point, which is, how much
profits this company is making. Well, that depends on the average co,
total cost, the cost per unit, because we know that profits is going to be equal to
price, minus average total cost, times whatever units a firm produces.
In this case, you see when the, when the firm produces this much, this many units,
and they priced this much, the average total cost is down here.
So this firm is making all this profits right here, this is Mike's situation, Mike
is making profits. Right?
So this, this fact that the price is higher than the average total cost,
suggests that this firm in this market, is making profits.
And like I said, that give an incentive to other entrepreneurs to enter the market.
So as more entrepreneurs enter the market the supply curve, would shift to the
right, and as more people enter, the price is driven down, and the asset price is
driven down, the firm will have to take a new price, which is always going to be
lower, and is going to cut the first profit.
You see, and now with this price, this firm has to produce that much.
Right? So each firm produces a little less, and
the profits are limit, some, not eliminated completely, but they're driven
now, because now Mike is going to have to share the consumers with other companies.
Right? And the profits are going to be lower, and
you would suggest that this process will continue as long as there's profits to be
made. And that is as long as the price is higher
than the average total cost, so when the supply curve shift enough, let's say to
this point, at that point, the price is driven all the way down to the lowest
point on the average total cost curve. Right?
And at that point, each firm is producing q3, there's a lot more firms in the
market, that's why the market quantity rise.
So people are buying a lot more, a lot more barbecue sandwiches, and the price of
barbecue sandwiches is a lot less than he was before.
But each firm that stays in the market, is able, is actually going to produce a
little less than Mike was producing. And that make sense, Mike is going to have
to share his customers with lot more firms than before, and as since that's, that's
occurring, each firm is going to a make a little less profits than when Mike was
making before. Now at the end, the process ends you see
when their price is lower as, at the lowest point of the average total cost
curve, which is also the point in which the marginal cost curve crosses the
average total cost curve. So a long run equilibrium occurs when,
price equals average total cost, and also equals marginal cost, this is going to be
your equilibrium point. And notice that at that point, companies
are making zero profits. That's the first thing that you know,
companies are making zero profits. Now remember that at the beginning of
this, of this week, I told you what that meant.
That didn't, that doesn't mean that Companies' owners like Mike that has a
barbecue sandwich store are not taking money home.
Yeah, they are taking accounting profits home.
So Mike is paying himself at least a salary that is as high as he would make if
he was doing something else, but economic profits are zero.
Now the second point here is that, whatever company stay Is operating at the
lowest point of the average total cost curve.
So it's operating at the most efficient scale of production, it's where the cost
per unit are the lowest. So this again is the idea of, you know,
natural selection, survival of the fittest, whatever you want to call it,
right? This is the idea that only those firms who
are the most efficient ones, are those firms who will actually stay in the
market. In the long run, those firm will be the
only ones able to stay in the market, if this market is competetive, as firms have
to compete mostly on costs. Now this model, the first time you see it,
so you're seeing it for the first time, you're probably chuck now, right?
Becasue this is it's, it's a lot of stuff going on here, so the only way you will
learn this model is if you actually try to use it many times.
Not only in your practice problems, but I'm actually going to offer you a couple
more videos in which I actually show you a couple more examples, in which we use the
model by changing difference curve and we see the we, you know follow through the
process from the short run to the long run.
And the more you use the model, the more you, you'll be able to, to actually use it
effectively. But the main ideas as intuitive issue,
still makes sense. And that's the idea that in the
competitive markets, first competing with each other are going to have the effect of
reducing the price, which is actually ultimately good news for consumers.
But we, we continue to use the model in the, in the next section, with a couple
more examples. Produced by OCE, Atlas Digital Media, at
the University of Illinois, Urbana-Champaign.
