Perfect competition with real firms Topic 3 Topic 4 Topic 5 - - PowerPoint PPT Presentation

Perfect competition with real firms

Topic 3 Topic 4 Topic 5 Isolate entry/exit Isolate quantity Combine entry/exit & quantity How Fix size of a firm, Fix which firms are in the market, Firms decide both whether to enter

• nly decision is whether to enter
• nly decision is how much to prod.

and how much to produce Individual Entry ← break-even price Quantity ← MC Entry ← AC firm (economic cost) Quantity ← MC Re-interpret unit supply from Sessions 1 & 2 as entry

20 40 10 20 30

MCi ↔ Supplyi €

Qi

10 20 30 40 50 5 10 15 20 25 30 35

AC MC €

Q

Qu ACu

Aggregate Supply goes up via Supply goes up via expansion Supply goes up via entry supply entry of new firms

• f output by firms in market

and expansion of firms in market

MC↔supply 5 10 15 20 25 30 35 40 45 5 10 15 20 25 30 Q (100MW) $

20 40 100 200 300

MC ↔ Supply €

Q

100 200 300 400 Q 5 10 15 20 25 30 P

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 1

This picture always holds

$ Q

Producer surplus Consumer surplus

P∗ → 35 Q∗ → 50 MV ↔ Demand MC ↔ Supply

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 2

• 6. Applications of Perfect Competition

1.

➥

Market dynamics.

• 2. Simulation results.
• 3. Bagels and Cranberries (“Growth and Profitability”).

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 3

Long-run dynamics

$ Q

10 20 30 40 50 60 10 20 30 40 50 60 70 80 90 P∗

1 →

P∗

2 →

D1 D2 Slong

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 4

Firms’ short-run responses to price changes

$ Q

10 20 30 40 50 60 10 20 30 40 50 60 70 80 90 P∗

1 →

D1 Slong

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 5

Short-run vs. long-run price adjustment

$ Q

10 20 30 40 50 60 10 20 30 40 50 60 70 80 90

D1 D2 Slong Sshort

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 6

Bottom line

Whatever the source of adjustment delays and costs: Adjustment delays and costs imply that supply adjusts less in the short run than in the long run—hence, prices are more volatile in the short run than in the long run.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 7

Interpreted as delays for entry

$ Q

10 20 30 40 50 60 10 20 30 40 50 60 70 80 90

D1 D2 Slong Sshort

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 8

Price and capacity dynamics in a competitive industry

• (Courtesy of David Besanko.)

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 9

Bulk shipping

Bulk shipping: vessels designed to carry a homogeneous unpacked dry or liquid cargo, for individual shippers on non-scheduled routes.

• Common cargo: iron ore, grain, coal, bauxite, phosphates, steel,

cement, sugar, wood chips.

• “Taxis, not buses”. (Entire cargo belongs to one shipper.)
• 72% of world seaborn trade (by weight).

(Data is thanks to Myrto Kaloupsidi.)

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 10

Market structure

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 11

Shipping prices

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 12

Demand volatility

Maarket is characterized by demand volatility due to changing export patterns, macroeconomic cycles.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 13

Elasticity

1 Transportation costs are a small portion of total cost for most goods

(e.g. for gasoline $0.07 per gallon).

2 Few short-run substitutes. 3 Disruptions are costly:

• “Just-in-time” inventory models
• “Continuous-flow” refining

So what?

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 14

Demand volatility

Demand: inelastic and volatile + Supply: inelastic

⇓

Volatile prices

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 15

• 6. Applications of Perfect Competition

1.

✓

Market dynamics. 2.

➥

Simulation results.

• 3. Bagels and Cranberries (“Growth and Profitability”).

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 16

• 6. Applications of Perfect Competition

1.

✓

Market dynamics. 2.

✓

Simulation results. 3.

➥

Bagels and Cranberries (“Growth and Profitability”).

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 17

Bagels and Cranberries: Key ideas

When making entrepreneurial decision:

• 1. Understand exit and entry of competitors to determine:
• Do you have a long-term comparative advantage?
• Otherwise, will short-term gains justify entry? When to get out?
• 2. Remember: Growth does not guarantee profit if the growth is equally

well anticipated by the other potential entrants.

• 3. Distinguish between:
• Returns to a productive asset.
• Returns to entrepreneurial/organizational comparative advantage.

Why? To determine whether

• wner of asset ≡ entrepreneur/organization that uses the asset

is efficient.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 18

• 6. Applications of Perfect Competition

1.

✓

Market dynamics. 2.

✓

Simulation results. 3.

➥

Bagels and Cranberries (“Growth and Profitability”).

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 19

This week

(Wed) Session 7: Elasticity of demand

• Prep Guide 8.
• FPM Ch. 8.
• A demand estimation exercise to hand in.

(Fri) Session 8: Pricing with Market Power

• Prep Guide 7.
• FPM Ch. 7.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 20

Reminder: Next week you have …

… optional review and quiz.

Monday Tuesday Wednesday Thursday Friday Session 9 Review Quiz Session 10 –

Quiz covers only up through Session 8.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 6 • Applications of Perfect Competition Slide 21