PrefaceThe difference in market structure determines the pricing and production decisions of enterprises operating in these markets. For example, if your local gas station increases its petrol price by 20%, it will find that its sales have dropped sharply. Its customers will soon turn to other gas stations to buy petrol. In contrast, if your local water company increases the water price by 20%, it will find that the water sales are only slightly reduced. In this section we will look at the behavior of competitive companies (such as your local gas stations). You may remember that if every buyer and seller is less than the size of the market and thus has little ability to influence market prices, then the market is competitive. On the contrary, if an enterprise can influence the market price of the goods it sells, we say that the enterprise hasMarket Forces。
What is a competitive market
the meaning of competition
Competitive Markets (competitive market)Sometimes called a fully competitive market, it has two characteristics:
- There are many buyers and many sellers on the market.
- The items supplied by each seller are generally the same
As a result of the above conditions, the behavior of any buyer or seller on the market will be negligible. In the competitive market, buyers and sellers must accept the price determined by the market and thus be calledPrice Recipients。 The following third condition is sometimes used as a characteristic of a fully competitive market:
- Companies are free to enter or exit the market
Many times, the analysis of competitive enterprises does not require the assumption of free entry and exit. But as said later, if there is free entry and exit in the competitive market, then this is a powerful force to achieve long-term equilibrium.
the profits of competitive enterprises
average return (average revenue)Is total revenue divided by yield. The average yield tells us how much the business has benefited from a common unit of sales. This illustrates a general conclusion that applies not only to competitive enterprises but also to other enterprises: the average return is total income (PXQ) divided by Production (Q). Therefore, for all enterprises, the average return is equal to the price of the item.
marginal income (marginal revenue)Is the amount of total revenue change resulting from the sales of each additional unit. The result illustrates a conclusion that applies only to competitive companies: Total revenue is PXQ, and P is fixed for competitive companies. Therefore, when Q increases by one unit, the total gain is increased by P $. For competitive enterprises, marginal income equals the price of an item.
maximization of profits and supply curve of competitive enterprises
marginal cost curve and Enterprise's supply decisionAs a cost graph. This figure has three features that describe most enterprises: the marginal Cost curve (MC) is tilted to the right, the average total cost curve (ATC) is U-shaped, and the marginal cost curve intersects the average total cost curve at the lowest point of the average total cost curve. The graph also shows that the market price (P) is a horizontal line. For a competitive enterprise, the price of an enterprise product is equal to its average income (AR) and its marginal income (MR).
Whether the business starts at a low production level (for example, Q1) or from a high production level (such as Q2), the enterprise eventually has to adjust to a yield of up to Qmax. This analysis gives the three general rules for maximizing profits:
- If the marginal income is greater than the marginal cost, the enterprise should increase its production.
- If the marginal cost is greater than the marginal income, the enterprise should reduce its output.
- Marginal income and marginal cost are exactly equal at the level of production at which the profit is maximized.
These laws are the key to making rational decisions for a profit maximization enterprise. They are not only applicable to competitive enterprises, but also to other enterprises. In essence, because the enterprise's marginal cost curve determines the amount of goods the enterprise is willing to supply at any one price, the marginal cost curve is also the supply curve of the competitive enterprise.
Short-term business decision-making for enterprisesIn some cases, the business will decide to stop business and not reproduce anything at all. We need to differentiate between the suspension of business and the permanent exit of the business.Stop BusinessShort-term decisions that do not produce anything at a particular time due to current market conditions.ExitA long-term decision to leave the market. Long-term decisions are different from short-term decisions because most businesses cannot avoid their fixed costs in the short term and can avoid them in the long run. That said, businesses that are temporarily closed still have to pay fixed costs, while companies that exit the market can save on variable costs while saving on fixed costs. Now let's consider what determines the business decision to stop business. If a business ceases to operate, it loses the full benefit of selling its own products. At the same time, it saves the variable cost of producing its products (but still has to pay a fixed cost). Therefore, if the yield of production is less than the variable cost of production, the business will cease to operate. Using a bit of mathematical knowledge can make this stop-business standard more useful. If the TR represents the total revenue, the VC represents the variable cost, then the decision of the enterprise can be written as: If tr < VC, stop business If the total revenue is less than the variable cost, the business will cease to operate. This equation is divided by the yield Q, we can write it as: &NB Sp If tr/q < vc/q, the left of the business Inequality tr/q is the total yield pxq divided by the yield Q, that is, the average return, the simplest is expressed by the price p. The right side of the inequality vc/q is the average variable cost AVC. Therefore, the standard for business to be closed is: &NB Sp If P < AVC, stop business that is to say, if the price of the item is lower than the average variable cost of production, the company will opt out of business. This standard is intuitive: when choosing whether to produce, the enterprise will compare the price of a common unit of products.And the average variable cost that must be caused by the production of this unit of product. If the price does not compensate for the average variable cost, the enterprise completely stops production, the situation will be better. The company will lose some money (because it still has to pay a fixed cost), but if it continues to operate, it will lose more money. If conditions change in the future so that the price is greater than the average variable cost, the enterprise can reopen. Now we fully describe the profit maximization strategy of competitive enterprises. If an enterprise produces something, it will produce production that makes marginal costs equal to the price of the goods. But if the price is lower than the average variable cost of the production, then the business will be better off without any production. Illustrate these conclusions.The short-term supply curve of competitive enterprises is that part of the marginal cost curve on the average variable cost curve。
spilt and other sunk costsWhen a cost has occurred and is not recoverable, economists say, the cost is
sunk costs (sunk cost)。 Because sunk costs cannot be recovered, the sunk costs can be taken into account when you make various social decisions, including your business strategy. Our analysis of the business decision to stop business is an example of the sunk cost independence. We assume that an enterprise cannot recover its fixed costs by temporarily shutting down. This means that, regardless of the quantity of supply, even if the output is zero, the enterprise still has to pay its fixed cost. Therefore, in the short term the fixed cost is sunk cost, the enterprise can not consider when deciding how much to produce.
long-term decision-making for an enterprise to exit or enter a marketThe long-term decision to exit a market is similar to the decision to stop business. If the enterprise exits, it loses all the proceeds from the sale, but it now saves not only the variable cost of production but also the fixed cost. Therefore, if the profit from production is less than its total cost, the enterprise should withdraw from the market. In a similar way as above, the exit criteria are: if P < ATC, the exit means that if the price of the item is less than the average total cost of production, the Enterprise chooses to quit. If the opposite, you can enter or keep. Now we explain the long-term profit maximization strategy of competitive enterprises. If the enterprise is in the market, it will produce production that makes marginal costs equal to the price of the goods. However, if the price is lower than the average total cost of the production, the Enterprise will opt out (or not enter) the market.the long-term supply curve of a competing enterprise is the part of the marginal cost curve that lies above the average total cost curve.
using competitive enterprise graphs to measure profitsWhen we analyze exit and enter, it is helpful to analyze the profit of the enterprise in more detail. Recall that profit equals total revenue (TR) minus total cost (TC): Profit = TR-TC we can multiply and divide this definition by the right-hand side of the formula: Profit = (tr/q-tc/q) x Q But note that tr/q is the average benefit, it is also the price p, while tc/q is the average total cost of ATC. Therefore, Profit = (P-ATC) x Q indicates that there is a positive profit in the enterprise:
is a loss-making enterprise:
supply curve of competitive marketWe have examined the supply decisions of individual enterprises, and now we are going to discuss the supply curve of the market. We have to consider two cases: first, to examine the market with a fixed number of enterprises, and second, to examine the number of enterprises will be with the old enterprise exit and new enterprises into the market change. Both of these situations are normal, because the two cases apply to two specific time frames, respectively. In the short term, it is often difficult for companies to enter and exit the market, so the assumption that the number of firms is fixed is appropriate. However, in the long term, the number of enterprises can be adjusted with market conditions change.
Short Term: market supply of a fixed number of enterprisesFirst consider a market with 1000 companies of the same business. Each enterprise's marginal cost curve rescues its supply curve. The market supply equals the sum of the supply of 1000 individual enterprises.
Long-term: market supply with entry and exitNow let's examine what happens if a business can enter or exit the market. We assume that everyone has access to the same technology that produced the item and can enter the same market to buy the inputs needed for production. Therefore, all enterprises and all potential enterprises have the same cost curve. The decision to enter and exit this type of market depends on the incentives faced by existing business owners and entrepreneurs who can start new businesses. If the existing enterprises in the market profit, the new enterprise will have to enter the market incentives. This kind of entry will increase the number of enterprises, increase the supply of goods, and make the price drop, profit reduction. Conversely, if companies in the market have losses, some existing companies will exit the market. Their exit will reduce the number of businesses, reduce the supply of goods, and make prices rise and profits increase.at the end of this process of entry and exit, the economic profits of companies still remaining in the market must be zero. Recall that we can write corporate profits as: Profit = (P-ATC) x Q Therefore, in the process of entering and exiting, the price and the average total cost are pushed to equal. This analysis has an astonishing meaning. In this case, the marginal cost will be equal to the average total cost if the competitor chooses to maximize the profit by choosing the output that makes the price equal to the marginal cost. However, the marginal cost and the average total cost are equal only when the enterprise is operating at the lowest average total cost. In retrospect, the lowest average total cost of production is called EnterpriseEffective Scale。 SoIn the long-term equilibrium of the competitive market, which is free to enter and exit, the enterprise must operate on its effective scale .。 The following (a) figure shows an enterprise in this long-term equilibrium. In this picture, the price p equals the marginal cost MC, so the enterprise realizes the profit maximization. The price is also equal to the average total cost of ATC, so the profit is zero. The new enterprise does not have the incentive to enter the market, the existing enterprise also does not leave the market incentive. Based on this analysis of business behavior, we can determine the long-term supply curve of the market. In a market that is free to enter and exit, only one price is consistent with 0 profit, which is equal to the lowest average total cost of the price. Therefore, the long-term market supply curve is necessarily the horizontal line of this price, as shown in the following (b) figure.
If competitive profits are zero, why should they stay on the marketTo better understand the 0 profit situation, recall that profit equals total revenue minus total cost, while total cost includes all opportunity costs of the enterprise. In particular, the total cost includes the cost of the business owner's time and money for the operation. In the 0 profit balance, the enterprise's earnings must be able to compensate the owner of the above opportunity cost. Consider an example. Suppose that in order to start a farm, a farmer will invest $1 million. If he did not, he could deposit the money in the bank and earn an interest of $50,000 a year. In addition, he must give up another job that can earn $30,000 a year. In this way, the opportunity cost of farmers ' farming includes the interest he could have earned, including the wages he gave up, totalling $80,000. Even if his profit is zero, the gains he gets from running the farm make up for his opportunity costs. According to the previous theory, rational people will choose the most profitable industry for themselves, then if the choice is a completely competitive industry, then the same as his choice of the industry, the highest profits are the same, the industry has made up for their opportunity cost, they are standing on the same floor of the people.
demand movement in the short and long termAlthough in the long run, the enterprises in the competitive market can not get profit. But in the short term, this happens, when demand increases, some companies get profits, and then more companies join in, the price decreases and returns to 0 of profit. When demand is reduced, some companies start to lose money, and then many companies leave the market, prices rise, and return to 0 profit.
Why the long-term supply curve tilts to the rightThere are two reasons why a long-term supply curve that looks like a fully competitive market may tilt the top right. The first reason is that some of the resources used for production may be limited. Consider, for example, the agricultural market. Any person can choose to buy land and engage in agriculture, but the amount of land is limited. As more and more people become farmers, the price of agricultural land has risen sharply, which has increased the cost of all farmers in the market. Therefore, the increase in demand for agricultural products can not increase the cost of farmers without increasing the supply, which means that prices will rise. As a result, the long-term market supply curve is tilted to the right, even in the case where agriculture is free to enter. The second reason that the supply curve is tilted to the right is that different companies may have different costs. For example, consider a painter market. Anyone can enter the paint labour market, but not everyone has the same cost. The cost is different partly because some people work faster than others, partly because some people have better public options than others. At any given price, those with low costs are more likely to enter the market than those who have high costs. In order to increase the supply of paint services, additional entrants must be encouraged to enter the market. As these new entrants are expensive, prices must rise to make markets profitable for these people. Thus, even in the case where markets are free to enter, the long-term market supply curve for paint services is tilted to the right. It is important to note that if companies have different costs, some companies can even profit in the long run. In this case, the market price represents the marginal enterprise-the average total cost of an enterprise that exits the market if the price has any drop. Although the long-term supply curve is likely to tilt to the right, our basic conclusion is the same:long-term supply curves are generally more resilient than short-term supply curves, as companies are more likely to enter and exit in the long term than in the short term.。
Microeconomics (14): Corporate Behavior and industrial organization-enterprises in the competitive market
