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Break-even price is the minimum average total cost.
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Costs and Production in the Short Run
Price, cost of bushel $30 Minimum average total cost 18 Break even price C 14
1. The number of producers in the market (one, few, or many)
2. Whether the goods are identical or differentiated.
Differentiated goods are goods that are different but considered somewhat substitutable by consumers (think Coke versus Pepsi).
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Profitability and the Market Price: P= $18
Price, cost of bushel
Price=$18 Firm is profitable because price exceeds the breakeven price, $14. Optimal output choice is (E) output of 5 bushels.
Minimum average total cost E
MC
$18 14.40 14 Break even price
MR=P Profit
C
Z
ATC
0
1
2
3
4
5
6
7
Quantity of tomatoes (bushels)
The vertical distance between E and Z: per unit profit $18.00 − $14.40 = $3.60

A price-taking consumer is a consumer whose actions have no effect on the market price of the good he or she buys. A perfectly competitive market is a market in which all market participants are price-takers.
MC
ATC
MR=P
0
1
2
3
4 Minimum-cost output
5
6
7 Quantity of tomatoes (bushels)
At point C: MC cuts the ATC curve at its minimum. Minimum average total cost is equal to the firm’s break-even price $14. The farm’s optimal output choice is (C) output of 4 bushels.
Monopolistic competition
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Perfect Competition
Price-takers cannot affect the market price (don’t have market power).
A price-taking producer is a producer whose actions have no effect on the market price of the good it sells.
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Types of Market Structure
Are Products Differentiated? No Yes
One
How Many Producers Are There? Few
Monopoly
Not applicable
Oligopoly
Many
Perfect competition

If MR < MC

produce less.
Producing one more unit generates a net loss.

If MR = MC
Optimal quantity!
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The Optimal Output Rule

The optimal output rule:
Total profit:5 × $3.60 = $18.00
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Profitability and the Market Price : P= $10
Price, cost of bushel
P=$10: Firm is unprofitable because the price is below the break even price, $14. The farm’s optimal output choice is (A) output of 3 bushels.


Selling one more unit brings a marginal revenue of P.

A price-taking firm’s profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to the market price.

A good is a standardized product, when consumers regard the products of different producers as the same good.
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Free Entry and Exit

A third condition is often satisfied as well: free entry and exit into and from the industry. New producers can easily enter into or leave that industry. Free entry and exit ensure that:
chapter:
13
>> Perfect Competition and The Supply Curve
Krugman/Wells
©2009 Worth Publishers
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Types of Market Structure

In order to develop principles and make predictions about markets and how producers will behave in them, economists have developed four principal models of market structure:




the number of producers in an industry can adjust to changing market conditions, and, producers in an industry cannot artificially keep other firms out.
Minimum average total cost
MC
$14.67 14 Break even price 10
Y
ห้องสมุดไป่ตู้
ATC
C A
Loss
MR=P
0
1
2
3
4
5
6
7
Quantity of tomatoes (bushels)
The vertical distance between A and Y: per unit loss, $14.67 − $10.00 = $4.67 Total Loss:3 × $4.67 = approx. $14.00

If TR < TC, the firm incurs a loss.
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When Is Production Profitable? (Using Marginal Analysis )

If MR > MC

produce more.
Producing one more unit generates a net gain, so keep producing.
MC = P = MR
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The Price-Taking Firm’s Profit-Maximizing Quantity of Output
Price, cost of bushel
$24 20 Market 18 price 16 12 8 6
Optimal point E
MC
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When Is Production Profitable?

Profit = TR – TC
(P × Q) (ATC × Q)

If TR > TC, the firm is profitable. If TR = TC, the firm breaks even.


The break-even price of a price-taking firm is the market price at which it earns zero profits.

perfect competition
monopoly
oligopoly monopolistic competition
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Types of Market Structure
This system of market structures is based on two dimensions:

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Two Necessary Conditions for Perfect Competition 1) Perfectly competitive industry: contains many producers, none of whom have a large market share. 2) An industry can be perfectly competitive only if consumers regard the products of all producers as equivalent.
P = MR
The profitmaximizing point is where MC crosses MR curve (horizontal line at the market price).
0
1
2
3
4
5
6
Profit-maximizing quantity
7 Quantity of tomatoes (bushels)
MC = MR

Profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to its marginal revenue.
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Profit, Break-Even or Loss

Profit = TR – TC
(P × Q) (ATC × Q)
Divide both sides by Q: P - ATC

If TR > TC, the firm is profitable. P > minimum ATC. If TR < TC, the firm incurs a loss. P < minimum ATC. If TR = TC, the firm breaks even. P = minimum ATC.
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Marginal Analysis Leads to Profit-Maximizing Quantity of Output

The price-taking firm’s optimal output rule says that: MC = MR. For a price-taking firm: MR = P.