nlecture11 - profits - slides

nlecture11 - profits - slides - 2/9/2009 Topic 5:...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
2/9/2009 1 Topic 5: Production (3) USC Marshal Profit maximization and competitive supply Profit maximization • Once the firm knows what is the minimum cost of producing any given quantity of output, the firm can then choose the output level that maximizes profits, which allows us to derive the supply curve USC Marshal • Profit, Π (Q), is simply the total revenue that the firm earns from selling its product minus the cost of production: Q TR Q TC Q Profit maximization • Recall that we have already dealt with the profit- maximization problem for a firm with an assumed cost function that controls the whole supply MR(Q) = MC(Q) • Exactly the same logic applies when considering USC Marshal pricing by a firm that is not a sole supplier. – The only difference is that now instead of using the industry demand to derive the total revenue, we use the residual demand curve faced by that particular firm
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2/9/2009 2 Profit maximization • Further, we now have microfoundations for the cost function: – Where do costs come from? • Firms employ inputs to minimize their costs of production Shor run versus long run USC Marshal – Short-run versus long-run • And we can take the analysis further: – Firm and industry supply functions under perfect competition Perfect competition: the number of suppliers is “large” • Next term – imperfect competition in detail Profit maximization • Recall that the total revenue was defined as P(Q)*Q – This continues to hold when there are multiple suppliers – The difference is that P(Q) is now the residual USC Marshal demand curve faced by that particular firm • How is the demand for my particular product affected by the price I charge • P(Q) is going to be more elastic than the industry demand curve • And how elastic, depends on the number and closeness of competitors – Substitution across firms Profit maximization Marginal revenue: dTR(Q)/dQ • Change in total revenue from an incremental increase in output TR Q P Q Q MR Q dTR Q dQ P Q dP Q dQ Q USC Marshal –Marginal revenue: price received for the marginal unit minus the reduction in revenue earned on the inframarginal units because of the reduction in price needed to sell that marginal unit
Background image of page 2
2/9/2009 3 Profit maximization P loss in revenue on Q* units resulting from the reduction in price needed to sell the extra Δ Q units
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/07/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

Page1 / 11

nlecture11 - profits - slides - 2/9/2009 Topic 5:...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online