Lecture_10_final

Lecture_10_final - Lecture 10 Chapter 8 : Profit...

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Lecture 10 Chapter 8 : Profit Maximization and Competitive Supply
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Roadmap Perfectly Competitive Markets Profit Maximization Marginal Revenue, Marginal Cost, and Profit Maximization Choosing Output in the Short Run
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Roadmap – Ctd. The Competitive Firm’s Short-Run Supply Curve Short-Run Market Supply Choosing Output in the Long Run The Industry’s Long-Run Supply Curve
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I. Perfectly Competitive Markets The model of perfect competition can be used to study a variety of markets Basic assumptions of Perfectly Competitive Markets 1. Price taking ( suppliers , consumers) 2. Product homogeneity (all products are the same) 3. Free entry and exit 4. [Perfect Information]
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Perfectly Competitive Markets 1. Price Taking Individual firm sells a very small share of the total market output and cannot influence market price Each firm takes market price as given – price taker The individual consumer buys too small a share of industry output to have any impact on market price. No Monopoly or Monopsony.
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Perfectly Competitive Markets 1. Product Homogeneity The products of all firms are perfect substitutes E.g. agricultural products, oil, copper, iron, lumber In contrast to product differentiation: Heterogeneous products, such as brand names, can charge higher prices because they are perceived as better Quality differences
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Perfectly Competitive Markets 1. Free Entry and Exit When there are no special costs that make it difficult for a firm to enter (or exit) an industry Buyers can easily switch from one supplier to another Suppliers can easily enter or exit a market Pharmaceutical companies are not perfectly competitive because of the large costs of R&D required as well as marketing expenses.
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When are Markets Competitive? Few real products are perfectly competitive Many markets are, however, highly competitive They face relatively low entry and exit costs Highly elastic demand curves No rule of thumb to determine whether a market is close to perfectly competitive, estimates of elasticity of demand are informative however. Theoretical concept to analyze a limiting case
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Profit Maximization Do firms maximize profits? Managers in firms may be concerned with other objectives Revenue maximization Revenue growth Dividend maximization Short-run profit maximization (due to bonus or share options) could be at expense of long run profits
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Profit Maximization Implications of non-profit objective Over the long run, investors would not support the company Without profits, survival is unlikely in competitive industries Managers have constrained freedom to pursue goals other than long-run profit maximization Evolutionary versus Rationality arguments for profit maximization.
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Marginal Revenue, Marginal Cost, and Profit Maximization We can study profit maximizing output for any firm,
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This note was uploaded on 05/24/2008 for the course ACC 203 taught by Professor Choi during the Spring '08 term at NYU.

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Lecture_10_final - Lecture 10 Chapter 8 : Profit...

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