slides5 - Perfect competition ECG 507 Professor Allen...

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Perfect competition ECG 507 Professor Allen 9/15/05
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1. Profit Maximization Determining the profit maximizing level of  output Profit =      = Total Revenue - Total Cost Total Revenue =  Pq Total Cost =  C(q) Therefore: π ) ( ) ( ) ( q C q R q - =
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2. Profit Maximization As firm expands q, TR increases with units sold But TR increases at a decreasing rate because  prices have to be cut to generate extra sales  TC increases at an increasing rate because of  law of diminishing marginal returns Expand as long as extra TR > extra TC
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3. Profit Maximization Maximize Π when d Π /dq = 0 = q(dp/dq) + p(q) – dC/dq q(dp/dq) + p(q) = MR(q) dC/dq = MC(q) At q*, MR(q) = MC(q)
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4. Practical considerations Firms do not calculate MR, MC at such a  fine level of detail.  Focus on hours,  staffing levels, overtime, orders accepted  vs. declined Careful using AVC as estimate of MC Model is fairly general.  Applies when MC  constant, MC zero, and P constant
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5. Output decision of competitive firm Output 10 20 30 40 Price ($ per unit) 0 1 2 3 4 5 6 7 8 9 10 11 50 60 D AR=MR=P MC Lost profit for q q < q * q 0 q * Lost profit for q 2 > q * q 1 : MR > MC and q 2 : MC > MR and q 0 : MC = MR but MC falling q 1 q 2
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6. A Competitive Firm
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slides5 - Perfect competition ECG 507 Professor Allen...

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