slides5

# slides5 - Perfect competition ECG 507 Professor Allen 1...

This preview shows pages 1–8. Sign up to view the full content.

Perfect competition ECG 507 Professor Allen 9/15/05

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

View Full Document
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 - =
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

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

View Full Document
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)
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

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

View Full Document
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
6. A Competitive Firm

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 08/01/2008 for the course ECG 507 taught by Professor Allen during the Fall '05 term at N.C. State.

### Page1 / 26

slides5 - Perfect competition ECG 507 Professor Allen 1...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online