Microeconomics 31 Wednesday, November 15, 2006

# Microeconomics 31 Wednesday, November 15, 2006 - good MC =...

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Wednesday, November 15, 2006 Microeconomics WHEAT MARKET INDIVIDUAL FIRM (Farmer) P S P P* P* d D Q* Q A B C D q Key idea underlying the notion of perfect competition is that individual firms react to rather than influence The demand curve that the individual firm in a perfectly competitive market faces is perfectly elastic. It can sell all it wants at the market price. Just because the perfectly competitive firm can sell all it wants at the market price doesn’t’ meant the firm wants to produce as much as it can. As output rises, so do the firms costs. The firm wants to produce the amount that maximizes profit PROFIT MAXIMIZATION BY THE PERFECTLY COMPETITIVE FIRM PROFIT = TR –TC Marginal Revenue is the additional revenue received from selling an additional unit of a

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Unformatted text preview: good MC = ∆TR/∆q q P* TR MR \$2.50--1 \$2.50 \$2.50 \$2.50 2 \$2.50 \$5.00 \$2.50 3 \$2.50 \$5.00 \$2.50 For the perfectly competitive firm Marginal Revenue will always equal P* Wednesday, November 15, 2006 TR, TC APPROACH TO PROFIT MAXIMIZATION TC \$ TR Slope of TC = Slope of TR ∆TC ∆TR ∆q ∆q Marginal = Marginal Cost Revenue q1 q* q2 q Profits are Maximized at q*, the output level for which TR exceeds TC by the largest amount. Profit Maximization occurs where MC = MR and since MR = Price for the perfectly competitive firm, we also conclude that profits are maximized at P = MC. MARGINAL ANALYSIS APPROACH TO PROFIT MAXIMIZATION \$ MC P* P = MR q*...
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