Econ 15 - Cite as Chia-Hui Chen course materials for 14.01...

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Unformatted text preview: Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 1 1 Profit Maximization 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 19, 2007 Lecture 15 Short Run and Long Run Supply Outline 1. Chap 8: Profit Maximization 2. Chap 8: Short Run Supply 3. Chap 8: Producer Surplus 4. Chap 8: Long Run Competitive Equilibrium 1 Profit Maximization For perfect competition in a product market, we make some assumptions: • Price taking: either individual firms or consumers cannot affect the price. • Product homogeneity: product of all firms are perfect substitutes. • Free entry and exit: no special cost to enter or exit the market. Firms choose the level of output to maximize their profits. Profit equals total revenue minus total cost, namely π ( q ) = R ( q ) − C ( q ) = P ( q ) q − C ( q ) . To maximize the profit, the following condition must hold: dπ ( q ) dR dC = − = MR ( q ) − MC ( q ) = 0 , dq dq dq and thus MR ( q ) = MC ( q ) ....
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Econ 15 - Cite as Chia-Hui Chen course materials for 14.01...

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