S2 ECO 511 Slides Session 2-3-4 Static and Dynamic Competition.pptx - MEDITERRANEAN SCHOOL OF BUSINESS COURSE ECO 511 BUSINESS ECONOMICS PROFESSOR Alec

S2 ECO 511 Slides Session 2-3-4 Static and Dynamic Competition.pptx

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MEDITERRANEAN SCHOOL OF BUSINESS COURSE: ECO 511 BUSINESS ECONOMICS 1 11/15/18 SOUTH MEDITERRANEAN UNIVERSITY PROFESSOR: Alec Hansen, Ph.D. DATE: October 2018
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SESSION 2 REVIEW OF STATIC COMPETITION DYNAMIC COMPETITION MARKET CONCENTRATION GAME THEORY COURNOT EQUILIBRIUM 2
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Firms’ Decisions 3 Profit maximizing behavior The total revenue and total cost approach The marginal revenue and marginal cost approach Short-run: shut down rule Long-run: exit rule
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Total Revenue 4 The total inflow of receipts from selling a given amount of output Each time the firm chooses a level of output, it also determines its total revenue Why? Total revenue—which is the number of units of output times the price per unit—follows automatically TR = P x Q
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The Total Revenue And Total Cost Approach 5 At any given output level, we know How much revenue the firm will earn Its cost of production In the total revenue and total cost approach, the firm calculates Profit = TR – TC at each output level Selects output level where profit is greatest
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The Marginal Revenue and Marginal Cost Approach 6 Marginal Cost: change in total cost from producing one more unit of output Marginal revenue: change in total revenue from producing one more unit of output The GOLDEN RULE OF ECONOMICS TO MAXIMIZE PROFIT, SET QUANTITY WHERE MR=MC
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The Marginal Revenue and Marginal Cost Approach 7 When a firm faces a downward sloping demand curve, each increase in output causes Revenue gain From selling additional output at the new price Revenue loss From having to lower the price on all previous units of output Marginal revenue is therefore less than the price of the last unit of output
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Using MR and MC to Maximize Profits 8 Marginal revenue and marginal cost can be used to find the profit-maximizing output level Logic behind MC and MR approach An increase in output will always raise profit as long as marginal revenue is greater than marginal cost (MR > MC) Converse of this statement is also true An increase in output will lower profit whenever marginal revenue is less than marginal cost (MR < MC) Guideline firm should use to find its profit-maximizing level of output Firm should increase output whenever MR > MC, and decrease output when MR < MC
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Profit Maximization 9 Total Fixed Cost TC TR TR from producing 2nd unit TR from producing 1st unit Profit at 3 Units Profit at 5 Units $3,500 3,000 2,500 2,000 1,500 1,000 500 Output Dollars 1 2 0 3 4 5 6 7 8 9 10 Profit at 7 Units
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Profit Maximization 10 profit rises profit falls MC MR 0 600 500 400 300 200 100 –100 –200 Output Dollars 1 2 3 4 5 6 7 8
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Exercise Demand: Q = 100 – P Costs: MC = AC = 10 Hence P = 100 – Q Revenue: R = PQ = (100 -Q) Q MC = AC = 10 implies that costs are C = 10 Q Profit: Π = R-C = (100-Q)Q -10 Q = (100Q -Q 2 )-10Q Want to find Q* (and therefore P*) that maximizes Π 12
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Solution Profit: Π = (100Q -Q 2 ) -10Q Take derivative: d Π/dQ = (100 -2Q) – 10 [ = MR – MC ] Profits are maximized where dΠ/dQ = 0 (100 -2Q) – 10 = 0 [MR – MC = 0] Q* = 45 Insert profit-maximizing value of Q into demand equation: P* = 100 - Q = 55 13
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Profit Maximization by Monopoly MC curve crosses MR curve from below 14 E MR 10,000 MC D 30,000 40 $60
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