PAM_2000_Fall_2008_Chapter_8 - Title: Cover of the Rolling...

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

View Full Document Right Arrow Icon
1 • Title: Cover of the Rolling Stone • Artist: Dr. Hook and the Medicine Show • Economic concept: firm objectives (profit, fame) • Representative lyrics: Well we are big rock singers, we've got golden fingers And we're loved everywhere we go We sing about beauty and we sing about truth At ten thousand dollars a show… We got all the friends that money can buy So we never have to be alone And we keep getting richer but we can't get our picture On the cover of the Rolling Stone PAM 200: Intermediate Microeconomics Prof. John Cawley Chapter 8: Competitive Firms and Markets
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 Where We Are Consumer Theory Individual Demand Market Demand Theory of Production Costs of Production Perfect Competition Imperfect Competition: Monopoly Monopolistic Competition Oligopoly Prices General Equilibrium Market Imperfections Factor Markets Strategy Game Theory Outline • Perfect Competition • Profit Maximization • Competition in the Short Run • Competition in the Long Run • Zero Profit for Competitive Firms in the Long Run
Background image of page 2
3 Perfect Competition 1. Firms sell identical products 2. Free entry and exit of firms 3. Perfect information about prices 4. Transaction costs are low If all four are true, then firms are price takers: cannot affect price Face horizontal demand curve Can sell as much as they like at market price Behavior of rival firms does not affect output decision AVC ATC=AVC+AFC MC P=D 0 Short-Run Cost Curves of a Firm in a Perfectly Competitive Market Price Costs Quantity of Output
Background image of page 3

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

View Full DocumentRight Arrow Icon
4 Why Study Perfect Competition? • Is applicable in many markets: – Agricultural commodities – Stock exchanges • Is also a benchmark from which can deviate later – Monopoly: not a price taker but a price setter – Oligopoly: each firm affected by rivals’ actions; strategic behavior – Market imperfections: poor information, transaction costs Profit Maximization • Firms choose output in order to maximize profits where • Recall: costs include opportunity costs () qR q C q π =−
Background image of page 4
5 Profit Maximization (cont.) To maximize profits, firms determine: 1. If firm produces, what output q* maximizes profit / minimizes loss? 2. Is it more profitable to set output at q* or 0? Output of 0 corresponds to shutting down Rules for Choosing Profit- Maximizing Output 3 Equivalent rules to determine profit-maximizing (loss-minimizing) output: 1. Set output where profit is maximized At output corresponding to peak of profit curve 2. Set output where marginal profit is zero 3. Set output where marginal revenue = marginal costs 0 q π Δ = Δ 0 RC R C qqq qq ΔΔ Δ =−= →= ΔΔΔ
Background image of page 5

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

View Full DocumentRight Arrow Icon
6 Maximizing Profit by Choosing Quantity of Output π Profit Δπ > 0 < 0 q * Q, Quantity Profit 1 1 π * 0 Competition in the Short Run • Profit-maximizing competitive firm produces output such that: –MC=MR – Note that in a competitive market, MR=price – So firm produces where MC=P
Background image of page 6
7 How a Competitive Firm Maximizes Profit π * π * π =R-C Cost, C Revenue, R e Q* P=MR π * ATC MC Q* Per Unit Price, Cost Total Cost, Revenue, Profit Q Q
Background image of page 7

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

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 27

PAM_2000_Fall_2008_Chapter_8 - Title: Cover of the Rolling...

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

View Full Document Right Arrow Icon
Ask a homework question - tutors are online