econ111_lecture9_10 - Econ 111 Microeconomics Spring 2009...

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1 Econ 111 Microeconomics Spring 2009 Lecture 9-10 (Chapter 8: Profit Maximization and Competitive Supply) Heiwai Tang
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2 Agenda Attributes of perfectly competitive markets? In perfectly competitive markets Short-run profit maximization (MC = MR = P) Short-run competitive supply curve Long-run profit maximization Long-run competitive supply curve Constant-cost supply curve Increasing-cost supply curve
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3 In perfectly competitive markets, firms take prices as given Bottom line : an individual firm sells products or services in the market that are too small in quantity to influence market prices. Each firm takes market price as given – price taker (as prices are unaffected by firm sales). Similarly, each individual consumer buys too small a share of industry output to have any impact on market price
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4 Product homogeneity - an essential attribute of perfectly competitive markets The products of all firms in a perfectly competitive market are perfect substitutes. It implies (requires) that product quality is relatively similar as well as other product characteristics. Real world examples: Agricultural products (oil, sugar, salt); Raw materials (copper, iron, lumber) Once a firm acquires “branding”, it can charge a different price than the market price because of the perceived quality differences.
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5 Free Entry and Exit – an outcome observed in perfectly competitive markets Free entry and exit happen when 1. There is no special costs that make it difficult for a firm to enter (or exit) an industry. 2. Buyers can easily switch from one supplier to another Counter-example: Pharmaceutical companies are not perfectly competitive because of high costs of R&D, etc.
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6 Demand curves facing the competitive firm is flat d $4 Output Price $ per bushel 100 200 Firm Industry D $4 Price $ per bushel Output 100K But the market demand is still downward-sloping.
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7 Do firms maximize profits? In reality, we may observe that firms are concerned with other objectives Revenue maximization Revenue growth Dividend maximization The above are often just short-run paths to long run profits. Without long run profits, survival is doubtful. Sometimes, managers seek short-run profits at the expense of long run profits because of incentives provided in their contracts (e.g. investment banks?).
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8 Profits and Profit Function Costs of production is a function of output (the ultimate goal of Chapter 7) Total Cost can be expressed by the cost function -- C(q) Profit for the firm = revenue – cost Profit function of the firm π (q) = max (R(q) – C(q))
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9 Profit Maximization: When Marginal Revenue = Marginal Cost Profit maximization: π (q) = max (R(q) – C(q)) Æ Solutions: MR(q) - MC(q) = 0 In a perfectly competitive market R(q) = P × q, where P is the market price MR = P in a perfectly competitive market Thus, for a perfectly competitive firm, profit maximizing output occurs when MC = MR = P = AR
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econ111_lecture9_10 - Econ 111 Microeconomics Spring 2009...

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