14-Competitive Firm

14-Competitive Firm - behavior in deciding how much to...

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1 Profit Maximization: A Competitive Firm Reading: Chapter 8
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2 How Much Output to Produce? To pick profit-maximizing level of output, a firm must consider: its cost function how much it can sell at a given price: depends on market demand and market structure : number of firms in the market ease of entry and exit firm’s ability to differentiate its product from its rivals’ products
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3 Perfect Competition 1. Consumers believe that all firms sell identical (homogeneous) products 2. Firms freely enter and exit the market (large number of firms in the market) 3. Buyers and sellers know the prices charged by firms 4. Transaction costs are low If these 4 conditions hold, each firm is a price taker : firm cannot affect market prices by changing its individual output
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4 Meaning of “Competitive Firms” To most people: firms that are rivals for the same customers To economists: firms that are price-takers competitive firm ignores individual rival’s
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Unformatted text preview: behavior in deciding how much to produce Since the output of a competitive firm does not affect the market price, it faces a horizontal demand curve. 5 General Profit Maximization Profit = Total Revenue - Total Cost Solution: produce where marginal revenue is equal to marginal cost Graphically: profit is maximized where slopes of the R(q) and C(q) curves are equal max ( ) ( ) ( ) q q R q C q = -( ) ( ) MR q MC q = 6 General Profit Maximization Cost, Revenue, Profit ($s per year) Output C(q) R(q) A B (q) q q* Profits are maximized where [R(q) C(q)] is maximized 7 Profit Maximization: Competitive Firm Price-taking firm: faces horizontal market demand (its sales have no effect on the market price) AR = MR = P For a perfectly competitive firm, profit maximizing condition is ( ) ( ) q Pq C q = -( ) P MC q =...
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14-Competitive Firm - behavior in deciding how much to...

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