8 Competitive Markets - 8 COMPETITIVE MARKETS 10/2/2009...

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COMPETITIVE MARKETS 8 Econ 100A Mortimer 10/2/2009 1
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PROFIT MAXIMIZATION Do Firms Maximize Profit? Managers may be concerned with revenue maximization, revenue growth, or the payment of dividends to satisfy shareholders, or may even use rules of thumb. In any case, firms that do not come close to maximizing profit are not likely to survive. The assumption of profit maximization predicts business behavior reasonably accurately Econ 100A Mortimer 10/2/2009 2
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PROFIT MAXIMIZATION profit . Economic profit = sales revenue – economic cost π(q) = R(q) − C(q) marginal revenue Change in revenue resulting from a one-unit increase in output. General Profit Maximization Condition Chooses q *, so that the difference between revenue R and cost C , is maximized. Max π → dπ/dq = dR/dq − dC/dq = 0 MR( q ) = MC( q ) Econ 100A Mortimer 10/2/2009 3 $ q TC
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PERFECTLY COMPETITIVE MARKETS (1) price taking; (2) product homogeneity; and (3) free entry and exit. Econ 100A Mortimer Three basic assumptions of perfect competition: 10/2/2009 4
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PERFECTLY COMPETITIVE MARKETS Free Entry and Exit There are no special costs that make it difficult for a firm to enter (or exit) an industry. Econ 100A Mortimer Price Taking Firms Each firm’s decisions have no impact on market price because it sells a small portion of total market output. Product Homogeneity No firm can raise the price of its good if the products of all of the firms are perfectly substitutable with one another 10/2/2009 5
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DEMAND AND MARGINAL REVENUE Demand and Marginal Revenue for a Competitive Firm Econ 100A Mortimer P q P Q Industry Firm D 10/2/2009 6 P=AR=MR
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CHOOSING OUTPUT IN THE SHORT RUN The Short-Run Profit of a Competitive Firm: P* > SAC at q*
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8 Competitive Markets - 8 COMPETITIVE MARKETS 10/2/2009...

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