Ch08_Pindyckfinal

Ch08_Pindyckfinal - Chapter 8 Profit Maximization and...

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Chapter 8 Profit Maximization and Competitive Supply
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Dr. Carlos Asarta Chapter 8 2 Perfectly Competitive Markets The model of perfect competition can be used to study a variety of markets Basic assumptions of Perfectly Competitive Markets 1. Price taking 2. Product homogeneity 3. Free entry and exit
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Dr. Carlos Asarta Chapter 8 3 When are Markets Competitive? Few real products are perfectly competitive Many markets are, however, highly competitive They face relatively low entry and exit costs Highly elastic demand curves
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Dr. Carlos Asarta Chapter 8 4 Marginal Revenue, Marginal Cost, and Profit Maximization We can study profit maximizing output for any firm, whether perfectly competitive or not Profit ( π ) = Total Revenue - Total Cost If q is output of the firm, then total revenue is price of the good times quantity Total Revenue (R) = Pq
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Dr. Carlos Asarta Chapter 8 5 Marginal Revenue, Marginal Cost, and Profit Maximization Costs of production depends on output Total Cost (C) = C(q) Profit for the firm, π , is difference between revenue and costs ) ( ) ( ) ( q C q R q - = π
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Dr. Carlos Asarta Chapter 8 6 Profit Maximization – Short Run 0 Cost, Revenue, Profit ($s per year) Output C(q) R(q) A B π (q) q 0 q* Profits are maximized where MR (slope at A) and MC (slope at B) are equal Profits are maximized where R(q) – C(q) is maximized
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Dr. Carlos Asarta Chapter 8 7 Marginal Revenue, Marginal Cost, and Profit Maximization Profit is maximized at the point at which an additional increment to output leaves profit unchanged MC MR MC MR q C q R q C R = = - = = - = - = 0 0 π
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Dr. Carlos Asarta Chapter 8 8 The Competitive Firm Demand curve faced by an individual firm is a horizontal line Firm’s sales have no effect on market price Demand curve faced by whole market is downward sloping Shows amount of goods all consumers will purchase at different prices
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Dr. Carlos Asarta Chapter 8 9 The Competitive Firm d $4 Output (bushels) Price $ per bushel 100 200 Firm Industry D $4 Price $ per bushel Output (millions of bushels) 100
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Dr. Carlos Asarta Chapter 8 10 The Competitive Firm The competitive firm’s demand Individual producer sells all units for $4 regardless of that producer’s level of output MR = P with the horizontal demand curve For a perfectly competitive firm, profit maximizing output occurs when AR P MR q MC = = = ) (
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Dr. Carlos Asarta Chapter 8 11 q 2 A Competitive Firm 10 20 30 40 Price 50 MC AVC ATC 0 1 2 3 4 5 6 7 8 9 10 11 Output q * AR=MR=P A q 1 : MR > MC q 2 : MC > MR q*: MC = MR q 1 Lost Profit Lost Profit
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Dr. Carlos Asarta Chapter 8 12 A Competitive Firm – Positive Profits 10 20 30 40 Price 50 0 1 2 3 4 5 6 7 8 9 10 11 Output q 2 MC AVC ATC q * AR=MR=P A q 1 D C B Profits are determined by profit per unit times quantity Profit per unit = P-ATC(q*) = A to B Total Profit = ABCD
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Chapter 8
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This document was uploaded on 11/29/2009.

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Ch08_Pindyckfinal - Chapter 8 Profit Maximization and...

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