10 profits - Chapter 10 Profits, Prices and Cost Under...

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Chapter 10 Profits, Prices and Cost Under Competition
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A Basic Assumption: Firms maximize Profit Profit = Total Revenue – Total Costs Will vary with output (q)
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• Profits drive three important decisions: – What price to charge? – How many goods should firms produce and sell? – When should firms enter or exit an industry?
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Setting prices in an competitive market • Products sold by different suppliers are similar – Close or perfect substitutes • Many sellers and buyers – Or many POTENTIAL sellers and buyers • Sellers will be price takers – Must accept the market price
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“Nodding Donkey” oil pumps Produce ~10 barrels of oil / day Worldwide production of oil is 82 million barrels / day
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Firms in competitive industries are price takers
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Maximizing Profit • Marginal Revenue (MR) is the additional revenue from selling one more unit In Competitive Markets MR = Price • Marginal Cost (MC) is the additional cost from producing one more unit • So long as MR > MC, keep producing and selling units • When MR = MC, stop – Profit is maximized
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Maximizing Profit
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Maximizing Profit
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The profit maximizing output varies with price
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Maximizing Profit with Calculus • Total Revenue, Total Cost and Profit are all functions of quantity produced and sold MR = ∂TR/ ∂q MC = ∂TC/ ∂q • Profit = TR(q) – TC(q) • First Order Condition ∂TR/ ∂q - ∂TC/ ∂q = 0 MR – MC = 0 MR = MC
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Profit • Profit = Total Revenue – Total Cost • Profit = TR-TC • Profit = (TR/Q – TC/Q) Q • TR/Q = Price = P • TC/Q = Average Cost = AC • Profit = (P – AC) Q • If Price < Average Cost, the firm is losing money
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Do firms really maximize profit? Or is it just the survival of the fittest?
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Survival of the Fittest?
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Survival of the fittest? • In Competitive markets, the “fittest” will those that most nearly equate Price with Marginal Cost – Whether by chance or by design
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Producing Goods at Lowest Cost • Different Firms may have different costs, but they all face the same Price. • Each will produce goods until P =MC
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This note was uploaded on 05/08/2011 for the course ECON 160B taught by Professor Michaelvardanyan during the Spring '08 term at Binghamton University.

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10 profits - Chapter 10 Profits, Prices and Cost Under...

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