chapter_8

chapter_8 - Perfectly Competitive Markets Market...

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Chapter 8 Slide 1 Perfectly Competitive Markets Market Characteristics 1) Price taking: the individual firm sells a very small share of total market output and so cannot influence market price. The individual consumer buys too small a share of output to have any impact on the price. 2) Product homogeneity: the products of all firms are perfect substitutes. 3) Free entry and exit: Buyers can easily switch from one supplier to another. Suppliers can easily enter or exit a market.
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Chapter 8 Slide 2 Profit Maximization Do firms maximize profits? Possibility of other objectives Revenue maximization Dividend maximization Short-run profit maximization Implications of non-profit objective Over the long-run investors would not support the company Without profits, survival unlikely
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Chapter 8 Slide 3 Marginal Revenue, Marginal Cost and π Maximization Determining the profit maximizing level of output Profit ( ) = Total Revenue - Total Cost Total Revenue ( R ) = Pq Total Cost ( C ) = Cq Therefore: π ) ( ) ( ) ( q C q R q - =
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Chapter 8 Slide 4 Profit Maximization in the Short Run 0 Cost, Revenue, Profit ($s per year) Output (units per year) R(q) Total Revenue Slope of R(q) = MR
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Chapter 8 Slide 5 0 Cost, Revenue, Profit $ (per year) Output (units per year) Profit Maximization in the Short Run C(q) Total Cost Slope of C(q) = MC Why is cost positive when q is zero?
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Chapter 8 Slide 6 Comparing R(q) and C(q) Output levels: 0 - q 0 : C(q)> R(q): negative profit FC + VC > R(q) MR > MC Output levels: q 0 - q * R (q)> C(q) MR > MC: higher profit at higher output. Profit is increasing 0 Cost, Revenue, Profit ($s per year) Output (units per year) R(q) C(q) A B q 0 q * ) ( q π Marginal Revenue, Marginal Cost and π Maximization
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Chapter 8 Slide 7 Comparing R(q) and C(q) Output level: q * R (q)= C(q) MR = MC Profit is maximized R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q 0 q * ) ( q π Marginal Revenue, Marginal Cost and π Maximization
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Demand and MR Faced by a Competitive Firm Output (bushels) Price $ per bushel Price $ per bushel Output (millions of bushels) d $4 100 200 100 Firm Industry D $4
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This note was uploaded on 05/09/2011 for the course ECON 111 taught by Professor Chan during the Spring '11 term at HKU.

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chapter_8 - Perfectly Competitive Markets Market...

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