Chapter-09 - 10/25/2010 CHAPTER OBJECTIVES The four basic...

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10/25/2010 1 CHAPTER 9 CHAPTER OBJECTIVES r The four basic market models r Conditions for pure competition r Profit maximization for competitive firms r The competitive firm supply curve r Industry entry and exit r Industry cost structure r Economic efficiency 9-2 FOUR MARKET MODELS r Pure competition r Pure monopoly r Monopolistic competition r Oligopoly Market Structure Continuum Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Imperfect Competition 9-3 PURE COMPETITION CHARACTERISTICS r Very large numbers of independently acting sellers r Standardized (identical or homogenous) product r “Price takers” r Free entry and exit (no barriers to entry) r Buyers and sellers have perfect information about the market 9-4 DEMAND CURVES FOR THE FIRM AND THE INDUSTRY P Q Market demand is downward sloping Market Supply Firm demand is perfectly elastic (horizontal) P 0 Market Demand P Q P 0 Firm Demand P = D = MR Q 1 Q 2 Q 3 14-5 SHORT RUN PROFIT MAXIMIZATION: INDIVIDUAL FIRM r Market price is given. The purely competitive firm can maximize its economic profit (minimize its loss) only by adjusting its output . r Three questions: c Should the product be produced? c If so, in what amount? c What economic profit (loss) will be realized? 9-6
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10/25/2010 2 Firm’s Demand Schedule (Average Revenue) Firm’s Revenue Data PURE COMPETITION: GRAPHIC Price and Revenue 2 4 6 8 10 12 131 262 393 524 655 786 917 1048 $1179 Quantity Demanded (Sold) D = MR = AR TR P Q D TR MR $131 131 131 131 131 131 131 131 131 131 131 0 1 2 3 4 5 6 7 8 9 10 $0 131 262 393 524 655 786 917 1048 1179 1310 $131 131 131 131 131 131 131 131 131 131 ] ] ] ] ] ] ] ] ] ] 9-7 Perfectly elastic demand Average revenue(AR) = Marginal revenue (MR) = Price (P) PROFIT MAXIMIZATION: INDIVIDUAL FIRM r Two approaches 1) Total revenue and total cost approach c Produce where TR-TC is greatest 2) Marginal revenue and marginal cost approach c Produce where MR=MC 9-8 FIRST APPROACH: TOTAL REVENUE AND TOTAL COST TABLE Q Total Revenue ($) Total Cost ($) Total Profit ($) 0 0 40 -40 1 35 68 -33 2 70 88 -18 3 105 104 1 4 140 118 22 5 175 130 45 6 210 147 63 7 245 169 76 8 280 199 81 9 315 239 76 10 350 293 57
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This note was uploaded on 12/05/2011 for the course ECON 2010 taught by Professor Staff during the Fall '08 term at Utah Valley University.

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Chapter-09 - 10/25/2010 CHAPTER OBJECTIVES The four basic...

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