Chapter8 - Part 2

# Chapter8 - Part 2 - Profit Maximization and Competitive...

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Profit Maximization and Competitive Supply Chapter 8

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A C T I V E  L E A R N I N G    A C T I V E  L E A R N I N G    Identifying a firm’s profit Identifying a firm’s profit 2 Determine this firm’s total profit. Identify the area on the graph that represents the firm’s profit. Q Costs, P MC ATC P = \$10 MR 50 \$6 A competitive firm
The Response of a Firm to a Change in Input Price When the marginal cost of production for a firm increases (from MC 1 to MC 2 ), the level of output that maximizes profit falls (from q 1 to q 2 ). The shaded area in the figure gives the total savings to the firm (or equivalently, the reduction in lost profit) associated with the reduction in output from q 1 to q 2 .

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Because the third firm has a lower average variable cost curve than the first two firms, the market supply curve S begins at price P 1 and follows the marginal cost curve of the third firm MC 3 until price equals P 2 , when there is a kink. For P 2 and all prices above it, the industry quantity supplied is the sum of the quantities supplied by each of the three firms. Industry Supply in the Short Run
producer surplus Sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production. The producer surplus for a firm is measured by the yellow area below the market price and above the marginal cost curve, between outputs 0 and q* , the profit-maximizing output. Alternatively, it is equal

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## This note was uploaded on 02/06/2012 for the course ECON 293 taught by Professor Akbulut during the Spring '11 term at South Carolina.

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Chapter8 - Part 2 - Profit Maximization and Competitive...

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