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

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