Profit max and Comp supply

Profit max and Comp supply - SessionXI:ProfitMaximization

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Session XI: Profit Maximization  and Competitive Supply  PGP I Term I
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Produce at least cost given the production  technology and input prices. Supply output to the level that profit is maximized  (today’s discussion) Separation of ownership and control and revenue  maximization goal  Firm’s objectives
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Profit=Total Revenue-Total Cost If firm’s profit maximizing output level is q, then  profit: Profit maximization ) q ( MC ) q ( MR 0 ) q ( MC ) q ( MR 0 q C q R q π C(q) R(q) (q) π = = - = - = - =
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Graphical representation q* R(q) C(q) A B (q) π output Cost,  Revenue,  Profit q1 q2 C q**
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Price taking behaviour  Product homogeneity Free entry and exit Full information, rationality, constant time and no  uncertainty.  Perfect Competition:  Assumptions
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Market demand and firm  demand P 0 Output Price Market  demand  curve Individual  firm’s  perceived  demand Market  supply  curve
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Price taker assumption- Individual firm’s perceived  demand curve P 0 Output Price P=MR P MR q TR Pq TR = = =
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Short run profit maximization Output Cost,  Price MC ATC AVC P 0 q0 q1 q2 A B C D G H E F
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Break even Output Cost,  Price MC ATC AVC P2 P 1 P 0 q0 q1 q2 P=MR A B C P=AVC=Break even
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Output Cost,  Price MC ATC AVC P=AVC Short run supply curve
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Profit max and Comp supply - SessionXI:ProfitMaximization

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