EDU ECO2003 Brief summary Revision.pptx

# Once these gradients become equal then the curves are

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Once these gradients become equal, then the curves are the furthest distance apart. But the gradients or “slope” of TR is MR And the gradient or “slope” of TC is MC, and so where profit is maximized, MR=MC ! Profit Maximization

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Profit Maximization In algebra: Profit=TR-TCMax profit where first derivative equals zero: dProfit/dQ=0 But dProfit/dQ = (dTR/dQ) – (dTC/dQ) = MR – MC = 0 Thus max or min profit where MR = MC When MR > MC, we will continue and produce more When MC > MR, we produce less
Important Profit maximizing firm will always produce where MR=MC

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The Perfect Market Perfect Market you say?? Look no further
Perfect Competition P Q TR MR AR 8 1 8 8 8 8 2 16 8 8 8 3 24 8 8 8 4 32 8 8 8 5 40 8 8 Look closely P=AR=MR=D Because the firm is a price taker Price remains the same, Lets assume Market gives rise to a price of R8, In this example, therefore, P=8 throughout. Assumptions Many firms and many buyers Sell identical profits Free entry and exit Perfect information The firm is a price-taker. Price is set by the market equilibrium.

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Market and individual firm Market Firm Under Perfect competition, the price is determined in the market by demand and supply. The individual firm is a price taker and faces a horizontal demand curve (perfectly elastic)
Economic Profit What quantity does the firm produce? Look for where MR=MC Green line intersects Blue line MR = MC at E1, P1 ,Q1 Q1 is the quantity that the firm will produce. Now, At Q1 we see AR > AC This represents Average profit Average Profit x Q Gives us Total Profit = (E 1 –M) x Q 1 Total Profit is equal to Grey Shaded Area = P 1 E 1 M C 1

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Economic Profit Another way to look at things MR = MC at E1, P1 ,Q1 Q1 is the quantity that the firm will produce. Now, At Q1 TR = P * Q = P1 * Q1 TR is therefore 0P 1 E 1 Q 1 At Q1 TC = C 1 * Q TC is therefore 0C 1 MQ 1 TR – TC = Total Profit Total Profit is equal to Grey Shaded Area = P 1 E 1 M C 1
Economic Loss Look for where MR=MC (Green line intersects Blue line) MR = MC at E3, P3 ,Q3 At Q3 we see AC > AR This represents Average Loss Average Loss x Q Gives us Total Loss Total Loss is equal to Grey Shaded Area = P 3 E 3 M C 3

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Zero Economic Profit = Normal Profit Look for where MR=MC (Green line intersects Blue line) MR = MC at E2, P2 ,Q2 At Q2 we see AR = AC Breaking even Normal profit Or Zero Economic Profit
Shutdown point Lets assume where MR=MC Quantity = 10 units ATC = 10 TC = 100 AFC = 6 FC = 60 AVC = 4 VC = 40 P = 5 Therefore AR = 5 TR = P*Q = 50 TC = 100 (given) 50 -100 = Loss of 50 P = 3 Therefore AR = 3 TR = P*Q = 30 TC = 100 (given) 30 – 100 = Loss of 70 If no production takes place, Only fixed costs need to be paid Loss of 60 This tells us that if P > AVC We will continue to produce P < AVC We will shutdown Rather not produce and take loss of 60 Lets look at the 3 scenarios below

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Collect R200 Monopoly
What distinguishes PC from monopoly? One of the obvious distinctions is how the market is served – in PC, we see that a number of smaller firms serve the market, but monopoly only has one firm serving the market. Another way to differentiate between the two is by their demand curves: PC firm has a horizontal demand curve; monopoly firm has a downward sloping demand curve .

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