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262-8
We can study profit maximizing output for any firm, whether perfectly competitive or not
Profit () = Total Revenue - Total Cost If q is output of the firm, then total revenue is price of the good times quantity Total Revenue (R) = Pq
Chapter 8
Chapter 8
Chapter 8
pp.
C(q) A R(q) B
q0
q*
Output
(q)
5
Chapter 8
Chapter 8
= RC R C = =0 q q q MR MC = 0 MR = MC
2005 Pearson Education, Inc. Chapter 8 7
Chapter 8
Firm
Industry S
$4
$4
D 100
2005 Pearson Education, Inc.
200
Output (bushels)
Chapter 8
100
MC (q ) = MR = P = AR
2005 Pearson Education, Inc. Chapter 8 11
pp.
q*
Output
(q)
2005 Pearson Education, Inc. Chapter 8 12
pp. 268-73
In the short run, capital is fixed and a firm must choose levels of variable inputs to maximize profits We can look at the graph of MR, MC, ATC and AVC to determine profits
Chapter 8
13
MC
Lost Profit for q2>q*
A ATC AVC
AR=MR=P
q1
2005 Pearson Education, Inc. Chapter 8
q* q2
11
Output
14
pp. 268-73
MC
A ATC
AR=MR=P
B AVC Profits are determined by output per unit times quantity
30 C 20 10 0 1 2 3 4 5 6 7 8
q1
2005 Pearson Education, Inc. Chapter 8
q* q2
10
11
Output
16
Chapter 8
17
MC B
P = MR AVC
q*
2005 Pearson Education, Inc. Chapter 8
Output
18
Chapter 8
19
Chapter 8
20
MC B
C D
P < ATC but AVC so firm will continue to produce in short run
P = MR AVC
q*
2005 Pearson Education, Inc. Chapter 8
Output
21
Competitive firms supply curve is portion of the marginal cost curve above the AVC curve
2005 Pearson Education, Inc. Chapter 8 22
MC
P2 P1
S ATC AVC
P = AVC
q1
2005 Pearson Education, Inc. Chapter 8
q2 Output
23
Chapter 8
24
Chapter 8
25
MC2
Savings to the firm from reducing output
MC1 $5
q2
2005 Pearson Education, Inc. Chapter 8
q1
Output
26
pp. 276-81
Shows the amount of product the whole market will produce at given prices Is the sum of all the individual producers in the market We can show graphically how we can sum the supply curves of individual producers
Chapter 8
27
MC1
MC2
MC3
The short-run industry supply curve is the horizontal summation of the supply curves of the firms.
P3
P2 P1
Q
2
2005 Pearson Education, Inc.
7 8
10
15
21
28
Chapter 8
pp. 276-81
MC B
AVC
P
At q* MC = MR. Between 0 and q, MR > MC for all units. Producer surplus is area above MC to the price
q*
2005 Pearson Education, Inc. Chapter 8
Output
29
Chapter 8
30
Chapter 8
31
pp. 276-81
MC B
AVC
P
Producer surplus is also ABCD = Revenue minus variable costs
q*
2005 Pearson Education, Inc. Chapter 8
Output
32
pp. 276-
P*
Producer Surplus
D
Output
33
Q*
2005 Pearson Education, Inc. Chapter 8
In the long run, a firm can alter all its inputs, including the size of the plant We assume free entry and free exit
No legal restrictions or extra costs
Chapter 8
34
Chapter 8
35
pp. 281-
A P = MR B
q1
2005 Pearson Education, Inc. Chapter 8
q2
q3
Output
36
pp. 281-
LMC LAC
q1
2005 Pearson Education, Inc. Chapter 8
q2
q3
Output
37
Chapter 8
38
Chapter 8
39
Chapter 8
40
Chapter 8
41
Firm
Industry S1
$40
LAC
P1
S2
$30
P2
D q2
2005 Pearson Education, Inc.
Output
Chapter 8
Q1
Q2
Output
42
Firm
LMC
Industry S2
$30
P2
S1
$20
P1
D q2
2005 Pearson Education, Inc.
Output
Chapter 8
Q2
Q1
Output
43
3. Market is in equilibrium
QD = Q S
Chapter 8
44
LMC
LAC
$7
1.0
2005 Pearson Education, Inc. Chapter 8
Chapter 8
46
Chapter 8
47
Chapter 8
48