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Firms in a Competitive Market

9. Firms in a Competitive Market. Profit Maximizing Rule. Quantity (Q) How many driveways did Mr. Plow clear? Price (P) Price charged per driveway Total Revenue (TR) TR = P  Q Total Costs (TC) Sum of all production costs at a certain level of output Profit ( π ) π = TR – TC.

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Firms in a Competitive Market

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  1. 9 Firms in a Competitive Market

  2. Profit Maximizing Rule • Quantity (Q) • How many driveways did Mr. Plow clear? • Price (P) • Price charged per driveway • Total Revenue (TR) • TR = P  Q • Total Costs (TC) • Sum of all production costs at a certain level of output • Profit (π) • π = TR – TC

  3. Profit Maximizing Rule • Marginal Revenue (MR) • MR = ΔTR ÷ ΔQ • Δ = change in • For a competitive firm, MR = P • Marginal Cost (MC) • MC = ΔTC ÷ ΔQ • Additional costs of producing additional units

  4. Profit Maximizing Rule • Change in Profit • ΔProfit = MR – MC • Profit maximizing rule: • To maximize profits, the firm should use a marginal analysis • Profit is maximized by choosing the level of output such that MR = MC

  5. Profit Maximizing Rule • Profit is maximized by choosing the level of output such that MR = MC • If MR > MC • The firm can increase profits by producing more Q • If MR < MC • The firm has produced “too much” Q, and profits are not maximized

  6. Calculating Profits

  7. Profit Maximizing Rule • Quantity (Q) • How many driveways did Mr. Plow clear? • Price (P) • Price charged per driveway • Total Revenue (TR) • TR = P  Q • Total Costs (TC) • Sum of all production costs at a certain level of output • Profit (π) • π = TR – TC

  8. Profit Maximizing Rule • Marginal Revenue (MR) • MR = ΔTR ÷ ΔQ • Δ = change in • For a competitive firm, MR = P • Marginal Cost (MC) • MC = ΔTC ÷ ΔQ • Additional costs of producing additional units

  9. Profit Maximizing Rule • Change in Profit • ΔProfit = MR – MC • Profit maximizing rule: • To maximize profits, the firm should use a marginal analysis • Profit is maximized by choosing the level of output such that MR = MC

  10. Profit Maximizing Rule • Profit is maximized by choosing the level of output such that MR = MC • If MR > MC • The firm can increase profits by producing more Q • If MR < MC • The firm has produced “too much” Q, and profits are not maximized

  11. Calculating Profits

  12. Profit Maximization

  13. Calculating Profit • To find profit, we need to know revenues and costs • For a perfectly competitive firm, revenues can be found by looking at the price (determined by the market) and the quantity sold • Costs are determined by the quantity sold • For the firm, • Intuition: Profit = (units sold) ×(average profit per unit)

  14. Calculating Profits

  15. Profit Maximization

  16. When to Operate or Shut Down

  17. Profit and Loss in the Short Run

  18. Short Run Supply Curve

  19. Long Run Supply Curve

  20. Long Run Shut Down Criteria

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