Marginal Revenue and Marginal Cost Profit Maximization in the Short Run - PowerPoint PPT Presentation

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Marginal Revenue and Marginal Cost Profit Maximization in the Short Run

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  1. Marginal Revenue and Marginal CostProfit Maximization in the Short Run

  2. Monopolistic competition Imperfect competition • Oligopoly • Monopolistic competition • Firms have some market power including the ability to change product price • Produce a quantity where price is greater then marginal cost

  3. Revenue with Market Power Q P TR MR 0 $21 $0 ---- 1 $19 $19 $19 2 $17 $34 $15 3 $15 $45 $11 4 $13 $52 $7 5 $11 $55 $3 6 $9 $54 - $1 D 7 $7 $49 - $5 8 $5 $40 - $9 9 $3 $27 - $13 MR

  4. Short-run Equilibrium Q P TR MR TFC TVC TC MC AFC AVC ATC Profit 0 $21 $0 ---- $10 $0 $10 ---- $10 $0 $10.00 -$10 1 $19 $19 $19 $10 $4 $14 $4 $10 $4.00 $14.00 $5 2 $17 $34 $15 $10 $7 $17 $3 $5 $3.50 $8.50 $17 3 $15 $45 $11 $10 $11 $21 $4 $3.33 $3.67 $7.00 $24 4 $13 $52 $7 $10 $18 $28 $7 $2.50 $4.50 $7.00 $24 $17 5 $11 $55 $3 $10 $28 $38 $10 $2.00 $5.60 $7.60 6 $9 $54 - $1 $10 $47 $57 $19 $1.67 $7.83 $9.50 -$3 7 $7 $49 - $5 $10 $74 $84 $27 $1.43 $10.57 $12.00 -$35 8 $5 $40 - $9 $10 $112 $122 $38 $1.25 $14.00 $15.25 -$82 9 $3 $27 - $13 $10 $162 $172 $50 $1.11 $18.00 $19.11 -$145

  5. Short-run Equilibrium Profit maximization • When MR > MC – increase production • When MR < MC – decrease production • When MR = MC – Maximum profit • Produce quantity where MR = MC • Intersection of the marginal-revenue curve and the marginal-cost curve

  6. Short-run Equilibrium Profit Max: MR = MC MC Price D MR

  7. Short-run Equilibrium MC When Q=4 $52 Revenue $13.00 P $18 TVC TFC $10 $28 Total Cost $7.00 ATC Profit $24 $4.50 AVC D MR