صفحه 1:
صفحه 2:
لحعجصمح() عا با Vopios
a @erPeviy Cowpetiive Ourkets
© Phi Ouxteizatiod
a Ourcjcral (Revewue, Ourgjcral Oost, urd (Prob it
Ouxicizativa
® Choosing Output ta the Gkort-Rua
9 Oke S
صفحه 3:
لحعجصمح() عا با Vopios
5 ۲ )6 tive من Gkort-Ruc Guppy
Cure
® Ghort-Rua Darket Guppy
a Chovsisry Output io the )مورا
۳ ۳ )مورا ج رسصله۱» Guppy Curve
9 Oke SD
صفحه 4:
® Choruterstivs vP PerPeviy Cowpetiive
Ourkets
d) Prive باه
۱ 9) Cree catry ocd exit
9 Oke
صفحه 5:
® Prive رن
© Phe individual Pir sels o very sudll shone oP the
totd warket culput cod, therefore, عصوص !”أ اصووی
warket price.
© Phe iodvidud poosuer buys tov swoll a shore
با تن تون have cay ispoct oo worket
price.
9 Oke S
صفحه 6:
® Produ رورا
© De products oP dll Pires ure perPent substitutes.
© Exanples
* @uricukurd products, vil, امد را رو
9 Oke Oo
صفحه 7:
® Pree etry ocd Cait
© Owers coo usily switch Pow vor supplier to
other.
و و افو و ای رای مه Guppliers ©
9 6
صفحه 8:
© Okt we sowe borers to eutry ocd exif?
© Dre dl workets ره
® Okeu is 0 worket high) cowpetiive?
9 Oke O
صفحه 9:
PrvPit Ouatevizatiod
# Op موز probits?
© Possibly oP other vbievives
* Revenue wuxtwizative
* Oividead waxicvizatica
۰۵ ۹ 5-6
9 Oke SO
صفحه 10:
PrvPit Ouatevizatiod
# Op موز probits?
© Hah 3 ene
* Over the Irogrpros wesiors would oot support
the powpoay
* Dikout profits, survival uclikely
صفحه 11:
PrvPit Ouatevizatiod
# Op موز probits?
® Lops probit woxtcvizative is veld ood does ut
exclude the possibiliy oP ات
bekuvior.
9 Olde 0
صفحه 12:
QDOarqcd Revenue, Dury Oust,
oot ProPit Ouxicoizaiva
® Detercnining the proPit woxtviziey bevel oF
لهس
۱
۰ سردا )0( - 0
© Tord Ovst (C) = Og
e 0 ىن :
Ad - 21۲9 )م
صفحه 13:
PrvPtt Ouatcizaiod to the Gkort Qua
Om Tord Qevecur 0
Cbpe oP R(q)= OR
صفحه 14:
PrvPtt Ouatcizaiod to the Gkort Qua
0
Obpe oF C(q)= OC
Ohy ts vost postive whe ots zero?
Ovi (vate per veor)
9 2
صفحه 15:
Qaqyed Revenue, Durcical Ovst,
oot ProPit Ouxicoizaiva
® Qargied reveoue is the uddiigcd never
Prow produciog oe wore uit oP vulput.
1" Dargie owst is the oddiicodl post Pro
prooduciagy poe wore انم bP الا
صفحه 16:
QDOarqcd Revenue, Dury Oust,
oot ProPit Ouxicoizaiva
۱ مرن A(q) od O(g)
© Output levels: O- gy:
* O@)> R(@)
* Dexaive prot
*PO +00 > R@)
*OR > OC
۱ ی higher prot
ct higher pirat
صفحه 17:
QDOarqcd Revenue, Dury Oust,
oot ProPit Ouxicoizaiva
5 ون Bla) oral Of)
© Question: Ohy & prot وا سره
whee pupal zeny? eos
صفحه 18:
QDOarqcd Revenue, Dury Oust,
oot ProPit Ouxicoizaiva
5 ون P(g) oval Of)
لاه
+ © <لو) 0)(
*MR>OC
© ladies biker proba
dhe neu
وا تن ©
صفحه 19:
QDOarqcd Revenue, Dury Oust,
oot ProPit Ouxicoizaiva
۱ مرن A(q) od O(g)
© Output level 9°
* © حلو) 0)
*MR=0C
* Prob is waxtcrized
صفحه 20:
QDOarqcd Revenue, Dury Oust,
oot ProPit Ouxicoizaiva
© Questo
© OW ts pot reduced
whee producto wore pr
يكو مما دوجا
صفحه 21:
QDOarqcd Revenue, Dury Oust,
oot ProPit Ouxicoizaiva
A(q) ord O(G) مرن ظ
Oupu levels bepord 9: °
٩ )(< 00 +
< 6) ۰
سس وا Phi ©
صفحه 22:
QDOarqcd Revenue, Dury Oust,
oot ProPit Ouxicoizaiva
© DherePore, it coo be suid:
we woxtkoed رن و
wea DO = OR.
صفحه 23:
Revenue, Darya Ovst, مب(
کش رو
Aq
Men
Aq
ed Profit Ouxteizaiva
Tone
صفحه 24:
Obde OF
PrvPis are موی دساكعجو |
QDarqed Qevene, Durga Oust,
aod rohit Daxtertrath
Aq Aq Aq
۱ MR. MC=Osotha
Aa _AR AC 5
MR(q# MC(q)
صفحه 25:
Qaqyed Revenue, Durcical Ovst,
oot ProPit Ouxicoizaiva
= Dke Cow petitive ireo
© (Prive tuker
© Market vulput (Q) ood Fire vutput (9)
© Dorel decwoad (D) oad Pro deword )9
® Rig) ic 4 sircigh line
9 Obte OS
صفحه 26:
Soo
100
صفحه 27:
Qaqyed Revenue, Durcical Ovst,
oot ProPit Ouxicoizaiva
= Dke Cow petitive ireo
© بر وا سر وا يا
*edvidual producer setts oll ucts Por SP
ان oP the produver’s bevel oP ول مسر
04P the producer tries tp reise price, sles ure
Zev.
9 Oke OP
صفحه 28:
Qaqyed Revenue, Durcical Ovst,
oot ProPit Ouxicoizaiva
= Dke Cow petitive ireo
> ی »
ات ها و رها ما زا ول با ۰
حصاده وس
«۰ ۳ < 6 < 0006 -
9 Oke CO
صفحه 29:
Qaqyed Revenue, Durcical Ovst,
oot ProPit Ouxicoizaiva
= Dke Cow petitive ireo
من( ان و
۱
9 Obte SS
صفحه 30:
Chovsiexy Output ta fhe Ghort Qua
1" De wil powbice produntion ued post usipsis
wits dewwoed to detercpice vulput ced
|
9 ۵» 0
صفحه 31:
voi DO = OR bu
09 ۵
صفحه 32:
صفحه 33:
Chovsiexy Output ta fhe Ghort Qua
۰ Gueowary vE Production Oevisives
مت وا نت و whea DO = OR
OW PP > OTC te Fire is wohiogy proPite.
۰1 BOC <P < OTC the Firsp shod produce
uta bss.
ew P< BOC < OPO the Pirw should shut
down.
9 ی 9
صفحه 34:
Tre Ghort+Rua Ouput oP
Ouest
oO 900 800 900 (ecw per dv)
Okger O »لت OE
صفحه 35:
Gowe Cost Ovusideraioes Por Ouoncgers
تاه ارو رو و OD iree yuietices 8
0) Qvernne variuble vost should ont be
used us u substitute Por مروت
vost.
ی 9
صفحه 36:
Gowe Cost Ovusideraioes Por Ouoncgers
تاه ارو رو و OD iree yuietices 8
©) © ste tew وت وا موه
fedyer way have two powpourts,
poly poe oF وراه انرب
pvst. ام
9 ی SO
صفحه 37:
Gowe Cost Ovusideraioes Por Ouoncgers
تاه ارو رو و OD iree yuietices 8
9) Ol ppportusity post should be
موه روص و موز
vost.
9 Ore 0
صفحه 38:
® Cowpertiive Pirw’s
GhortRQuc Guppy Curve
Cree
(Sper
ntl)
۳ واه مت
itt bel whore OR = OO,
يجحا جد te Pw bee
ey
صفحه 39:
® حرط07 ۳
GhortRua Guppy Curve
© Observes:
9 حدم 0
9 ) 2 60
9 ۸ - 60
® Guppy ts the aout oP putput Por every possible
price. DkerePore:
oP P= @,, hes g= رو
» روم دص عد hes وو حو
9 ی 9
صفحه 40:
Curve بامس6 میج مان
® Cowpertiive Pirw’s
صفحه 41:
® Obsernuuiiow:
© Guppy is upward sloping due to dicvicishicrey
returas.
© A Wigher price cowperusties the Pies Por higher
vost oP additicod cutput ced iooreuses total proPit
becouse it upplies to oll unite.
9 9 0
صفحه 42:
" Pirn’s (Respowe io كد dapat Prive Chace
© Dkeu the price oP u Piren’s produnt choos, the
Finn chooyes its cutput level, so thot the warqical
vost OF productive newoies equal to the price.
لب 9
صفحه 43:
و اوه نج
00 حا عاك 00 لج
wed y Pub & 95.
The Qespowse ve a Pir 0
a Choc ta Input Price
Gournp ty te Pro
Pree
Grr
wt)
صفحه 44:
Tre Gkhor-RQuc Production
یجان بو و Products
‘Phe DO oP prockotey
98,000 8,000 40,000 M000
صفحه 45:
Tre Gkort+Ruc Produvioa
عسحاصك2 :ص Produ ۳
® Gtepped GOO tedicates اما هن
productive (cost) process ot رمرم عضو
levels.
© Observation:
©» Dik نب stepped OO Pucntiog, savall choagyes ict
price way vot trigger 0 chooge it pulpal.
9 Obde PS
صفحه 46:
Tre Gkort+Ruc Produvioa
عسحاصك2 :ص Produ ۳
5 ۲۱۱ shorn worket supply curve shows
the awouet oP mutput thot the industry will
produce ia the short-rod Por every possible
proce.
او عرص ند رتاو Oovsider, Por ®
oc
Obde 0
صفحه 47:
باه ۳
Iechsiry Guppy ta the Gkort Qua
صفحه 48:
Dre GhortRQua Dorket Guppy جر
© Chosticiy oP Darket Guppy
E, =(AQ/QM(AP/P)
9 Ore FO
صفحه 49:
۱ Guppy Ourve
® PerPeniy nelostio skort-nam supply wises
whe the todustey’s plorat ord equipsect are
sv Puy utilized that cevw plots oust be built 17
ubhieve yreuter vulput.
® erPeniy elostic short-am supply wises
9 Obde FO
صفحه 50:
۱ Guppy Ourve
® Qvuestivw
0( Give wa excople oP a perPeviy
©) ع4 OC ses rapidly, would the supply
9 ۵» 0
صفحه 51:
Tre Oorld Copper >] رصصسل- )4999(
ood Production انا
(howsodd wet tows) (dolars/pourd) سوت
99 0 ری
م0 20 Cucada
90 99800 علان
99 260 استی ها
Peru ۰50 0۶۰
0.00 ۰90 ولو
Resa 500 090
Outed Gries 690 0۶۰
99 950 ت۷۳
9 Oke 0
صفحه 52:
F000 8000 C000 000 6۵۵0 هه
Proketon (howrand wore tw)
9 Obte SO
صفحه 53:
۱ Guppy Ourve
® Producer Gurplus ist the Gkort Qua
Pines bord u surplus va ol but the fost uit oP و
ان این
۱ is the suc pver لك units
pooduced oP the dPReneuse betweed the warket
proodurtioa.
9 Obte SO
صفحه 54:
صفحه 55:
Dre GhortRQua Dorket Guppy جر
® Producer Gurls ic the Gkort-Ruc
@roduver Gurplus =PE=R - OC
١ ProPit =r -R- OOC-FC
9 Obte SS
صفحه 56:
۱ Guppy Ourve
® Observation
© ار مان posiive Pixed post
PG> a
9 Obte SO
صفحه 57:
صفحه 58:
Ckovsiey Output to hee boy Qua
84a the loony am, 0 Piecy ooo ober ofl its رن
iuchodiag the size oP the plot.
8 Oe wee fee cory ond Pree ext.
9 Ore SO
صفحه 59:
Ouput Choice to the boo Que
P=OR
Aa ker short rv, ber
Piro Posed wk Phord
.هجر 230 < 00
Crotty ead e 000:
Ara te box ra, be pho tae ull be
feoreeerd wd op terrane بو
Lower ,لامج 0600 < short re
prot BOO.
(Sper
vot oP
vipa)
صفحه 60:
Ouput Choice to the boo Que
بلس سدم صا ا/ نس Pree
100 موی اس Per باوج و (Sper
یت ae bowery
صفحه 61:
Ckovsiey Output to hee boy Qua
© امد رتیت & Coowwsnic PrvPit
© Boomnioy poh 3 6 - ناس
9 Rit
ره = bor ost
رس ره oost oP capital
9 Oke Od
صفحه 62:
Ckovsiey Output to hee boy Qua
تامس تا) یر
ure posiive تا OW Rew trk, eoowwir
OW Raw tHk, ze eoowwir profits, but the
Pins is rorcey a corel rote له تحص ان
the industry is vow petitive
۰1 RR <i tk, poosider «ping vot oP business
9 605-68
صفحه 63:
Ckovsiey Output to hee boy Qua
® Cat ocd Exit
۱ respouse to short-run probity is 17
© PrP its Wil attract other producers.
ات امه تلا وه Oore produvers ©
ی 9
صفحه 64:
صفحه 65:
Ckovsiey Output to hee boy Qua
8 ۱ ela Paar
d) @C=0R
e) و -ه
وه ۲ ما وا مضه و«
,م۰ = O
9) Cquilibriucz Ourket Prive
9 لب OS
صفحه 66:
Ckovsiey Output to hee boy Qua
® Questo
P <LOC wed Pirsos kawe ideotical posts.
Pies hove diPPereat costs.
9) Okt is the vpportuctiy cost oF bord?
ی 9
صفحه 67:
Ckovsiey Output to hee boy Qua
® Coowwir Rect
© Covdwir red is the dPPereuve betweed what
Finns one willy to pay Por oc ioput tess the
writ umount uepessury to obtaic it.
عه ل 9
صفحه 68:
Ckovsiey Output to hee boy Qua
# Ou ام
© Tw Pires 0 & ©
و Bok nwa thetr hoor
® Bis tpodted va a river whick lwers 0's shippicry
vost by $40 OOO vowpared to ۰
© Phe dewerd Por O's river lovoive wil ieoreuse
the prive oP P's kad t7 $10, DOO
9 Oke OO
صفحه 69:
Ckovsiey Output to hee boy Qua
® Ou Cxanple
® Crowwwio rect = $10, OOD
*$d0 OOO - zerv vost Por the food
دعجم جم دا ار من
0 2 ۵ خر ار من و
9 Obte OS
صفحه 70:
Pinos Gara Dero Prob it ta
Grea eho
(سشی ده
Ode TO
صفحه 71:
6 مت be awe
vost ۰ بات رها
سب عاسج Por $10.
تسه مه
(سشی ده
۷» 0
Pinos Gara Dero Prob it ta
صفحه 72:
Crews Carn Tero Profit ta
LowpRuc Gqubbrivas
® ith و Pred toput suck us وه unique lpootivd, the
diPPereuwe betwee the vost oF production
(L®O =P) wed price ($(O) te the value pr
vpportusiy ast oF the ioput (lovato) cord
represeuts the epourwir reat Prov the iuput.
9 Oke TO
صفحه 73:
Crews Carn Tero Profit ta
LowpRuc Gqubbrivas
BOP the opportuaiy cost oF the foput (rect) is oot
fokeu ity pousiderdive it way upped that
eooUoWwir probits exist io the maroc.
9 Oe TS
صفحه 74:
Phe ”روص ج11 boo-Ruc Guppy Ouve
© Phe shope of the ropes supply cove
depeuds oo the exted to Wwhick chooges it
industry ouiput oPPevt the prices the Pires
wust pup Por ioputs.
9
ی
صفحه 75:
Phe ”روص ج11 boo-Ruc Guppy Ouve
supply, we weave! رما تسیل ۳ ظ
۱
۳
® Output is روا تسس usiay wore iuputs, oot by
موز
9 Oe 7S
صفحه 76:
Phe ”روص ج11 boo-Ruc Guppy Ouve
رما تسیل ۳ ظ supply, we weave!
اس اه بت حول و بت بلوت ۱ ۰
ced pvotranivas oP the iodusiry. ۳ ]
9 Ore TO
صفحه 77:
صفحه 78:
د دا باوص 8) ون ۱۳
Coxsteat-Ovst Terdusiry
§ 4a poostt-ovst teustry, اوح مر
0 korizodtd fae ot o prive thot is equel to the
9 ۵ TO
صفحه 79:
Loeer-Rua Gupply tao
صفحه 80:
د دا باوص 8) ون ۱۳
ماسجا" اوو )سوج جيم ص 1
supply رما رل امس جد ج11 "ا
pure is upward slppic.
9 Ore OO
صفحه 81:
Te decksiry’s
Loxer-Ruc Guppy Curve
® Qvuestivw
0) ادام kow انوس مرول is
possible.
©( Thostrote uo depreusiag vet iedusiry.
9) Oka he sbpe Pte Gia
9 9۷» 0
صفحه 82:
Gupply ta oo میجآپورا
صفحه 83:
د دا باوص 8) ون ۱۳
supply روا بلماعدلوا اودجوو جوج وصل ou "ا
کر vue is downward
9 Ore OS
صفحه 84:
Te decksiry’s
Loxer-Ruc Guppy Curve
۴ ۱ GPPRevts oP a Dux
© ون وت ون we studied kow Pires
resposd to taxes po oo input.
ه صا موم ما وه how ویس Dow, we wil و
تابن بر
9 Oe OF
صفحه 85:
GPPect oP aw Oupu Tax va a Cowprtiive
Crew's Ouput
صفحه 86:
Pree +
Sir ر 2 ۷
وی /
nev) 6
6
Derchhe Oy سر
Py punt Pol Qo. Pree
بوظ) ها سس(
>
9 Ore OO
صفحه 87:
Te decksiry’s
Loxer-Ruc Guppy Curve
a )مورا Elasticity ve Guppy
0) )09 أ05- اكاك itusiry
PLoeprec supply is korizveted
© Gord faoreuse fu price wil جه ده
pxtrewely large وج نی
9 Oke OF
صفحه 88:
Te decksiry’s
Loxer-Ruc Guppy Curve
a )مورا Elasticity ve Guppy
)( Covstad-ovet industry
ها راصنا سا واه supply سمدوجور| *
امه رال *apuis would be
9
Okt 66
صفحه 89:
Te decksiry’s
Loxer-Ruc Guppy Curve
. مورا Elasticity عم Gupply
Lopes supply is upuoard-slopiey cod elostiviiy is
positive
¢Dke slope (closticiy) will depecd vo the rote oF
fopreuse tu iopul ost
will yeserdhy be yneuter tho واه مورا
shorten ehosticiiy oP supply
9 Ore 9
صفحه 90:
۳ ع رسصل1
bowr-Rua Guppy Curve
® Qvuestiod
oP supply ia a تاه متا سا سنمیز و
devreusiagy -vst inchustry.
9 ۵» OD
صفحه 91:
® Open (1: Ouxer-vooupied Kousiccy
© Guburbas or nord aeus
© Datiocd warket Por ioputs
9 Oke Od
صفحه 92:
٩ 6 عمنوین
۱
© Okat would pou predict obvut the elosticiiy oP
supply?
9 Obte SS
صفحه 93:
® Gpewri OC: (Reutal propery
© ”] حوور resticiives apply
© Orban مسا
© اه ای را
و ی 9
صفحه 94:
® Qvuesiivews
توص و رو من اجه iodustqy?
© دا( would pou predict ubout the ehsticity oP
supply?
9 Obde OF
صفحه 95:
عطه نون عا حا pwwpetiive worket 0 2
عا ۳ اوعد علا اما روموت وا ماوت
جا ناه مره ۱
بسن
ی 6
صفحه 96:
060
Bo the skort nn, حمموت ما عرص ن
وه مجتوصی بر تا جلا culput ot whick prive is
© OD ke short worket supply رصح is the
۱۳ susmevutiva oF the supply purves ve
the لو مه وا و
و ی 9
صفحه 97:
060
سكا كا بسنا ب عونا جن اإوصيج موصن لويم جز ”]١ ا"
لجه متا وه مهو ونوا وال
the wicitouc post thot would be cevessury tv
® Coowwir red is the popwed Por ou scorce
resource oF productivg fess the wisit7us7
۱ avout uevessury to kine that ات
9 Ore O?
صفحه 98:
060
84a the jpop, poPi-wurxievizioy po wpetiive
Pirsvs choose the pulpal ot whick price is equal
to loop worse ost.
© Phe loexprog supply curve Por u Pir coo be
رتنس upward slopiegy, or وتو
\
Ore SO
صفحه 99:
Ex oP Ckupter ©
Chapter 8
Profit Maximization and
Competitive Supply
Topics to be Discussed
Perfectly Competitive Markets
Profit Maximization
Marginal Revenue, Marginal Cost, and Profit
Maximization
Choosing Output in the Short-Run
Chapter 8
Slide 2
Topics to be Discussed
The Competitive Firm’s Short-Run Supply
Curve
Short-Run Market Supply
Choosing Output in the Long-Run
The Industry’s Long-Run Supply Curve
Chapter 8
Slide 3
Perfectly Competitive Markets
Characteristics of Perfectly Competitive
Markets
1)
Price taking
2)
Product homogeneity
3)
Free entry and exit
Chapter 8
Slide 4
Perfectly Competitive Markets
Price Taking
The
individual firm sells a very small share of the
total market output and, therefore, cannot influence
market price.
The
individual consumer buys too small a share
of industry output to have any impact on market
price.
Chapter 8
Slide 5
Perfectly Competitive Markets
Product Homogeneity
The
products of all firms are perfect substitutes.
Examples
Chapter 8
Agricultural products, oil, copper, iron, lumber
Slide 6
Perfectly Competitive Markets
Free Entry and Exit
Buyers
can easily switch from one supplier to
another.
Suppliers
Chapter 8
can easily enter or exit a market.
Slide 7
Perfectly Competitive Markets
Discussion Questions
What
are some barriers to entry and exit?
Are
all markets competitive?
When
Chapter 8
is a market highly competitive?
Slide 8
Profit Maximization
Do firms maximize profits?
Possibility
Chapter 8
of other objectives
Revenue maximization
Dividend maximization
Short-run profit maximization
Slide 9
Profit Maximization
Do firms maximize profits?
Implications
Chapter 8
of non-profit objective
Over the long-run investors would not support
the company
Without profits, survival unlikely
Slide 10
Profit Maximization
Do firms maximize profits?
Long-run
profit maximization is valid and does not
exclude the possibility of
altruistic
behavior.
Chapter 8
Slide 11
Marginal Revenue, Marginal Cost,
and Profit Maximization
Determining the profit maximizing level of
output
Profit
( ) = Total Revenue - Total Cost
Total
Revenue (R) = Pq
Total
Cost (C) = Cq
Therefore:
(q) R(q) C(q)
Chapter 8
Slide 12
Profit Maximization in the Short Run
Total Revenue
Cost,
Revenue,
Profit
($s per year)
R(q)
Slope of R(q) = MR
0
Output (units per year)
Chapter 8
Slide 13
Profit Maximization in the Short Run
C(q)
Cost,
Revenue,
Profit
$ (per year)
Total Cost
Slope of C(q) = MC
Why is cost positive when q is zero?
0
Output (units per year)
Chapter 8
Slide 14
Marginal Revenue, Marginal Cost,
and Profit Maximization
Marginal revenue is the additional revenue
from producing one more unit of output.
Marginal cost is the additional cost from
producing one more unit of output.
Chapter 8
Slide 15
Marginal Revenue, Marginal Cost,
and Profit Maximization
Comparing R(q) and C(q)
Output
levels: 0- q0:
C(q)> R(q)
Cost,
Revenue,
Profit
($s per year)
C(q)
Negative profit
FC + VC > R(q)
MR > MC
R(q)
A
B
Indicates
higher profit
at higher output
0
q0
q*
(q)
Output (units per year)
Chapter 8
Slide 16
Marginal Revenue, Marginal Cost,
and Profit Maximization
Comparing R(q) and C(q)
Question: Why is profit negative
when output is zero?
Cost,
Revenue,
Profit
$ (per year)
C(q)
R(q)
A
B
0
q0
q*
(q)
Output (units per year)
Chapter 8
Slide 17
Marginal Revenue, Marginal Cost,
and Profit Maximization
Comparing R(q) and C(q)
Output
levels: q0 - q*
R(q)> C(q)
MR > MC
Cost,
Revenue,
Profit
$ (per year)
C(q)
R(q)
A
Indicates
higher profit
at higher output
Profit is increasing
B
0
q0
q*
(q)
Output (units per year)
Chapter 8
Slide 18
Marginal Revenue, Marginal Cost,
and Profit Maximization
Comparing R(q) and C(q)
Output
level: q*
R(q)= C(q)
MR = MC
Profit is maximized
Cost,
Revenue,
Profit
$ (per year)
C(q)
R(q)
A
B
0
q0
q*
(q)
Output (units per year)
Chapter 8
Slide 19
Marginal Revenue, Marginal Cost,
and Profit Maximization
Question
Why
is profit reduced
when producing more or
less than q*?
Cost,
Revenue,
Profit
$ (per year)
C(q)
R(q)
A
B
0
q0
q*
(q)
Output (units per year)
Chapter 8
Slide 20
Marginal Revenue, Marginal Cost,
and Profit Maximization
Comparing R(q) and C(q)
Output
levels beyond q*:
R(q)> C(q)
Cost,
Revenue,
Profit
$ (per year)
C(q)
R(q)
A
MC > MR
Profit is decreasing
B
0
q0
q*
(q)
Output (units per year)
Chapter 8
Slide 21
Marginal Revenue, Marginal Cost,
and Profit Maximization
Therefore, it can be said:
Profits
are maximized
when MC = MR.
Cost,
Revenue,
Profit
$ (per year)
C(q)
R(q)
A
B
0
q0
q*
(q)
Output (units per year)
Chapter 8
Slide 22
Marginal Revenue, Marginal Cost,
and Profit Maximization
R - C
R
MR
q
C
MC
q
Chapter 8
Slide 23
Marginal Revenue, Marginal Cost,
and Profit Maximization
Profits are maximized when :
R C
0or
q q q
MR MC0 so that
MR(q)MC(q)
Chapter 8
Slide 24
Marginal Revenue, Marginal Cost,
and Profit Maximization
The Competitive Firm
Price
taker
Market
output (Q) and firm output (q)
Market
demand (D) and firm demand (d)
R(q)
Chapter 8
is a straight line
Slide 25
Demand and Marginal Revenue Faced
by a Competitive Firm
Price
$ per
bushel
Price
$ per
bushel
Firm
d
$4
Industry
$4
D
100
200
Output
(bushels)
100
Output
(millions
of bushels)
Marginal Revenue, Marginal Cost,
and Profit Maximization
The Competitive Firm
The
Chapter 8
competitive firm’s demand
Individual producer sells all units for $4
regardless of the producer’s level of output.
If the producer tries to raise price, sales are
zero.
Slide 27
Marginal Revenue, Marginal Cost,
and Profit Maximization
The Competitive Firm
The
Chapter 8
competitive firm’s demand
If the producers tries to lower price he cannot
increase sales
P = D = MR = AR
Slide 28
Marginal Revenue, Marginal Cost,
and Profit Maximization
The Competitive Firm
Profit
Chapter 8
Maximization
MC(q) = MR = P
Slide 29
Choosing Output in the Short Run
We will combine production and cost analysis
with demand to determine output and
profitability.
Chapter 8
Slide 30
A Competitive Firm
Making a Positive Profit
MC
Price 60
($ per
unit)
50
40
Lost profit for
Lost profit for
qq < q *
q2 > q *
D
A
AR=MR=P
ATC
C
B
30
AVC
At q*: MR = MC
and P > ATC
q1 : MR > MC and
20
q2: MC > MR
and
q0: MC = MR but
(P - AC)x q*
or ABCD
MC falling10
0
Chapter 8
1
q0
2
3
4
5
6
7
8
q1 q
*
9
q2
10
11
Output
Slide 31
A Competitive Firm
Incurring Losses
MC
Price
($ per
unit)
C
D
At q*: MR = MC
and P < ATC
Losses = P- AC) x q*
or ABCD
F
B
A
P = MR
AVC
E
q*
Chapter 8
ATC
Would this producer
continue to produce with a
loss?
Output
Slide 32
Choosing Output in the Short Run
Summary of Production Decisions
Profit
is maximized when MC = MR
If
P > ATC the firm is making profits.
If
AVC < P < ATC the firm should produce
If
P < AVC < ATC the firm should shut-
at a loss.
down.
Chapter 8
Slide 33
The Short-Run Output of
an Aluminum Smelting Plant
Cost
(dollars per item)
1400
Observations
•Price between $1140 & $1300: q = 600
•Price > $1300: q = 900
•Price < $1140: q = 0
P2
1300
P1
1200
Question
Should the firm stay in business
when P < $1140?
1140
1100
0
Chapter 8
300
600
900
Output
(tons per day)
Slide 34
Some Cost Considerations for Managers
Three guidelines for estimating marginal cost:
1) Average variable cost should not be
used as a substitute for marginal
cost.
Chapter 8
Slide 35
Some Cost Considerations for Managers
Three guidelines for estimating marginal cost:
2) A single item on a firm’s accounting
ledger may have two components,
only one of which involves marginal
cost.
Chapter 8
Slide 36
Some Cost Considerations for Managers
Three guidelines for estimating marginal cost:
3) All opportunity cost should be
included in determining marginal
Chapter 8
cost.
Slide 37
A Competitive Firm’s
Short-Run Supply Curve
Price
($ per
unit)
The firm chooses the
output level where MR = MC,
as long as the firm is able to
cover its variable cost of
production.
MC
P2
ATC
P1
AVC
What happens
if P < AVC?
P = AVC
q1
Chapter 8
q2
Output
Slide 38
A Competitive Firm’s
Short-Run Supply Curve
Observations:
P
= MR
MR = MC
P = MC
Supply is the amount of output for every
possible price. Therefore:
If
P = P1, then q = q1
If P = P , then q = q
2
2
Chapter 8
Slide 39
A Competitive Firm’s
Short-Run Supply Curve
Price
($ per
unit)
S = MC above AVC
MC
P2
ATC
P1
AVC
P = AVC
Shut-down
q1
Chapter 8
q2
Output
Slide 40
A Competitive Firm’s
Short-Run Supply Curve
Observations:
Supply
is upward sloping due to diminishing
returns.
Higher
price compensates the firm for higher
cost of additional output and increases total profit
because it applies to all units.
Chapter 8
Slide 41
A Competitive Firm’s
Short-Run Supply Curve
Firm’s Response to an Input Price Change
When
the price of a firm’s product changes, the
firm changes its output level, so that the marginal
cost of production remains equal to the price.
Chapter 8
Slide 42
The Response of a Firm to
a Change in Input Price
Price
($ per
unit)
MC2
Savings to the firm
from reducing output
Input cost increases
and MC shifts to MC2
and q falls to q2.
MC1
$5
q2
Chapter 8
q1
Output
Slide 43
The Short-Run Production
of Petroleum Products
Cost
($ per
barrel) 27
26
The MC of producing
a mix of petroleum products
from crude oil increases
sharply at several levels
of output as the refinery
shifts from one processing
unit to another.
SMC
How much would
be produced if
P = $23?
P = $24-$25?
25
24
23
8,000
Chapter 8
9,000
10,000
11,000
Output
(barrels/day)
Slide 44
The Short-Run Production
of Petroleum Products
Stepped SMC indicates a different
production (cost) process at various capacity
levels.
Observation:
With
a stepped MC function, small changes in
price may not trigger a change in output.
Chapter 8
Slide 45
The Short-Run Production
of Petroleum Products
The short-run market supply curve shows
the amount of output that the industry will
produce in the short-run for every possible
price.
Consider, for simplicity, a competitive market
with three firms:
Chapter 8
Slide 46
Industry Supply in the Short Run
MC1 MC2 MC3
$ per
unit
The short-run
industry supply curve
is the horizontal
summation of the supply
curves of the firms.
P3
P2
P1
0
Chapter 8
Question: If increasing
output raises input
costs, what impact
would it have on
market supply?
2
4 5
78
10
15
Quantity 21
Slide 47
S
The Short-Run Market Supply Curve
Elasticity of Market Supply
Es (Q / Q) /(P / P)
Chapter 8
Slide 48
The Short-Run Market Supply Curve
Perfectly inelastic short-run supply arises
when the industry’s plant and equipment are
so fully utilized that new plants must be built to
achieve greater output.
Perfectly elastic short-run supply arises
when marginal costs are constant.
Chapter 8
Slide 49
The Short-Run Market Supply Curve
Questions
1) Give an example of a perfectly
inelastic supply.
2) If MC rises rapidly, would the supply
be more or less elastic?
Chapter 8
Slide 50
The World Copper Industry (1999)
Country
Australia
Canada
Chile
Indonesia
Peru
Poland
Russia
United States
Zambia
Chapter 8
Annual Production
(thousand metric tons)
600
710
3660
750
450
420
450
1850
280
Marginal Cost
(dollars/pound)
0.65
0.75
0.50
0.55
0.70
0.80
0.50
0.70
0.55
Slide 51
The Short-Run World Supply of Copper
Price
($ per pound)
0.90
MCPo
0.80
MCCa
0.70
MCA
0.60
0.50
0.40
0
MCP,MCUS
MCJ,MCZ
MCC,MCR
2000
4000
6000
8000
10000
Production (thousand metric tons)
Chapter 8
Slide 52
The Short-Run Market Supply Curve
Producer Surplus in the Short Run
Firms
earn a surplus on all but the last unit of
output.
The
producer surplus is the sum over all units
produced of the difference between the market
price of the good and the marginal cost of
production.
Chapter 8
Slide 53
Producer Surplus for a Firm
Price
($ per
unit of
output)
A
D
0
Chapter 8
At q* MC = MR.
Between 0 and q ,
MR > MC for all units.
Producer
Surplus
MC
B
AVC
P
C
q*
Alternatively, VC is the
sum of MC or ODCq* .
R is P x q* or OABq*.
Producer surplus =
R - VC or ABCD.
Output
Slide 54
The Short-Run Market Supply Curve
Producer Surplus in the Short-Run
Producer Surplus PSR - VC
Profit - R - VC- FC
Chapter 8
Slide 55
The Short-Run Market Supply Curve
Observation
Short-run
with positive fixed cost
PS
Chapter 8
Slide 56
Producer Surplus for a Market
S
Price
($ per
unit of
output)
Market producer surplus is
the difference between P*
and S from 0 to Q*.
P*
Producer
Surplus
D
Q*
Chapter 8
Output
Slide 57
Choosing Output in the Long Run
In the long run, a firm can alter all its inputs,
including the size of the plant.
We assume free entry and free exit.
Chapter 8
Slide 58
Output Choice in the Long Run
Price
($ per
unit of
output)
In the long run, the plant size will be
increased and output increased to q3.
Long-run profit, EFGD > short run
profit ABCD.
SMC
D
$40
A
C
G
LMC
LAC
SAC
E
B
P = MR
F
$30
In the short run, the
firm is faced with fixed
inputs. P = $40 > ATC.
Profit is equal to ABCD.
q1
Chapter 8
q2
q3
Output
Slide 59
Output Choice in the Long Run
Price
($ per
unit of
output)
Question: Is the producer making
a profit after increased output
lowers the price to $30?
LAC
SMC
D
$40
LMC
A
C
G
SAC
E
B
P = MR
F
$30
q1
Chapter 8
q2
q3
Output
Slide 60
Choosing Output in the Long Run
Accounting Profit & Economic Profit
Accounting profit (=
) R - wL
Economic profit ( )= R = wL - rK
wl
= labor cost
rk =
Chapter 8
opportunity cost of capital
Slide 61
Choosing Output in the Long Run
Long-Run
Long-Run Competitive
Competitive Equilibrium
Equilibrium
Zero-Profit
If
R > wL + rk, economic profits are positive
If
R = wL + rk, zero economic profits, but the
firms is earning a normal rate of return; indicating
the industry is competitive
If
Chapter 8
R < wl + rk, consider going out of business
Slide 62
Choosing Output in the Long Run
Long-Run
Long-Run Competitive
Competitive Equilibrium
Equilibrium
Entry and Exit
The
long-run response to short-run profits is to
increase output and profits.
Profits
will attract other producers.
More
producers increase industry supply which
lowers the market price.
Chapter 8
Slide 63
Long-Run Competitive Equilibrium
•Profit attracts firms
•Supply increases until profit = 0
$ per
unit of
output
$ per
unit of
output
Firm
Industry
S1
LMC
$40
LAC
P1
S2
P2
$30
D
q2
Output
Q1
Q2
Output
Choosing Output in the Long Run
Long-Run Competitive Equilibrium
1)
MC = MR
2)
P = LAC
3)
Chapter 8
No incentive to leave or enter
Profit = 0
Equilibrium Market Price
Slide 65
Choosing Output in the Long Run
Questions
1)
Explain the market adjustment when
P < LAC and firms have identical
costs.
2) Explain the market adjustment when
firms have different costs.
3) What is the opportunity cost of land?
Chapter 8
Slide 66
Choosing Output in the Long Run
Economic Rent
Economic
rent is the difference between what
firms are willing to pay for an input less the
minimum amount necessary to obtain it.
Chapter 8
Slide 67
Choosing Output in the Long Run
An Example
Two
firms A & B
Both
own their land
A
is located on a river which lowers A’s shipping
cost by $10,000 compared to B.
demand for A’s river location will increase
the price of A’s land to $10,000
The
Chapter 8
Slide 68
Choosing Output in the Long Run
An Example
Economic
rent = $10,000
$10,000 - zero cost for the land
Economic
rent increases
Economic
profit of A = 0
Chapter 8
Slide 69
Firms Earn Zero Profit in
Long-Run Equilibrium
Ticket
Price
LMC
LAC
A baseball team
in a moderate-sized city
sells enough
tickets so that price
is equal to marginal
and average cost
(profit = 0).
$7
1.0
Chapter 8
Season Tickets
Sales (millions)
Slide 70
Firms Earn Zero Profit in
Long-Run Equilibrium
Ticket
Price
Economic Rent
LMC
LAC
$10
$7
A team with the same
cost in a larger city
sells tickets for $10.
1.3
Chapter 8
Season Tickets
Sales (millions)
Slide 71
Firms Earn Zero Profit in
Long-Run Equilibrium
With a fixed input such as a unique location, the
difference between the cost of production
(LAC = 7) and price ($10) is the value or
opportunity cost of the input (location) and
represents the economic rent from the input.
Chapter 8
Slide 72
Firms Earn Zero Profit in
Long-Run Equilibrium
If the opportunity cost of the input (rent) is not
taken into consideration it may appear that
economic profits exist in the long-run.
Chapter 8
Slide 73
The Industry’s Long-Run Supply Curve
The shape of the long-run supply curve
depends on the extent to which changes in
industry output affect the prices the firms
must pay for inputs.
Chapter 8
Slide 74
The Industry’s Long-Run Supply Curve
To determine long-run supply, we assume:
All
firms have access to the available production
technology.
Output
is increased by using more inputs, not by
invention.
Chapter 8
Slide 75
The Industry’s Long-Run Supply Curve
To determine long-run supply, we assume:
The
market for inputs does not change with
expansions and contractions of the industry.
Chapter 8
Slide 76
Long-Run Supply in a
Constant-Cost Industry
$ per
unit of
output
Economic profits attract new
firms. Supply increases to S2 and
the market returns to long-run
equilibrium.
MC
AC
P2
$ per
unit of
output
Q1 increase to Q2.
Long-run supply = SL = LRAC.
Change in output has no impact on
input cost.
S1
C
P2
A
P1
S2
B
SL
P1
D1
q1
q2
Output
Q1
Q2
D2
Output
Long-Run Supply in a
Constant-Cost Industry
In a constant-cost industry, long-run supply is
a horizontal line at a price that is equal to the
minimum average cost of production.
Chapter 8
Slide 78
Long-Run Supply in an
Increasing-Cost Industry
$ per
unit of
output
SMC2
SMC1
LAC2
LAC1
P2
Due to the increase
in input prices, long-run
equilibrium occurs at
a higher price.
$ per
unit of
output
S1 S2
P2
P3
P3
P1
P1
B
A
D1
q1
q2
Output
SL
Q1 Q2 Q3
D1
Output
Long-Run Supply in a
Increasing-Cost Industry
In a increasing-cost industry, long-run supply
curve is upward sloping.
Chapter 8
Slide 80
The Industry’s
Long-Run Supply Curve
Questions
1) Explain how decreasing-cost is
possible.
2)
Illustrate a decreasing cost industry.
3) What is the slope of the SL in a
decreasing-cost industry?
Chapter 8
Slide 81
Long-Run Supply in an
Decreasing-Cost Industry
$ per
unit of
output
Due to the decrease
in input prices, long-run
equilibrium occurs at
a lower price.
$ per
unit of
output
SMC1
S1
S2
SMC2 LAC1
P2
LAC2
P1
P2
P1
P3
P3
A
B
SL
D1
q1
q2
Output
Q1 Q2 Q3
D2
Output
Long-Run Supply in a
Increasing-Cost Industry
In a decreasing-cost industry, long-run supply
curve is downward sloping.
Chapter 8
Slide 83
The Industry’s
Long-Run Supply Curve
The Effects of a Tax
In
an earlier chapter we studied how firms
respond to taxes on an input.
Now,
we will consider how a firm responds to a
tax on its output.
Chapter 8
Slide 84
Effect of an Output Tax on a Competitive
Firm’s Output
Price
($ per
unit of
output)
MC2 = MC1 + tax
An output tax
raises the firm’s
marginal cost by the
amount of the tax.
MC1
The firm will
reduce output to
the point at which
the marginal cost
plus the tax equals
the price.
t
P1
AVC2
AVC1
q2
Chapter 8
q1
Output
Slide 85
Effect of an Output
Tax on Industry Output
Price
($ per
unit of
output)
S2 = S 1 + t
S1
t
P2
Tax shifts S1 to S2 and
output falls to Q2. Price
increases to P2.
P1
D
Q2
Chapter 8
Q1
Output
Slide 86
The Industry’s
Long-Run Supply Curve
Long-Run Elasticity of Supply
1)
Constant-cost industry
Long-run
supply is horizontal
Small
increase in price will induce an
extremely large output increase
Chapter 8
Slide 87
The Industry’s
Long-Run Supply Curve
Long-Run Elasticity of Supply
1)
Chapter 8
Constant-cost industry
Long-run supply elasticity is infinitely large
Inputs would be readily available
Slide 88
The Industry’s
Long-Run Supply Curve
Long-Run Elasticity of Supply
2)
Chapter 8
Increasing-cost industry
Long-run supply is upward-sloping and elasticity is
positive
The slope (elasticity) will depend on the rate of
increase in input cost
Long-run elasticity will generally be greater than
short-run elasticity of supply
Slide 89
The Industry’s
Long-Run Supply Curve
Question:
Describe
the long-run elasticity of supply in a
decreasing -cost industry.
Chapter 8
Slide 90
The Long-Run Supply of Housing
Scenario 1: Owner-occupied housing
Suburban
National
Chapter 8
or rural areas
market for inputs
Slide 91
The Long-Run Supply of Housing
Questions
Is
this an increasing or a constant-cost industry?
What
would you predict about the elasticity of
supply?
Chapter 8
Slide 92
The Long-Run Supply of Housing
Scenario 2: Rental property
Zoning
restrictions apply
Urban location
High-rise construction cost
Chapter 8
Slide 93
The Long-Run Supply of Housing
Questions
Is
this an increasing or a constant-cost industry?
What
would you predict about the elasticity of
supply?
Chapter 8
Slide 94
Summary
The managers of firms can operate in
accordance with a complex set of objectives
and under various constraints.
A competitive market makes its output choice
under the assumption that the demand for its
own output is horizontal.
Chapter 8
Slide 95
Summary
In the short run, a competitive firm
maximizes its profit by choosing an output at
which price is equal to (short-run) marginal
cost.
The short-run market supply curve is the
horizontal summation of the supply curves of
the firms in an industry.
Chapter 8
Slide 96
Summary
The producer surplus for a firm is the
difference between revenue of a firm and
the minimum cost that would be necessary to
produce the profit-maximizing output.
Economic rent is the payment for a scarce
resource of production less the minimum
amount necessary to hire that factor.
Chapter 8
Slide 97
Summary
In the long-run, profit-maximizing competitive
firms choose the output at which price is equal
to long-run marginal cost.
The long-run supply curve for a firm can be
horizontal, upward sloping, or downward
sloping.
Chapter 8
Slide 98
End of Chapter 8
Profit Maximization and
Competitive Supply
