Profit Maximization and Competitive Supply
اسلاید 1: Chapter 8Profit Maximization and Competitive Supply
اسلاید 2: Chapter 8Slide 2Topics to be DiscussedPerfectly Competitive MarketsProfit MaximizationMarginal Revenue, Marginal Cost, and Profit MaximizationChoosing Output in the Short-Run
اسلاید 3: Chapter 8Slide 3Topics to be DiscussedThe Competitive Firm’s Short-Run Supply CurveShort-Run Market SupplyChoosing Output in the Long-RunThe Industry’s Long-Run Supply Curve
اسلاید 4: Chapter 8Slide 4Perfectly Competitive MarketsCharacteristics of Perfectly Competitive Markets1)Price taking2)Product homogeneity3)Free entry and exit
اسلاید 5: Chapter 8Slide 5Perfectly Competitive MarketsPrice TakingThe 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.
اسلاید 6: Chapter 8Slide 6Perfectly Competitive MarketsProduct HomogeneityThe products of all firms are perfect substitutes.ExamplesAgricultural products, oil, copper, iron, lumber
اسلاید 7: Chapter 8Slide 7Perfectly Competitive MarketsFree Entry and ExitBuyers can easily switch from one supplier to another.Suppliers can easily enter or exit a market.
اسلاید 8: Chapter 8Slide 8Perfectly Competitive MarketsDiscussion QuestionsWhat are some barriers to entry and exit?Are all markets competitive?When is a market highly competitive?
اسلاید 9: Chapter 8Slide 9Profit MaximizationDo firms maximize profits?Possibility of other objectivesRevenue maximizationDividend maximizationShort-run profit maximization
اسلاید 10: Chapter 8Slide 10Profit MaximizationDo firms maximize profits?Implications of non-profit objectiveOver the long-run investors would not support the companyWithout profits, survival unlikely
اسلاید 11: Chapter 8Slide 11Profit MaximizationDo firms maximize profits?Long-run profit maximization is valid and does not exclude the possibility of altruistic behavior.
اسلاید 12: Chapter 8Slide 12Marginal Revenue, Marginal Cost, and Profit MaximizationDetermining the profit maximizing level of outputProfit ( ) = Total Revenue - Total CostTotal Revenue (R) = PqTotal Cost (C) = CqTherefore:
اسلاید 13: Chapter 8Slide 13Profit Maximization in the Short Run0Cost,Revenue,Profit($s per year)Output (units per year)R(q)Total RevenueSlope of R(q) = MR
اسلاید 14: Chapter 8Slide 140Cost,Revenue,Profit$ (per year)Output (units per year)Profit Maximization in the Short RunC(q)Total CostSlope of C(q) = MCWhy is cost positive when q is zero?
اسلاید 15: Chapter 8Slide 15Marginal 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.Marginal Revenue, Marginal Cost, and Profit Maximization
اسلاید 16: Chapter 8Slide 16Comparing R(q) and C(q)Output levels: 0- q0: C(q)> R(q)Negative profit FC + VC > R(q)MR > MCIndicates higher profit at higher output0Cost,Revenue,Profit($s per year)Output (units per year)R(q)C(q)ABq0q*Marginal Revenue, Marginal Cost, and Profit Maximization
اسلاید 17: Chapter 8Slide 17Comparing R(q) and C(q)Question: Why is profit negative when output is zero?Marginal Revenue, Marginal Cost, and Profit MaximizationR(q)0Cost,Revenue,Profit$ (per year)Output (units per year)C(q)ABq0q*
اسلاید 18: Chapter 8Slide 18Comparing R(q) and C(q)Output levels: q0 - q*R(q)> C(q)MR > MCIndicates higher profit at higher outputProfit is increasingR(q)0Cost,Revenue,Profit$ (per year)Output (units per year)C(q)ABq0q*Marginal Revenue, Marginal Cost, and Profit Maximization
اسلاید 19: Chapter 8Slide 19Comparing R(q) and C(q)Output level: q*R(q)= C(q)MR = MCProfit is maximizedR(q)0Cost,Revenue,Profit$ (per year)Output (units per year)C(q)ABq0q*Marginal Revenue, Marginal Cost, and Profit Maximization
اسلاید 20: Chapter 8Slide 20QuestionWhy is profit reduced when producing more or less than q*? R(q)0Cost,Revenue,Profit$ (per year)Output (units per year)C(q)ABq0q*Marginal Revenue, Marginal Cost, and Profit Maximization
اسلاید 21: Chapter 8Slide 21Comparing R(q) and C(q)Output levels beyond q*: R(q)> C(q)MC > MR Profit is decreasingMarginal Revenue, Marginal Cost, and Profit MaximizationR(q)0Cost,Revenue,Profit$ (per year)Output (units per year)C(q)ABq0q*
اسلاید 22: Chapter 8Slide 22Therefore, it can be said:Profits are maximized when MC = MR.Marginal Revenue, Marginal Cost, and Profit MaximizationR(q)0Cost,Revenue,Profit$ (per year)Output (units per year)C(q)ABq0q*
اسلاید 23: Chapter 8Slide 23Marginal Revenue, Marginal Cost, and Profit Maximization
اسلاید 24: Chapter 8Slide 24Marginal Revenue, Marginal Cost, and Profit Maximization
اسلاید 25: Chapter 8Slide 25The Competitive FirmPrice takerMarket output (Q) and firm output (q)Market demand (D) and firm demand (d)R(q) is a straight lineMarginal Revenue, Marginal Cost, and Profit Maximization
اسلاید 26: Demand and Marginal Revenue Faced by a Competitive FirmOutput (bushels)Price$ per bushelPrice$ per bushelOutput (millions of bushels)d$4100200100FirmIndustryD$4
اسلاید 27: Chapter 8Slide 27The Competitive FirmThe competitive firm’s demandIndividual producer sells all units for $4 regardless of the producer’s level of output.If the producer tries to raise price, sales are zero.Marginal Revenue, Marginal Cost, and Profit Maximization
اسلاید 28: Chapter 8Slide 28The Competitive FirmThe competitive firm’s demandIf the producers tries to lower price he cannot increase salesP = D = MR = ARMarginal Revenue, Marginal Cost, and Profit Maximization
اسلاید 29: Chapter 8Slide 29The Competitive FirmProfit MaximizationMC(q) = MR = PMarginal Revenue, Marginal Cost, and Profit Maximization
اسلاید 30: Chapter 8Slide 30Choosing Output in the Short RunWe will combine production and cost analysis with demand to determine output and profitability.
اسلاید 31: Chapter 8Slide 31q0Lost profit forqq < q*Lost profit forq2 > q*q1q2A Competitive Firm Making a Positive Profit10203040Price($ perunit)012345678910115060MCAVCATCAR=MR=POutputq*At q*: MR = MCand P > ATCDABCq1 : MR > MC andq2: MC > MR andq0: MC = MR butMC falling
اسلاید 32: Chapter 8Slide 32Would this producercontinue to produce with a loss?A Competitive Firm Incurring LossesPrice($ perunit)OutputAVCATCMCq*P = MRBFCAEDAt q*: MR = MCand P < ATCLosses = P- AC) x q* or ABCD
اسلاید 33: Chapter 8Slide 33Choosing Output in the Short RunSummary of Production DecisionsProfit is maximized when MC = MRIf P > ATC the firm is making profits.If AVC < P < ATC the firm should produce at a loss.If P < AVC < ATC the firm should shut-down.
اسلاید 34: Chapter 8Slide 34The Short-Run Output of an Aluminum Smelting PlantOutput (tons per day) Cost(dollars per item)300600900011001200130014001140P1P2ObservationsPrice between $1140 & $1300: q = 600Price > $1300: q = 900Price < $1140: q = 0 QuestionShould the firm stay in businesswhen P < $1140?
اسلاید 35: Chapter 8Slide 35Some Cost Considerations for ManagersThree guidelines for estimating marginal cost:1)Average variable cost should not be used as a substitute for marginal cost.
اسلاید 36: Chapter 8Slide 36Some Cost Considerations for ManagersThree guidelines for estimating marginal cost:2)A single item on a firm’s accounting ledger may have two components, only one of which involves marginal cost.
اسلاید 37: Chapter 8Slide 37Three guidelines for estimating marginal cost:3)All opportunity cost should be included in determining marginal cost.Some Cost Considerations for Managers
اسلاید 38: Chapter 8Slide 38A Competitive Firm’s Short-Run Supply CurvePrice($ perunit)OutputMCAVCATCP = AVCWhat happensif P < AVC?P2q2P1q1The firm chooses theoutput level where MR = MC,as long as the firm is able tocover its variable cost of production.
اسلاید 39: Chapter 8Slide 39Observations:P = MRMR = MCP = MCSupply is the amount of output for every possible price. Therefore:If P = P1, then q = q1If P = P2, then q = q2A Competitive Firm’s Short-Run Supply Curve
اسلاید 40: Chapter 8Slide 40Price($ perunit)MCOutputAVCATCP = AVCP1P2q1q2S = MC above AVCA Competitive Firm’s Short-Run Supply CurveShut-down
اسلاید 41: Chapter 8Slide 41Observations: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.A Competitive Firm’s Short-Run Supply Curve
اسلاید 42: Chapter 8Slide 42Firm’s Response to an Input Price ChangeWhen 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.A Competitive Firm’s Short-Run Supply Curve
اسلاید 43: Chapter 8Slide 43MC2q2Input cost increases and MC shifts to MC2and q falls to q2.MC1q1The Response of a Firm to a Change in Input PricePrice($ perunit)Output$5Savings to the firmfrom reducing output
اسلاید 44: Chapter 8Slide 44The Short-Run Production of Petroleum ProductsCost($ perbarrel)Output(barrels/day)8,0009,00010,00011,0002324252627SMCHow much wouldbe produced if P = $23? P = $24-$25?The MC of producinga mix of petroleum productsfrom crude oil increasessharply at several levelsof output as the refinery shifts from one processingunit to another.
اسلاید 45: Chapter 8Slide 45Stepped SMC indicates a different production (cost) process at various capacity levels. Observation:With a stepped MC function, small changes in price may not trigger a change in output.The Short-Run Production of Petroleum Products
اسلاید 46: Chapter 8Slide 46The short-run market supply curve shows the amount of output that the industry will produce in the short-run for every possible price.Consider, for simplicity, a competitive market with three firms:The Short-Run Production of Petroleum Products
اسلاید 47: Chapter 8Slide 47MC3Industry Supply in the Short Run$ perunit024810571521MC1SThe short-runindustry supply curveis the horizontalsummation of the supplycurves of the firms.QuantityMC2P1P3P2Question: If increasingoutput raises inputcosts, what impactwould it have on market supply?
اسلاید 48: Chapter 8Slide 48The Short-Run Market Supply CurveElasticity of Market Supply
اسلاید 49: Chapter 8Slide 49Perfectly 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.The Short-Run Market Supply Curve
اسلاید 50: Chapter 8Slide 50Questions1)Give an example of a perfectly inelastic supply.2)If MC rises rapidly, would the supply be more or less elastic?The Short-Run Market Supply Curve
اسلاید 51: Chapter 8Slide 51The World Copper Industry (1999)Annual ProductionMarginal CostCountry(thousand metric tons)(dollars/pound)Australia6000.65Canada7100.75Chile36600.50Indonesia7500.55Peru4500.70Poland4200.80Russia4500.50United States18500.70Zambia2800.55
اسلاید 52: Chapter 8Slide 52The Short-Run World Supply of CopperProduction (thousand metric tons) Price($ per pound)02000400060008000100000.400.500.600.700.800.90MCC,MCRMCJ,MCZMCAMCP,MCUSMCCaMCPo
اسلاید 53: Chapter 8Slide 53Producer Surplus in the Short RunFirms 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.The Short-Run Market Supply Curve
اسلاید 54: Chapter 8Slide 54ADBCProducerSurplusAlternatively, VC is thesum of MC or ODCq* .R is P x q* or OABq*.Producer surplus =R - VC or ABCD.Producer Surplus for a FirmPrice($ perunit ofoutput)OutputAVCMC0Pq*At q* MC = MR.Between 0 and q , MR > MC for all units.
اسلاید 55: Chapter 8Slide 55Producer Surplus in the Short-RunThe Short-Run Market Supply Curve
اسلاید 56: Chapter 8Slide 56ObservationShort-run with positive fixed costThe Short-Run Market Supply Curve
اسلاید 57: Chapter 8Slide 57DP*Q*ProducerSurplusMarket producer surplus isthe difference between P* and S from 0 to Q*.Producer Surplus for a MarketPrice($ perunit ofoutput)OutputS
اسلاید 58: Chapter 8Slide 58Choosing Output in the Long RunIn the long run, a firm can alter all its inputs, including the size of the plant.We assume free entry and free exit.
اسلاید 59: Chapter 8Slide 59q1ABCDIn the short run, thefirm is faced with fixedinputs. P = $40 > ATC.Profit is equal to ABCD.Output Choice in the Long RunPrice($ perunit ofoutput)OutputP = MR$40SACSMCIn the long run, the plant size will be increased and output increased to q3.Long-run profit, EFGD > short runprofit ABCD.q3q2GF$30LACELMC
اسلاید 60: Chapter 8Slide 60q1ABCDOutput Choice in the Long RunPrice($ perunit ofoutput)OutputP = MR$40SACSMCQuestion: Is the producer makinga profit after increased outputlowers the price to $30?q3q2GF$30LACELMC
اسلاید 61: Chapter 8Slide 61Choosing Output in the Long RunAccounting Profit & Economic ProfitAccounting profit = R - wLEconomic profit = R = wL - rKwl = labor costrk = opportunity cost of capital
اسلاید 62: Chapter 8Slide 62Choosing Output in the Long RunZero-ProfitIf R > wL + rk, economic profits are positiveIf R = wL + rk, zero economic profits, but the firms is earning a normal rate of return; indicating the industry is competitiveIf R < wl + rk, consider going out of businessLong-Run Competitive Equilibrium
اسلاید 63: Chapter 8Slide 63Choosing Output in the Long RunEntry and ExitThe long-run response to short-run profits is to increase output and profits.Profits will attract other producers.More producers increase industry supply which lowers the market price.Long-Run Competitive Equilibrium
اسلاید 64: S1Long-Run Competitive EquilibriumOutputOutput$ per unit ofoutput$ per unit ofoutput$40LACLMCDS2P1Q1q2FirmIndustry$30Q2P2Profit attracts firmsSupply increases until profit = 0
اسلاید 65: Chapter 8Slide 65Choosing Output in the Long RunLong-Run Competitive Equilibrium1) MC = MR 2)P = LACNo incentive to leave or enterProfit = 03) Equilibrium Market Price
اسلاید 66: Chapter 8Slide 66Choosing Output in the Long RunQuestions1)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?
اسلاید 67: Chapter 8Slide 67Choosing Output in the Long RunEconomic RentEconomic rent is the difference between what firms are willing to pay for an input less the minimum amount necessary to obtain it.
اسلاید 68: Chapter 8Slide 68Choosing Output in the Long RunAn ExampleTwo firms A & BBoth own their landA is located on a river which lowers A’s shipping cost by $10,000 compared to B.The demand for A’s river location will increase the price of A’s land to $10,000
اسلاید 69: Chapter 8Slide 69Choosing Output in the Long RunAn ExampleEconomic rent = $10,000 $10,000 - zero cost for the landEconomic rent increasesEconomic profit of A = 0
اسلاید 70: Chapter 8Slide 70Firms Earn Zero Profit in Long-Run EquilibriumTicketPriceSeason TicketsSales (millions)LAC$71.0A baseball teamin a moderate-sized city sells enough tickets so that price is equal to marginal and average cost(profit = 0).LMC
اسلاید 71: Chapter 8Slide 711.3$10Economic RentTicketPrice$7LACA team with the samecost in a larger citysells tickets for $10.Firms Earn Zero Profit in Long-Run EquilibriumSeason TicketsSales (millions)LMC
اسلاید 72: Chapter 8Slide 72With a fixed input such as a unique location, the difference between the cost of production (LAC = 7) and price ($10) is the value or opportunity cost of the input (location) and represents the economic rent from the input.Firms Earn Zero Profit in Long-Run Equilibrium
اسلاید 73: Chapter 8Slide 73If the opportunity cost of the input (rent) is not taken into consideration it may appear that economic profits exist in the long-run.Firms Earn Zero Profit in Long-Run Equilibrium
اسلاید 74: Chapter 8Slide 74The shape of the long-run supply curve depends on the extent to which changes in industry output affect the prices the firms must pay for inputs.The Industry’s Long-Run Supply Curve
اسلاید 75: Chapter 8Slide 75The Industry’s Long-Run Supply CurveTo determine long-run supply, we assume:All firms have access to the available production technology.Output is increased by using more inputs, not by invention.
اسلاید 76: Chapter 8Slide 76The Industry’s Long-Run Supply CurveTo determine long-run supply, we assume:The market for inputs does not change with expansions and contractions of the industry.
اسلاید 77: AP1ACP1MCq1D1S1Q1CD2P2P2q2BS2Q2Economic profits attract newfirms. Supply increases to S2 andthe market returns to long-run equilibrium.Long-Run Supply in a Constant-Cost IndustryOutputOutput$ per unit ofoutput$ per unit ofoutputSLQ1 increase to Q2.Long-run supply = SL = LRAC.Change in output has no impact on input cost.
اسلاید 78: Chapter 8Slide 78In a constant-cost industry, long-run supply is a horizontal line at a price that is equal to the minimum average cost of production.Long-Run Supply in a Constant-Cost Industry
اسلاید 79: Long-Run Supply in an Increasing-Cost IndustryOutputOutput$ per unit ofoutput$ per unit ofoutputS1D1P1LAC1P1SMC1q1Q1ASLP3SMC2Due to the increasein input prices, long-runequilibrium occurs at a higher price.LAC2BS2P3Q3q2P2P2D1Q2
اسلاید 80: Chapter 8Slide 80In a increasing-cost industry, long-run supply curve is upward sloping.Long-Run Supply in a Increasing-Cost Industry
اسلاید 81: Chapter 8Slide 81The Industry’s Long-Run Supply CurveQuestions1) 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?
اسلاید 82: S2BSLP3Q3SMC2P3LAC2Due to the decreasein input prices, long-runequilibrium occurs at a lower price.Long-Run Supply in an Decreasing-Cost IndustryOutputOutput$ per unit ofoutput$ per unit ofoutputP1P1SMC1AD1S1Q1q1LAC1Q2q2P2P2D2
اسلاید 83: Chapter 8Slide 83In a decreasing-cost industry, long-run supply curve is downward sloping.Long-Run Supply in a Increasing-Cost Industry
اسلاید 84: Chapter 8Slide 84The Effects of a TaxIn 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.The Industry’s Long-Run Supply Curve
اسلاید 85: Chapter 8Slide 85Effect of an Output Tax on a Competitive Firm’s OutputPrice($ perunit ofoutput)OutputAVC1MC1P1q1The firm willreduce output tothe point at whichthe marginal costplus the tax equalsthe price.q2tMC2 = MC1 + taxAVC2An output taxraises the firm’smarginal cost by theamount of the tax.
اسلاید 86: Chapter 8Slide 86Effect of an Output Tax on Industry OutputPrice($ perunit ofoutput)OutputDP1S1Q1P2Q2S2 = S1 + ttTax shifts S1 to S2 andoutput falls to Q2. Priceincreases to P2.
اسلاید 87: Chapter 8Slide 87Long-Run Elasticity of Supply1)Constant-cost industryLong-run supply is horizontalSmall increase in price will induce an extremely large output increaseThe Industry’s Long-Run Supply Curve
اسلاید 88: Chapter 8Slide 88Long-Run Elasticity of Supply1)Constant-cost industryLong-run supply elasticity is infinitely largeInputs would be readily availableThe Industry’s Long-Run Supply Curve
اسلاید 89: Chapter 8Slide 89Long-Run Elasticity of Supply2)Increasing-cost industryLong-run supply is upward-sloping and elasticity is positiveThe slope (elasticity) will depend on the rate of increase in input costLong-run elasticity will generally be greater than short-run elasticity of supplyThe Industry’s Long-Run Supply Curve
اسلاید 90: Chapter 8Slide 90Question:Describe the long-run elasticity of supply in a decreasing -cost industry.The Industry’s Long-Run Supply Curve
اسلاید 91: Chapter 8Slide 91The Long-Run Supply of HousingScenario 1: Owner-occupied housingSuburban or rural areasNational market for inputs
اسلاید 92: Chapter 8Slide 92The Long-Run Supply of HousingQuestionsIs this an increasing or a constant-cost industry?What would you predict about the elasticity of supply?
اسلاید 93: Chapter 8Slide 93Scenario 2: Rental propertyZoning restrictions applyUrban locationHigh-rise construction costThe Long-Run Supply of Housing
اسلاید 94: Chapter 8Slide 94QuestionsIs this an increasing or a constant-cost industry?What would you predict about the elasticity of supply?The Long-Run Supply of Housing
اسلاید 95: Chapter 8Slide 95SummaryThe 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.
اسلاید 96: Chapter 8Slide 96SummaryIn 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.
اسلاید 97: Chapter 8Slide 97SummaryThe 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.
اسلاید 98: Chapter 8Slide 98SummaryIn 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.
اسلاید 99: End of Chapter 8Profit Maximization and Competitive Supply
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