LECTURE #12 MICROECONOMICSCHAPTER 14.ppt

LECTURE #12: MICROECONOMICSCHAPTER 14 Competitive Markets Profit Maximization Supply Function Firms in Competitive Markets The Meaning of Competition Competitive Market: a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker. There are three characteristics of a [perfectly] competitive market There are many buyers and sellers. Goods offered by the sellers are largely the same. Firms can freely enter or exit the market. Firms in Competitive Markets The Revenue of a Competitive Firm Total Revenue: Price times Quantity. TR = P x Q Average Revenue: Total Revenue divided by Quantity sold. AR = TR / Q Marginal Revenue: Change in Total Revenue from additional unit sold. MR = DTR / DQ Profit Maximization  Vaca Family Dairy Farm Profit is maximized if the farm produces 4 or 5 gallons of milk (see Profit column). Profit-Maximizing quantity occurs when marginal revenue = marginal cost. If MR exceeds MC, increasing output will increase profit If MR is less than MC, firm will increase profit by decreasing output. Profit-maximization occurs where MR is equal to MC. Profit Maximization and Competitive Firms Supply Curve The Marginal-Cost Curve and the Firms Supply Decision Cost curves have special features that are important for our analysis. The marginal-cost curve is upward sloping. The average-total-cost curve is U-shaped. The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost. Marginal and average revenue can be shown by a horizontal line at the market price To find the profit-maximizing level of output, we can follow the same rules that we discussed above. Profit Maximization If MR is greater than MC, the firm should increase its output. MR1 MC1 If MC is greater than MR, the firm should decrease its output. MR2 MC2 IF MR = MC, then firm is at profit-maximizing level of output These rules apply to competitive firms, and firms with market power. Profit Maximization