Chapter 8 profit max and competitive supply
Perfect competition:
- Price taking: Firms have no influence on price; price is fixed.
- Product homogeneity: Products are perfectly substitutable.
- Free entry and exit: No special costs.
Many firms are highly competitive, they face very elastic demand curves.
How much output firm decides to sell has no effect on price. → demand curve is
horizontal. Demand curve is both average revenue curve and marginal revenue curve.
Manager’s freedom to pursue goals other than long-run profit maximization is limited.
Cooperative= association of businesses and operated by members for mutual benefit.
Condominium= housing unit that is individually owned but provides access to common
facilities that are paid for and controlled jointly by association of owners.
Marginal revenue = change in revenue resulting from one unit increase.
Profit is maximized when → MR = MC
Output rule : if a firm is producing any output, it should produce at the level at which MR
equals MC.
Supply curve: for P less than AVC output is 0.
When perfectly inelastic supply → arises when industry’s plant and equipment
are so fully utilized that greater output can be achieved when new plants are
build.
Perfectly elastic supply → marginal costs are constant.
Because marginal cost curves are upward sloping, short-run elasticity of supply is always
positive. In short-run firms are capacity-constrained, but when MC increases slowly in
response to increases in output, supply is relatively elastic.
In short-run, when fixed cost is positive, producer surplus is greater than profit.
Long-run output is point at which long-run MC equals the price.
Zero economic profit = Firm is earning normal return on its investment; it’s doing as well as it
could by investing money elsewhere.
In a market with entry and exit, firm enters when it can earn positive long-run profit and exits
when it faces the prospect of long-run loss.
Long-run competitive equilibrium:
- All firms in industry are maximizing profit.
- No firm has incentive to enter/exit because all firms are earning zero economic profit.
- P of product is such that the quantity supplied by industry is equal to q demanded.
Positive accounting profits are translated into economic rent that is earned by scarce factors.
Economic rent = amount that firms are willing to pay for an input less the minimum amount
Perfect competition:
- Price taking: Firms have no influence on price; price is fixed.
- Product homogeneity: Products are perfectly substitutable.
- Free entry and exit: No special costs.
Many firms are highly competitive, they face very elastic demand curves.
How much output firm decides to sell has no effect on price. → demand curve is
horizontal. Demand curve is both average revenue curve and marginal revenue curve.
Manager’s freedom to pursue goals other than long-run profit maximization is limited.
Cooperative= association of businesses and operated by members for mutual benefit.
Condominium= housing unit that is individually owned but provides access to common
facilities that are paid for and controlled jointly by association of owners.
Marginal revenue = change in revenue resulting from one unit increase.
Profit is maximized when → MR = MC
Output rule : if a firm is producing any output, it should produce at the level at which MR
equals MC.
Supply curve: for P less than AVC output is 0.
When perfectly inelastic supply → arises when industry’s plant and equipment
are so fully utilized that greater output can be achieved when new plants are
build.
Perfectly elastic supply → marginal costs are constant.
Because marginal cost curves are upward sloping, short-run elasticity of supply is always
positive. In short-run firms are capacity-constrained, but when MC increases slowly in
response to increases in output, supply is relatively elastic.
In short-run, when fixed cost is positive, producer surplus is greater than profit.
Long-run output is point at which long-run MC equals the price.
Zero economic profit = Firm is earning normal return on its investment; it’s doing as well as it
could by investing money elsewhere.
In a market with entry and exit, firm enters when it can earn positive long-run profit and exits
when it faces the prospect of long-run loss.
Long-run competitive equilibrium:
- All firms in industry are maximizing profit.
- No firm has incentive to enter/exit because all firms are earning zero economic profit.
- P of product is such that the quantity supplied by industry is equal to q demanded.
Positive accounting profits are translated into economic rent that is earned by scarce factors.
Economic rent = amount that firms are willing to pay for an input less the minimum amount
