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1、,Chapter 8,Profit Maximization and Competitive Supply,Topics to be Discussed,Profit Maximization Marginal Revenue, Marginal Cost, and Profit Maximization Choosing Output in the Short Run The Competitive Firms Short-Run Supply Curve,Topics to be Discussed,Choosing Output in the Long Run The Industrys
2、 Long-Run Supply Curve Perfectly Competitive Markets,Introduction,Characteristics of Perfectly Competitive Markets 1) Identical products 2) Individual firms are too small to impact the market 3) No barriers to entry and exit,Profit Maximization,Do firms maximize profits? 1) Possibility of other obje
3、ctives Revenue maximization Dividend maximization Short-run profit maximization,Profit Maximization,Do firms maximize profits? 2) Implications of non-profit objective Over the long-run investors would not support the company Without profits, survival unlikely,Profit Maximization,Do firms maximize pr
4、ofits? 3) Long-run profit maximization is valid and does not exclude the possibility of altruistic behavior.,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 T
5、herefore:,Profit Maximization in the Short Run,0,Cost, Revenue, Profit $ (per year),Output (units per year),Profit Maximization in the Short Run,0,Cost, Revenue, Profit $ (per year),Output (units per year),R(q),Profit Maximization in the Short Run,0,Cost, Revenue, Profit $ (per year),Output (units p
6、er year),R(q),C(q),Profit Maximization in the Short Run,0,Cost, Revenue, Profit $ (per year),Output (units per year),R(q),C(q),A,B,q0,q*,Marginal Revenue, Marginal Cost, and Profit Maximization,Observations R(q) Curvature of the line indicating that higher output levels are accompanied by lower pric
7、es R(q) slope = marginal revenue C(q) C(q) slope = marginal cost Question: Why is C(q) positive when output is zero?,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 p
8、roducing one more unit of output.,Marginal Revenue, Marginal Cost, and Profit Maximization,0,Cost, Revenue, Profit $ (per year),Output (units per year),R(q),C(q),A,B,q0,q*,Marginal Revenue, Marginal Cost, and Profit Maximization,Comparing R(q) and C(q) Output levels 0- q0: C(q) R(q) FC + VC R(q) MR
9、MC Indicates higher profit at higher output,0,Cost, Revenue, Profit $ (per year),Output (units per year),R(q),C(q),A,B,q0,q*,Marginal Revenue, Marginal Cost, and Profit Maximization,Comparing R(q) and C(q) Output levels 0- q0: C(q) R(q) FC + VC R(q) MR MC Indicates higher profit at higher output Que
10、stion: Why is profit negative when output is zero?,0,Cost, Revenue, Profit $ (per year),Output (units per year),R(q),C(q),A,B,q0,q*,Marginal Revenue, Marginal Cost, and Profit Maximization,Comparing R(q) and C(q) Output levels q0 - q*: R(q) C(q) MR MC Indicates higher profit at higher output,0,Cost,
11、 Revenue, Profit $ (per year),Output (units per year),R(q),C(q),A,B,q0,q*,Marginal Revenue, Marginal Cost, and Profit Maximization,Comparing R(q) and C(q) Output levels q*: R(q)= C(q) MR = MC,0,Cost, Revenue, Profit $ (per year),Output (units per year),R(q),C(q),A,B,q0,q*,Marginal Revenue, Marginal
12、Cost, and Profit Maximization,Comparing R(q) and C(q) Output levels q*: R(q)= C(q) MR = MC Question: Why would profit be reduced at lower and higher levels of output?,0,Cost, Revenue, Profit $ (per year),Output (units per year),R(q),C(q),A,B,q0,q*,Marginal Revenue, Marginal Cost, and Profit Maximiza
13、tion,Comparing R(q) and C(q) Output levels Beyond q*: R(q) C(q) MC = MR,0,Cost, Revenue, Profit $ (per year),Output (units per year),R(q),C(q),A,B,q0,q*,Marginal Revenue, Marginal Cost, and Profit Maximization,Therefore, it can be said: Profits are maximized when MC = MR.,0,Cost, Revenue, Profit $ (
14、per year),Output (units per year),R(q),C(q),A,B,q0,q*,Marginal Revenue, Marginal Cost, and Profit Maximization,Marginal Revenue, Marginal Cost, and Profit Maximization,Marginal Revenue, Marginal Cost, and Profit Maximization,The Competitive Firm 1) Price taker 2) Market output (Q) and firm output (q
15、) 3) Market demand (D) and firm demand (d) 4) R(q) is a straight line,Marginal Revenue, Marginal Cost, and Profit Maximization,Output (bushels),Price $ per bushel,Price $ per bushel,Output millions of bushels),Marginal Revenue, Marginal Cost, and Profit Maximization,Output (bushels),Price $ per bush
16、el,Price $ per bushel,Output millions of bushels),d,$4,D,100,200,100,Firm,Industry,$4,Marginal Revenue, Marginal Cost, and Profit Maximization,The Competitive Firm 5) The competitive firms demand Individual producer sells all units for $4 regardless of the producers level of output. If the producer tries to raise price, sales are ze
