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1、Chapter 9, 2006 Thomson Learning/South-Western,Profit Maximization and Supply,2,The Output Decision,Economic profits () are defined as = R(q) - TC(q) (9.1) where R(q) is the amount of revenues received and TC(q) are the economic costs incurred, , both depending upon the level of output (q) produced.
2、 The firm will choose the level of output that generates the largest level of profit.,3,The Output Decision,In Figure 9-1, (TC) is the total cost curve that is drawn consistent with the discussion in Chapter 8. The total revenues curve is labeled (R). As drawn in the figure, profits reach their maxi
3、mum at the output level q*.,4,Costs (TC),Revenues (R),Profits,q1,q2,q*,Costs, Revenue,(a),(b),Profits,0,Output per week,0,FIGURE 9-1: Marginal Revenue Must Equal Marginal Cost for Profit Maximization,Output per week,5,The Marginal Revenue/Marginal Cost Rule,At output levels below q* increasing outpu
4、t causes profits to increase, so profit maximizing firms would not stop short of q*. Increasing output beyond q* reduces profits, so profit maximizing firms would not produce more than q*.,6,The Marginal Revenue/Marginal Cost Rule,At q* marginal cost equals marginal revenue, the extra revenue a firm
5、 receives when it sells one more unit of output. In order to maximize profits, a firm should produce that output level for which the marginal revenue from selling one more unit of output is exactly equal to the marginal cost of producing that unit of output.,7,The Marginal Revenue/Marginal Cost Rule
6、,At the profit maximizing level of output Marginal Revenue = Marginal Cost (9.2) or MR = MC. (9.3) Firms, starting at zero output, can expand output so long as marginal revenue exceeds marginal cost, but dont go beyond the point where these two are equal.,8,Marginal Revenue,A price taker is a firm o
7、r individual whose decisions regarding buying or selling have no effect on the prevailing market price of a good or service. For a price taking firm MR = P. (9.4),9,Marginal Revenue for a Downward-Sloping Demand Curve,A firm that is not a price taker faces a downward sloping demand curve for its pro
8、duct. These firms must reduce their selling price in order to sell more goods or services. In this case marginal revenue is less than market price MR P. (9.5),10,A Numerical Example,Assume the quantity demanded of CDs from a particular store per week (q) is related to the price (P) by q = 10 - P. (9
9、.6) Total revenue is (Pq) and marginal revenue (MR) is the change in total revenue due to a change in quantity demanded.,11,A Numerical Example,This example demonstrates that MR 5, total revenues decline causing marginal revenue to be negative.,12,TABLE 9-1: Total and Marginal Revenue for CDs (q = 1
10、0 - P),13,A Numerical Example,This hypothetical demand curve is shown in Figure 9-2. When q = 3, P = $7 and total revenue equals $21 which is shown by the area of the rectangle P*Aq*0. If the firm wants to sell four CDs it must reduce the price to $6.,14,Price (dollars),Demand,A,P* = $7,10,CDs per w
11、eek,1,2,3,4,10,q*,0,FIGURE 9-2: Illustration of Marginal Revenue for the Demand Curve for CDs (q = 10 - P),15,A Numerical Example,Total revenue is not $24 as illustrated by the area of the rectangle P*Bq*0. The sale of one more CD increases revenue by the price at which it sells ($6). But, to sell t
12、he fourth CD, it must reduce its selling price on the first three CDs from $7 to $6 which reduces revenue by $3, which is shown in the lightly shaded rectangle.,16,Price (dollars),Demand,A,B,P* = $7,10,CDs per week,1,2,3,4,10,q*,q*,0,FIGURE 9-2: Illustration of Marginal Revenue for the Demand Curve
13、for CDs (q = 10 - P),P* = $6,17,A Numerical Example,The net result of this price decrease is total revenue increases by only $3 ($6 - $3). Thus, the marginal revenue of the fourth CD is $3. The sale of the sixth CD, instead of five, results in an increase in revenue of the price ($4), but a decrease
14、 for the five other CDs (-$5) with a net effect (MR) = -$1.,18,Marginal Revenue and Price Elasticity,As previously defined in Chapter 4, the price elasticity of demand for the market is,This same concept can be defined for a single firm as,19,Marginal Revenue and Price Elasticity,If demand facing th
15、e firm is inelastic (0 eq,P -1), a rise in the price will cause total revenues to rise. If demand is elastic (eq,P -1), a rise in price will result in smaller total revenues. This relationship between the price elasticity and marginal revenue is summarized in Table 9-2.,20,TABLE 9-2: Relationship be
16、tween Marginal Revenue and Elasticity,21,Marginal Revenue and Price Elasticity,It can be shown that all of the relationships in Table 9-2 can be derived from the basic equation For example, if eq,P -1 (elastic), this equation shows that MR is positive.,22,Marginal Revenue and Price Elasticity,If demand is infinitely elastic (eq,P = -), MR will equal price, as was shown when the firm
