1、Chapter 8Profit Maximizationand CompetitiveSupplyTopics to be DiscussednProfit MaximizationnMarginal Revenue,Marginal Cost,and Profit MaximizationnChoosing Output in the Short RunnThe Competitive Firms Short-Run Supply CurveTopics to be DiscussednChoosing Output in the Long RunnThe Industrys Long-Ru
2、n Supply CurvenPerfectly Competitive MarketsIntroductionnCharacteristics of Perfectly Competitive Markets1)Identical products2)Individual firms are too small to impact the market3)No barriers to entry and exitProfit MaximizationnDo firms maximize profits?1)Possibility of other objectivesRevenue maxi
3、mizationDividend maximizationShort-run profit maximizationProfit MaximizationnDo firms maximize profits?2)Implications of non-profit objectiveOver the long-run investors would not support the companyWithout profits,survival unlikelyProfit MaximizationnDo firms maximize profits?3)Long-run profit maxi
4、mization is valid and does not exclude the possibility of altruistic behavior.Marginal Revenue,Marginal Cost,and Profit MaximizationnDetermining the profit maximizing level of outputProfit()=Total Revenue-Total CostTotal Revenue(R)=PqTotal Cost(C)=CqTherefore:)()()(qCqRqProfit Maximizationin the Sho
5、rt Run0Cost,Revenue,Profit$(per year)Output(units per year)Profit Maximizationin the Short Run0Cost,Revenue,Profit$(per year)Output(units per year)R(q)Profit Maximizationin the Short Run0Cost,Revenue,Profit$(per year)Output(units per year)R(q)C(q)Profit Maximizationin the Short Run0Cost,Revenue,Prof
6、it$(per year)Output(units per year)R(q)C(q)ABq0q*)(qMarginal Revenue,Marginal Cost,and Profit MaximizationnObservationsR(q)Curvature of the line indicating that higher output levels are accompanied by lower pricesR(q)slope=marginal revenueC(q)C(q)slope=marginal costnQuestion:Why is C(q)positive when
7、 output is zero?Marginal Revenue,Marginal Cost,and Profit MaximizationnMarginal revenue is the additional revenue from producing one more unit of output.nMarginal cost is the additional cost from producing one more unit of output.Marginal Revenue,Marginal Cost,and Profit Maximization0Cost,Revenue,Pr
8、ofit$(per year)Output(units per year)R(q)C(q)ABq0q*)(qMarginal Revenue,Marginal Cost,and Profit MaximizationnComparing R(q)and C(q)Output levels0-q0:C(q)R(q)FC+VC R(q)MR MCIndicates higher profit at higher output0Cost,Revenue,Profit$(per year)Output(units per year)R(q)C(q)ABq0q*)(qnegativeMarginal R
9、evenue,Marginal Cost,and Profit MaximizationnComparing R(q)and C(q)Output levels0-q0:C(q)R(q)FC+VC R(q)MR MCIndicates higher profit at higher outputnQuestion:Why is profit negative when output is zero?0Cost,Revenue,Profit$(per year)Output(units per year)R(q)C(q)ABq0q*)(qnegativeMarginal Revenue,Marg
10、inal Cost,and Profit MaximizationnComparing R(q)and C(q)Output levelsq0-q*:R(q)C(q)MR MCIndicates higher profit at higher output 0Cost,Revenue,Profit$(per year)Output(units per year)R(q)C(q)ABq0q*)(qincreasing)(qMarginal Revenue,Marginal Cost,and Profit MaximizationnComparing R(q)and C(q)Output leve
11、ls q*:R(q)=C(q)MR=MC 0Cost,Revenue,Profit$(per year)Output(units per year)R(q)C(q)ABq0q*)(qmaximized)(qMarginal Revenue,Marginal Cost,and Profit MaximizationnComparing R(q)and C(q)Output levels q*:R(q)=C(q)MR=MC nQuestion:Why would profit be reduced at lower and higher levels of output?0Cost,Revenue
12、,Profit$(per year)Output(units per year)R(q)C(q)ABq0q*)(qmaximized)(qMarginal Revenue,Marginal Cost,and Profit MaximizationnComparing R(q)and C(q)Output levels Beyond q*:R(q)C(q)MC=MR 0Cost,Revenue,Profit$(per year)Output(units per year)R(q)C(q)ABq0q*)(qdecreasing)(qMarginal Revenue,Marginal Cost,an
13、d Profit MaximizationnTherefore,it can be said:Profits are maximized when MC=MR.0Cost,Revenue,Profit$(per year)Output(units per year)R(q)C(q)ABq0q*)(qMarginal Revenue,Marginal Cost,and Profit MaximizationqCMCqR MRC-R Marginal Revenue,Marginal Cost,and Profit MaximizationorqCqR0q:whenmaximized are Pr
14、ofitsMC(q)MR(q)MCMR thatso0Marginal Revenue,Marginal Cost,and Profit MaximizationnThe Competitive Firm1)Price taker2)Market output(Q)and firm output(q)3)Market demand(D)and firm demand(d)4)R(q)is a straight lineMarginal Revenue,Marginal Cost,and Profit MaximizationOutput(bushels)Price$per bushelPric
15、e$per bushelOutput millions of bushels)Marginal Revenue,Marginal Cost,and Profit MaximizationOutput(bushels)Price$per bushelPrice$per bushelOutput millions of bushels)d$4D100200100FirmIndustry$4Marginal Revenue,Marginal Cost,and Profit MaximizationnThe Competitive Firm5)The competitive firms demandI
16、ndividual producer sells all units for$4 regardless of the producers level of output.If the producer tries to raise price,sales are zero.If the producers tries to lower price he cannot increase salesP=D=MR=ARMarginal Revenue,Marginal Cost,and Profit MaximizationnThe Competitive Firm6)Profit Maximiza
17、tionMC(q)=MR=PChoosing Output in the Short RunnWe will combine production and cost analysis with demand to determine output and profitability.A Competitive FirmMaking a Positive Profit10203040Price($perunit)012345678910115060OutputA Competitive FirmMaking a Positive Profit10203040Price($perunit)0123
18、45678910115060AR=MR=PAssume a marketprice of$40.DOutputA Competitive FirmMaking a Positive Profit10203040Price($perunit)012345678910115060DAR=MR=PMC MR MCq whereat maximized*q0q*OutputA Competitive FirmMaking a Positive ProfitOutput10203040Price($perunit)012345678910115060DAR=MR=PMCLost profit forqq
19、 q*q1:MR MC andq2:MC MR andq0:MC=MR butMC fallingq1q2A Competitive FirmMaking a Positive Profit10203040Price($perunit)012345678910115060DAR=MR=PMCLost profit forqq q*Why must MC berising to maximizeprofits?OutputA Competitive FirmMaking a Positive Profit10203040Price($perunit)012345678910115060DMCq0
20、q*AVCATCAR=MR=PABOutputCAt q*:MR=MCand P ATCABCDorqx AC)-(P*A Competitive FirmIncurring LossesPrice($perunit)DAR=MR=PMCq*OutputA Competitive FirmIncurring LossesPrice($perunit)DP=MRMCq*OutputAVCATCFCBAEAt q*:MR=MCand P ATCABCDorqx AC)-(P*A Competitive FirmIncurring LossesPrice($perunit)DP=MRMCq*Outp
21、utAVCATCFCBAEWould this producercontinue to produce with a loss?Choosing Output in the Short RunnSummary of Production Decisionsdown.-shut should firm the If 4.loss.aat produce should firm the If 3.s.making is firm the If 2.when maximized is 1.ATCAVC PATC PAVC ATC P MR MCExample:Some CostConsiderati
22、ons for ManagersnThree guidelines for estimating marginal cost:1)Average variable cost should not be used as a substitute for marginal cost.2)A single item on a firms accounting ledger may have two components,only one of which involves marginal cost.Example:Some CostConsiderations for ManagersnThree
23、 guidelines for estimating marginal cost:3)All opportunity cost should be included in determining marginal cost.A Competitive FirmsShort-Run Supply CurvePrice($perunit)OutputA Competitive FirmsShort-Run Supply CurvePrice($perunit)OutputAVCATCA Competitive FirmsShort-Run Supply CurvePrice($perunit)MC
24、OutputAVCATCA Competitive FirmsShort-Run Supply CurvePrice($perunit)MCOutputAVCATCP=AVCP1P2q1q2The firm chooses theoutput level where MR=MC,as long as the firm is able tocover its variable cost of production.What happensif P MC for all units.Producer Surplus for a FirmPrice($perunit ofoutput)OutputA
25、lternatively,VC is thesum of MC or ODCq*.R is P x q*or OABq*.Producer surplus=R-VC or ABCD.Producer Surplus for a MarketPrice($perunit ofoutput)OutputProducer Surplus for a MarketPrice($perunit ofoutput)OutputProducer Surplus for a MarketPrice($perunit ofoutput)OutputMarket supply(S)is the sum of th
26、e firms MC.Producer Surplus for a MarketPrice($perunit ofoutput)OutputMarket producer surplus isthe difference between P*and S from 0 to Q*.Choosing Output in the Long RunnIn the long run,a firm can alter all its inputs,including the size of the plant.nWe assume free entry and free exit.Output Choic
27、e in the Long RunPrice($perunit ofoutput)OutputOutput Choice in the Long RunPrice($perunit ofoutput)OutputP=MR$40Output Choice in the Long RunPrice($perunit ofoutput)OutputP=MRSACSMC$40Output Choice in the Long RunPrice($perunit ofoutput)OutputP=MRSACSMCq1$40ABDIn the short run,thefirm is faced with
28、 fixedinputs.P=$40 ATC.Profit is equal to ABCD.Output Choice in the Long RunPrice($perunit ofoutput)OutputP=MRSACSMCq1$40ABCD$30LACEGLMCOutput Choice in the Long RunPrice($perunit ofoutput)OutputP=MRSACSMCq1$40ABCDIn the long run,the plant size will be increased and output increased to q3.Long-run p
29、rofit,EFGD short runprofit ABCD.$30q3q2LACEGFLMCOutput Choice in the Long RunPrice($perunit ofoutput)OutputP=MRSACSMCq1$40ABCDIn the long run the profit maximizing output is LMC=P(MR).$30q3q2LACEGFLMCOutput Choice in the Long RunnQuestion:Would the producer make an economic profit if the price=$30?C
30、hoosing Output in the Long RunnZero-ProfitEconomic profit=R=wL-rKwl=labor costrk=opportunity cost of capitalChoosing Output in the Long RunnZero-ProfitIf R wL+rk,economic profits are positiveIf R=wL+rk,zero economic profits,but the firms is earning a normal rate of return;indicating the industry is
31、competitiveIf R wl+rk,consider going out of businessChoosing Output in the Long RunnLong-Run Competitive EquilibriumThe long-run response to short-run profits is to increase output and profits.Profits will attract other producers.More producers increases industry supply which decreases market price.
32、Long-Run Competitive EquilibriumOutputOutput$per unit ofoutput$per unit ofoutputFirmIndustryLong-Run Competitive EquilibriumOutputOutputQ1$per unit ofoutput$per unit ofoutput$40P1LACLMCDS1FirmIndustryLong-Run Competitive EquilibriumOutputOutput$per unit ofoutput$per unit ofoutput$40P1LACLMCDS1S2$30Q
33、2P2Q1q2FirmIndustryChoosing Output in the Long RunnLong-Run Competitive Equilibrium1)P=LAC:No incentive to leave or enter2)MC=MR3)Equilibrium Market PriceChoosing Output in the Long RunnQuestions:1)Explain the market adjustment when P MC for some firms.3)Explain why zero economic profits is essentia
34、l for the market to be in long-run equilibrium.Choosing Output in the Long RunnEconomic RentEconomic rent is the difference between what firms are willing to pay for an input to production less the minimum amount necessary to buy that input.Firms Earn Zero Profit in Long-Run EquilibriumTicketPriceSe
35、ason TicketsSales(millions)LACLMCA baseball teamin a city with othercompetitive sports teams sells enough tickets so that price is equal to marginal and average cost.Firms Earn Zero Profit in Long-Run EquilibriumTicketPriceSeason TicketsSales(millions)LACLMCIn this city,thereare no other competitors
36、,so a$10 price can be charged.Economic RentChoosing Output in the Long RunnWith a fixed input such as a unique location,the difference between the cost of production(LAC=7)and price($10)is the value or opportunity cost of the input(location)and represents the rent from the input.Choosing Output in t
37、he Long RunnIf the opportunity cost of the input(rent)is not taken into consideration it may appear that economic profits exist in the long-run.The IndustrysLong-Run Supply CurvenTo determine long-run supply,we assume all firms have access to the available production technology.nOutput is increased
38、by using more inputs,not by invention.The IndustrysLong-Run Supply CurvenThe shape of the long-run supply curve depends on the extent to which changes in industry output affect the prices the firms must pay for inputs.Long-Run Supply in aConstant-Cost IndustryOutputOutput$per unit ofoutput$per unit
39、ofoutputLong-Run Supply in aConstant-Cost IndustryOutputOutput$per unit ofoutput$per unit ofoutputP1P1q1D1S1Q1Price=P1 and the industryis in long-run equilibrium,P=MC=AC.ACMCALong-Run Supply in aConstant-Cost IndustryOutputOutput$per unit ofoutput$per unit ofoutputP1ACP1MCq1D1S1Q1Demand increases an
40、d price increases to P2.q2P2P2ACD2Long-Run Supply in aConstant-Cost IndustryOutputOutput$per unit ofoutput$per unit ofoutputP1ACP1MCq1D1S1Q1Economic profits attract newfirms.Supply increases to S2 andthe market returns to long-run equilibrium.q2P2P2ABCS2D2Long-Run Supply in aConstant-Cost IndustryOu
41、tputOutput$per unit ofoutput$per unit ofoutputP1ACP1MCq1SLD1S1Q1Q1 increase to Q2.Long-run supply=SL=LRAC.Change in output has no impact on input cost.ABCS2Q2D2Long-Run Supply in anIncreasing-Cost IndustryOutputOutput$per unit ofoutput$per unit ofoutputS1Long-Run Supply in anIncreasing-Cost Industry
42、OutputOutput$per unit ofoutput$per unit ofoutputP1P1q1D1ALAC1SMC1Q1Price=P1 and the industryis in long-run equilibrium,P=MC=AC.D1Long-Run Supply in anIncreasing-Cost IndustryOutputOutput$per unit ofoutput$per unit ofoutputP1P1q1S1q2P2P2D2ALAC1SMC1Q1Q2Demand increases and price increases to P2.Pricei
43、ncreases to P2 and createseconomic profits.D1Long-Run Supply in anIncreasing-Cost IndustryOutputOutput$per unit ofoutput$per unit ofoutputP1P1q1S1q2P2P2D1S2P3ABLAC1SMC1The entry of new firmscauses supply to shift to the right.Q1Q2D1Long-Run Supply in anIncreasing-Cost IndustryOutputOutput$per unit o
44、foutput$per unit ofoutputP1LAC1P1q1S1Q1q2P2P2ABD1S2P3SMC1P3SMC2However,due to the increasein input prices,long-runequilibrium occurs at a higher price.Q2Q3LAC2The IndustrysLong-Run Supply CurvenQuestions1)Explain how decreasing-cost is possible.2)Illustrate a decreasing cost industry.3)What is the s
45、lope of the SL in a decreasing-cost industry?Long-Run Supply in anDecreasing-Cost IndustryOutputOutput$per unit ofoutput$per unit ofoutputS1Long-Run Supply in anDecreasing-Cost IndustryOutputOutput$per unit ofoutput$per unit ofoutputP1q1D1LAC1Q1Price=P1 and the industryis in long-run equilibrium,P=M
46、C=AC.ASMC1P1D1Long-Run Supply in anDecreasing-Cost IndustryOutputOutput$per unit ofoutput$per unit ofoutputP1q1S1q2P2P2D2ALAC1Q1Q2Demand increases and price increases to P2.Priceincreases to P2 and createseconomic profits.SMC1P1D1Long-Run Supply in anDecreasing-Cost IndustryOutputOutput$per unit ofo
47、utput$per unit ofoutputP1q1S1q2P2P2D2ALAC1Q1Q2S2BSMC1P1The entry of new firmscauses supply to shift to the right.D1Long-Run Supply in anDecreasing-Cost IndustryOutputOutput$per unit ofoutput$per unit ofoutputP1P1q1S1q2P2P2D2ALAC1SMC1Q1Q2S2BSLP3Q3SMC2P3LAC2However,due to the decreasein input prices,l
48、ong-runequilibrium occurs at a lower price.The IndustrysLong-Run Supply CurvenThe Short and Long Run Effects of a TaxIn an earlier chapter we studied how firms respond to taxes on an input.Now,we will consider how a firm responds to a tax on its output.Effect of an Output Tax on a Competitive Firms
49、OutputPrice($perunit ofoutput)OutputAVC1P1MC1q1Effect of an Output Tax on a Competitive Firms OutputPrice($perunit ofoutput)OutputAVC1An output taxraises the firmsmarginal cost by theamount of the tax.MC2=MC1+taxAVC2P1MC1q1Effect of an Output Tax on a Competitive Firms OutputPrice($perunit ofoutput)
50、OutputAVC1The firm willreduce output tothe point at whichthe marginal costplus the tax equalsthe price.MC2=MC1+taxAVC2P1MC1q1q2Effect of an Output Taxon Industry OutputPrice($perunit ofoutput)OutputEffect of an Output Taxon Industry OutputPrice($perunit ofoutput)OutputP1Q11Effect of an Output Taxon
