【正文】 Lecture 8 Profit Maximization and Competitive Supply 1 Topics to be Discussed ? Perfectly Competitive Markets ? Profit Maximization ? Marginal Revenue, Marginal Cost, and Profit Maximization ? Choosing Output in the ShortRun 2 Topics to be Discussed ? The Competitive Firm’s ShortRun Supply Curve ? ShortRun Market Supply ? Choosing Output in the LongRun ? The Industry’s LongRun Supply Curve 3 Perfectly Competitive Markets ? Characteristics of Perfectly Competitive Markets 1) Price taking 2) Product homogeneity 3) Free entry and exit 4 Perfectly Competitive Markets ? Price Taking ? The individual firm sells a very small share of the total market output and, therefore, cannot influence market price. ? The individual consumer buys too small a share of industry output to have any impact on market price. 5 Perfectly Competitive Markets ? Product Homogeneity ? The products of all firms are perfect substitutes. ? Examples ?Agricultural products, oil, copper, iron, lumber 6 Perfectly Competitive Markets ? Free Entry and Exit ? Buyers can easily switch from one supplier to another. ? Suppliers can easily enter or exit a market. 7 Perfectly Competitive Markets ? Discussion Questions ? What are some barriers to entry and exit? ? Are all markets petitive? ? When is a market highly petitive? 8 Profit Maximization ? Do firms maximize profits? ? Possibility of other objectives ?Revenue maximization ?Dividend maximization ?Shortrun profit maximization 9 Profit Maximization ? Do firms maximize profits? ? Implications of nonprofit objective ?Over the longrun investors would not support the pany ?Without profits, survival unlikely 10 Profit Maximization ? Do firms maximize profits? ? Longrun profit maximization is valid and does not exclude the possibility of altruistic behavior. 11 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 ? Therefore: ? )()()( qCqRq ??12 Profit Maximization in the Short Run 0 Cost, Revenue, Profit ($s per year) Output (units per year) R(q) Total Revenue Slope of R(q) = MR 13 0 Cost, Revenue, Profit $ (per year) Output (units per year) Profit Maximization in the Short Run C(q) Total Cost Slope of C(q) = MC Why is cost positive when q is zero? 14 ? Marginal revenue is the additional revenue from producing one more unit of output. ? Marginal cost is the additional cost from producing one more unit of output. Marginal Revenue, Marginal Cost, and Profit Maximization 15 ? Comparing R(q) and C(q) ? Output levels: 0 q0: ? C(q) R(q) ? Negative profit ? FC + VC R(q) ? MR MC ? Indicates higher profit at higher output 0 Cost, Revenue, Profit ($s per year) Output (units per year) R(q) C(q) A B q0 q* )(q?Marginal Revenue, Marginal Cost, and Profit Maximization 16 ? Comparing R(q) and C(q) ? Question: Why is profit negative when output is zero? Marginal Revenue, Marginal Cost, and Profit Maximization R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0 q* )(q?17 ? Comparing R(q) and C(q) ? Output levels: q0 q* ? R(q) C(q) ? MR MC ? Indicates higher profit at higher output ? Profit is increasing R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0 q* )(q?Marginal Revenue, Marginal Cost, and Profit Maximization 18 ? Comparing R(q) and C(q) ? Output level: q* ? R(q)= C(q) ? MR = MC ? Profit is maximized R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0 q* )(q?Marginal Revenue, Marginal Cost, and Profit Maximization 19 ? Question ? Why is profit reduced when producing more or less than q*? R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0 q* )(q?Marginal Revenue, Marginal Cost, and Profit Maximization 20 ? Comparing R(q) and C(q) ? Output levels beyond q*: ? R(q) C(q) ? MC MR ? Profit is decreasing Marginal Revenue, Marginal Cost, and Profit Maximization R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0 q* )(q?21 ? Therefore, it can be said: ? Profits are maximized when MC = MR. Marginal Revenue, Marginal Cost, and Profit Maximization R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0 q* )(q?22 C R ??Marginal Revenue, Marginal Cost, and Profit Ma