【正文】 and Marginal Revenue for a Competitive Firm Because each firm in a petitive industry sells only a small fraction of the entire industry output, how much output the firm decides to sell will have no effect on the market price of the product. Because it is a price taker, the demand curve d facing an individual petitive firm is given by a horizontal line. Chapter 8: Profit Maximization and Competitive Supply 9 of 37 MARGINAL REVENUE, MARGINAL COST, AND PROFIT MAXIMIZATION Demand and Marginal Revenue for a Competitive Firm Demand Curve Faced by a Competitive Firm Figure A petitive firm supplies only a small portion of the total output of all the firms in an industry. Therefore, the firm takes the market price of the product as given, choosing its output on the assumption that the price will be unaffected by the output choice. In (a) the demand curve facing the firm is perfectly elastic, even though the market demand curve in (b) is downward sloping. Chapter 8: Profit Maximization and Competitive Supply 10 of 37 MARGINAL REVENUE, MARGINAL COST, AND PROFIT MAXIMIZATION The demand d curve facing an individual firm in a petitive market is both its average revenue curve and its marginal revenue curve. Along this demand curve, marginal revenue, average revenue, and price are all equal. Profit Maximization by a Competitive Firm MC(q) = MR = P Chapter 8: Profit Maximization and Competitive Supply 11 of 37 CHOOSING OUTPUT IN THE SHORT RUN ShortRun Profit Maximization by a Competitive Firm Marginal revenue equals marginal cost at a point at which the marginal cost curve is rising. Output Rule: If a firm is producing any output, it should produce at the level at which marginal revenue equals marginal cost. Chapter 8: Profit Maximization and Competitive Supply 12 of 37 CHOOSING OUTPUT IN THE SHORT RUN The ShortRun Profit of a Competitive Firm A Competitive Firm Making a Positive Profit Figure In the short run, the petitive firm maximizes its profit by choosing an output q* at which its marginal cost MC is equal to the price P (or marginal revenue MR) of its product. The profit of the firm is measured by the rectangle ABCD. Any change in output, whether lower at q1 or higher at q2, will lead to lower profit. Chapter 8: Profit Maximization and Competitive Supply 13 of 37 CHOOSING OUTPUT IN THE SHORT RUN The ShortRun Profit of a Competitive Firm A Competitive Firm Incurring Losses Figure A petitive firm should shut down if price is below AVC. The firm may produce in the short run if price is greater than average variable cost. ShutDown Rule: The firm should shut down if the price of the product is less than the average variable cost of production at the profitmaximizing output. Chapter 8: Profit Maximization and Competitive Supply 14 of 37 CHOOSING OUTPUT IN THE SHORT RUN How should the manager determine the plant’s profit maximizing output? Recall that the smelting plant’s shortrun marginal cost of production depends on whether it is running two or three shifts per day. The ShortRun Output of an Aluminum Smelting Plant Figure In the short run, the plant should produce 600 tons per day if price is above $1140 per ton but less than $1300 per ton. If price is greater than $1300 per ton, it should run an overtime shift and produce 900 tons per day. If price drops below $1140 per ton, the firm should stop producing, but it should probably stay in business because the price may rise in the future. Chapter 8: Profit Maximization and Competitive Supply 15 of 37 CHOOSING OUTPUT IN THE SHORT RUN The application of the rule that marginal revenue should equal marginal cost depends on a manager’s ability to estimate marginal cost. To obtain useful measures of cost, managers should keep three guidelines in mind. First, except under limited circumstances, average variable cost should not be used as a substitute for marginal cost. Second, a single item on a firm’s accounting ledger may have two ponents, only one of which involves marginal cost. Third, all opportunity costs should be included in determining marginal cost. Chapter 8: Profit Maximization and Competitive Supply 16 of 37 THE COMPETITIVE FIRM’S SHORTRUN SUPPLY CURVE The firm’s supply curve is the portion of the marginal cost curve for which marginal cost is gre