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Microeconomics Unit 2
Production, cost, profit and perfect competition
Topic 1: PRODUCTION
Marginal Product (MP)- the additional output generated by additional inputs (workers).
= change in total product
Total Product (TP)- total output or quantity produced
Average Product (AP)- the output per unit of input
Average Product =Total Product
# of workers2
calculate MP and AP
# of Workers
(Input)
Total Product(TP)
PIZZAS
Marginal Product(MP)
Average Product(AP)
0 0
1 10
2 25
3 45
4 60
5 70
6 75
7 75
8 70 3
# of Workers
(Input)
Total Product(TP)
PIZZAS
Marginal Product(MP)
Average Product(AP)
0 0 - -
1 10 10
2 25 15
3 45 20
4 60 15
5 70 10
6 75 5
7 75 0
8 70 -5
calculate MP and AP
4
# of Workers
(Input)
Total Product(TP)
PIZZAS
Marginal Product(MP)
Average Product(AP)
0 0 - -
1 10 10 10
2 25 15 12.5
3 45 20 15
4 60 15 15
5 70 10 14
6 75 5 12.5
7 75 0 10.71
8 70 -5 8.75
calculate MP and AP
5
Stages of Production
Increasing returns: workers produce more additional products
Happens because of SPECIALIZATION
Stages of Production
Diminishing returns: workers produce less ADDITIONAL products
Happens because more workers are using the same fixed resources
(not enough fixed resources to go around)
Diminishing Marginal Returns
Too many cooks in the kitchen!
Stages of Production
Negative returns: workers produce less total product
Happens because workers get in each others way
# of Workers
(Input)
Total Product(TP)
PIZZAS
Marginal Product(MP)
Average Product(AP)
0 0 - -
1 10 10 10
2 25 15 12.5
3 45 20 15
4 60 15 15
5 70 10 14
6 75 5 12.5
7 75 0 10.71
8 70 -5 8.75
Identify the three stages of returns
10
Graphing
Production
11
Stage I: increasing marginal returns
Total Product
Quantity of Labor
Marginal and
Average Product
Quantity of Labor
Total Product
Due to Specialization
Average Product
12Marginal Product
Stage II: decreasing marginal returnsDue to more workers using same fixed
resources
Total Product
Quantity of Labor
Marginal and
Average Product
Quantity of Labor
Total Product
Average Product
13Marginal Product
Total Product
Quantity of Labor
Marginal and
Average Product
Quantity of Labor
Total Product
Stage III: Negative Marginal Returns
Marginal Product
Average Product
14
Topic 2: short run costs vs. long run costs
Short Run: fixed plant
• Time period in which some resources remain fixed; it is too brief for a firm to change its plant capacity
Long Run: Variable plant
• Time frame in which all resources can be varied; period of time is long enough to change plant size
Topic 3:
Short Run Costs of Production
workers TP Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
Average fixed cost
Average variable cost
Average total cost
0 0
1 14
0 70 0 70 ---
3.29
---
5
----
3.29
----
8.29
2 42
92 1.64
3 75
138 1.39
4 112
184 1.24
5 150
230 1.21
6 180
276 1.53
7 203
322 2.00
8 216
368 3.54
• Complete MP in chart in notes
workers TP Marginal product
1 14 14
2 42 28
3 75 33
4 112 37
5 150 38
6 180 30
7 203 23
8 216 13
Increasing and decreasing returns????
EXPLICIT VS. IMPLICIT COSTS
• Explicit costs = out of pocket expenses
Accountants only look at this
• Implicit costs = opportunity costs (foregone wages, depreciation ect)
Economists consider explicit AND implicit!
Overall costs: What is the overall cost of producing??
Must look at TOTALS
Fixed Costs: (FC) Costs that DON’T change
Variable Costs: (VC) Costs that DO change
Total Costs: FC + VC
workers TP Marginal product
Fixed cost
0 0
1 14
0
14
70
2 42 38
3 75 33
4 112 37
5 150 38
6 180 30
7 203 23
8 216 13
workers TP Marginal product
Fixed cost
1 14 14 70
2 42 28 70
3 75 33 70
4 112 37 70
5 150 38 70
6 180 30 70
7 203 23 70
8 216 13 70
What happens to FC as more products are produced???
workers TP Marginal product
Fixed cost
Variable cost
Total cost
0 0
1 14
0
14
70 0 70
2 42 38 70
92
3 75 33 70
138
4 112 37 70
184
5 150 38 70
230
6 180 30 70
276
7 203 23 70
322
8 216 13 70
368
What happens to VC as more products are produced?
workers TP Marginal product
Fixed cost
Variable cost
Total cost
1 14 14 70 46 116
2 42 28 70 92 162
3 75 33 70 138 208
4 112 37 70 184 254
5 150 38 70 230 300
6 180 30 70 276 346
7 203 23 70 322 392
8 216 13 70 368 438
What happens to TC as more products are produced???
Total Costs Cost Graphs
• 1. Fixed cost will always be the same
• 2. VC will always slope up
• 3. Total cost will always slope up
* TC always > VC
*Distance between TC and VC = FC
Marginal Cost:
Additional costs of making ONE more product .
30
workers TP Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
1 14 14 70 46 116 3.29
2 42 28 70 92 162 1.64
3 75 33 70 138 208 1.39
4 112 37 70 184 254 1.24
5 150 38 70 230 300 1.21
6 180 30 70 276 346 1.53
7 203 23 70 322 392 2.00
8 216 13 70 368 438 3.54
What happens to MC as more products are produced???
How much does each product cost to make? Use AVERAGES
Average Fixed Cost (AFC): fixed cost PER PRODUCT
AFC = FC/TP
workers TP Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
Average fixed cost
1 14 14 70 46 116 3.29 5
2 42 28 70 92 162 1.64
3 75 33 70 138 208 1.39
4 112 37 70 184 254 1.24
5 150 38 70 230 300 1.21
6 180 30 70 276 346 1.53
7 203 23 70 322 392 2.00
8 216 13 70 368 438 3.54
workers TP Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
Average fixed cost
1 14 14 70 46 116 3.29 5
2 42 28 70 92 162 1.64 1.67
3 75 33 70 138 208 1.39 .93
4 112 37 70 184 254 1.24 .63
5 150 38 70 230 300 1.21 .47
6 180 30 70 276 346 1.53 .39
7 203 23 70 322 392 2.00 .34
8 216 13 70 368 438 3.54 .32
What happens to AFC as more products are produced???
• Average Variable cost (AVC): variable cost PER PRODUCT
AVC = VC/TP
workers TP Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
Average fixed cost
Average variable cost
1 14 14 70 46 116 3.29 5 3.29
2 42 28 70 92 162 1.64 1.67
3 75 33 70 138 208 1.39 .93
4 112 37 70 184 254 1.24 .63
5 150 38 70 230 300 1.21 .47
6 180 30 70 276 346 1.53 .39
7 203 23 70 322 392 2.00 .34
8 216 13 70 368 438 3.54 .32
workers TP Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
Average fixed cost
Average variable cost
1 14 14 70 46 116 3.29 5 3.29
2 42 28 70 92 162 1.64 1.67 2.19
3 75 33 70 138 208 1.39 .93 1.84
4 112 37 70 184 254 1.24 .63 1.64
5 150 38 70 230 300 1.21 .47 1.53
6 180 30 70 276 346 1.53 .39 1.53
7 203 23 70 322 392 2.00 .34 1.59
8 216 13 70 368 438 3.54 .32 1.70
What happens to AVC as more products are produced???
• Average total cost (ATC): TOTAL cost PER PRODUCT
ATC = TC/TP or ACT = AFC + AVC
workers TP Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
Average fixed cost
Average variable cost
Average total cost
1 14 14 70 46 116 3.29 5 3.29 8.29
2 42 28 70 92 162 1.64 1.67 2.19
3 75 33 70 138 208 1.39 .93 1.84
4 112 37 70 184 254 1.24 .63 1.64
5 150 38 70 230 300 1.21 .47 1.53
6 180 30 70 276 346 1.53 .39 1.53
7 203 23 70 322 392 2.00 .34 1.59
8 216 13 70 368 438 3.54 .32 1.70
workers TP Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
Average fixed cost
Average variable cost
Average total cost
1 14 14 70 46 116 3.29 5 3.29 8.29
2 42 28 70 92 162 1.64 1.67 2.19 3.86
3 75 33 70 138 208 1.39 .93 1.84 2.77
4 112 37 70 184 254 1.24 .63 1.64 2.27
5 150 38 70 230 300 1.21 .47 1.53 2
6 180 30 70 276 346 1.53 .39 1.53 1.92
7 203 23 70 322 392 2.00 .34 1.59 1.93
8 216 13 70 368 438 3.54 .32 1.70 2.03
What happen to ATC as more products are produced???
Average costs graph
• AFC will always get smaller as more products are produced
Why??? Fixed cost are spread out among more products
AVC and ATC – always U shaped due to increasing and then diminishing returns
Distance between ATC and AVC gets smaller as more products are produced
Marginal cost with Average costs ***
MC intersects ATC at min. point Gap between ATC and AVC gets smaller as Q increases
Quantity
Co
sts
(do
llar
s)
TC
VC
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
What is the FC?
At 9 units what is the:
VC TC AVC
ATC AFC
800
700
600
500
400
300
200
100
0
45
Quantity
Co
sts
(do
llar
s) AVC
ATC
Practice reading
121110987654321
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
MC
46
At an output of 11, what is the :
AVC MC AFC
ATC TC VC
Practice reading
At output Q, what area represents:
TCVCFC
CDQ0BEQ0AFQ0 or CDEB
47
Co
sts
(d
olla
rs)
Ave
rag
e p
rod
uct
an
dm
arg
inal
pro
du
ct
Quantity of labor
Quantity of output
MP
MC
ATC
•When the marginal cost is below the average, it pulls the average down. •When the marginal cost is above the average, it pulls the average up.
Relationship between ATC and MC
Example:•The average income in the room is $50,000.•An additional (marginal) person enters the room: Bill Gates.•If the marginal is greater than the average it pulls it up.
The MC curve intersects the ATC curve at its lowest point.
48
Things to remember about drawing cost curves:
• 1. Draw MC first (looks like a check mark) • 2. Draw ATC – start at point above MC • 3. Draw AVC – start at point above MC but
below ATC• 4. MC curve always intersects ATC and AVC at
their minimum points • 5. Distance between ATC and AVC gets smaller
as output (quantity) increases• 6.ATC and AVC are U shaped (due to increasing
and then decreasing marginal returns)
TOPIC 4: Long run costs of production
• Long run costs reflect changes in plant size
In the long run all resources are variable. Plant capacity/size can change.
Definition and Purpose of the Long Run
Why is this important?The Long-Run is used for planning. Firms use to identify
which plant size results in the lowest per unit cost.
3 things can happen in the long run 1. Economies of scale 2. Constant returns to scale 3. Diseconomies of scale
51
Long Run AVERAGE Total Cost
52Quantity Cars
CostsATC1
MC1
0 1 100 1,000 100,000 1,000,0000
$9,900,000
$50,000
$6,000
$3,000
Long Run AVERAGE Total Cost
53Quantity Cars
CostsATC1
MC1
MC2
0 1 100 1,000 100,000 1,000,0000
$9,900,000
ATC2
Company builds new plant ATC goes down due to mass
production
$50,000
$6,000
$3,000
Long Run AVERAGE Total Cost
54Quantity Cars
CostsATC1
MC1
ATC2
MC2
ATC3
MC3
0 1 100 1,000 100,000 1,000,0000
$9,900,000
$50,000
$6,000
$3,000
Company builds new plant ATC goes down due to mass production
Long Run AVERAGE Total Cost
55Quantity Cars
CostsATC1
MC1
ATC2
MC2
ATC3
MC3
0 1 100 1,000 100,000 1,000,0000
$9,900,000
$50,000
$6,000
$3,000
MC4
ATC4
Company builds more plants, ATC stays the same
Long Run AVERAGE Total Cost
56Quantity Cars
CostsATC1
MC1
ATC2
MC2
ATC3
MC3MC5
0 1 100 1,000 100,000 1,000,0000
$9,900,000MC4 ATC5
$6,000
$3,000
ATC4
Company builds more plants and ATC begins to
increase
$50,000
Long Run AVERAGE Total Cost
57Quantity Cars
CostsATC1
MC1
ATC2
MC2
ATC3
MC3MC5
0 1 100 1,000 100,000 1,000,0000
$9,900,000MC4 ATC5
$6,000
$3,000
ATC4 $50,000
Long Run AVERAGE Total Cost
58Quantity Cars
CostsATC1
MC1
ATC2
MC2
ATC3
MC3MC5
0 1 100 1,000 100,000 1,000,0000
$9,900,000MC4 ATC5
$6,000
$3,000
ATC4
Where is the Long Run Average Cost Curve?
$50,000
The LRATC curve connects the lowest points on all of the
SRATC curve (envelope)
• Economies of Scale- LRATC curve is decreasing
• Happens due to mass production techniques
Constant Returns to Scale- The ATC to produce is staying the same
LRATC is flat
Diseconomies of Scale- LRATC is increasing
Caused by a firm becoming too big “for own good”
LRATC Simplified
63Quantity
Costs
Long Run Average Cost
Curve
Economies of Scale
Constant Returns to Scale
Diseconomies of Scale
The law of diminishing marginal returns doesn’t apply in the long run because there are no FIXED RESOURCES.
Firm should select the size of firm that has lowest SRATC
Topic 5: Revenue
• Total Revenue = amount of $ a firm takes in from selling a product
TR = P X Q
• Marginal revenue
The increase in revenue that results from selling ONE more unit
Topic 6: PROFIT
• Profit = financial gain
TOTAL REVENUE – TOTAL COST
TR>TC = PROFIT
TR<TC = LOSS
TR = TC = BREAK EVEN (normal profit)
Calculate profit
Total product Total cost Total revenue Profit
50 700 500
80 800 800
100 850 1,000
130 900 1,300
Calculate profit
Total product Total cost Total revenue Profit
50 700 500 -200
80 800 800 0
100 850 1,000 150
130 900 1,300 400
2 ways to improve profit
• 1. Increase revenue
• 2. decrease costs
Making a profit activity
Review:
• What is Revenue????
What are the different types of costs???
FIXED and VARIABLE cost
EXPLICIT cost and an IMPLICIT cost
Profit
Video clip
• Costs??? • Revenue??? • Profit???
PROFIT =
total revenue –
total cost
Marshmallow Towers Objective:
Your goal in this activity is the same goal of every business, to make PROFIT.
Your assignment is to earn the most profit as you make a tower made only of toothpicks and mini-marshmallows. You will have 15 minutes
What does it cost to build the tower???
Fixed Costs
rent $500
property tax $150
Insurance $100
opportunity cost$ $ 50
Total Fixed Cost = $ 800
Variable cost – will depend upon the # of marshmallows and toothpicks you use $50.00 each $100.00 each
How much will we earn for building our tower???
• Revenue will be based on the HEIGHT and STRENGTH of your tower
HEIGHT
• Inches 1-4 = $1,000 in inch
• Every inch over 4 = $2,000 each inch
Strength
• Can stand alone for at least 10 seconds = $2,000
• Can hold a sheet of paper on top for at least 10 seconds = $2,000
Record Sheet
You will record all costs on your record sheet
You may purchase as many toothpicks and marshmallows as you wish RECORD THE NUMBER EACH TIME YOU PURCHASE!
Marshmallows toothpicks
______ ________
_______ ________
_______ ________
_______ ________
Total # marshmallows ___ Total # toothpicks ______
Before tower is judged
Marshmallows Toothpicks
______ ________
_______ ________
_______ ________
_______ ________
Total # marshmallows __ Total # toothpicks ____
X $50 = ______ X $100 = ______
Total Variable cost = ________
• Stop Watch: 15:00
Discuss these questions as a group – answer on your record sheet
1. We could have improved our profit by…..
1. How did your group try to minimize your costs?
2. How did your group try to maximize your revenue?
1. Why is it important to consider both cost and
revenue when making business decisions?
PerfectCompetition
PureMonopoly
MonopolisticCompetition
Oligopoly
TOPIC 7: MARKET STRUCTURES
Imperfect Competition
85
Most competition least competition
Perfect Competition
• Number of firms: Many (thousands) of small firms
• Choice for Consumers: many • Type of Good: identical products; perfect
substitutes to each another• Market Entry: very easy, no barriers to entry• Amount of competition: Great deal; more
than any other structure
Perfect competition
• Example: Agricultural products
Monopolistic Competition
Characteristics of monopolistic competition
Number of firms: hundreds of small companies
Choice for consumers: many
Type of Good: product DIFFERENTIATION
Market Entry: easy, little barriers to entry
Amount of competition: significant amount; non-price competition
Examples: monopolistic competition
• Retail stores • Restaurants• Pizza
Oligopoly Number of firms: Few large companies
Choice for Consumers: Few
Type of Good: similar or different from one another
Market entry: difficult to enter; barriers exist
Amount of Competition: LITTLE
One firm’s actions have impact on other firms
Brand name recognition important
Examples: Oligopoly
• Soft drinks • Cereal • Athletic apparel
Example of how one firm in oligopoly impacts another
94
Monopoly
Number of firms: Single Seller
Choice for consumers: ONE
Type of Good: unique; no substitutes
Amount of Competition: none (usually illegal because of this)
Market Entry: Impossible
Example: Monopoly
• Utility companies
ID the market structure• Business 1: I’ve got plenty of competition.
If I tried to raise my price, I’d lose business to the large firms that dominate our industry. I wait for them to raise prices and I follow along behind.
• Business 2: New shops like mine are opening all the time – there are hundreds of us. I have to spend money on advertising to convince people that my shop is unique and different.
• Business 3: I can’t afford to advertise; it would eat up what little profit I make. Besides, what good would it do? My product is the same as everyone else’s.
Business 4: My product is like no one else’s. I work hard to make sure my firm stays out in front to avoid cutthroat competition.
Intellectual Property
• Intellectual Property includes: secret formulas, ideas, inventions (products and processes), industrial designs, literary and artistic works (novels, films, music, architectural designs and web pages)
Intellectual property is protected by: 1. Patents2. Copyrights3. Trademarks
Patents
• legal right to exclude anyone else from manufacturing or marketing an invention
• Last for 20 years.
Strange patents ???
• Anti-eating face mask
• Gerbil shirt
Copyrights
protect written or artistic expressions - novels, poems, songs or movies.
Lasts for the life of the author plus 50 years.
Famous copyright cases
S. Victor Whitmill v. Warner Bros. Entertainment Inc.Tatoo (like Mike Tyson’s) in The Hangover Part 2. Warner Bros. and Whitmill worked out an agreement of undisclosed terms.
• Mattel Inc. v. MGA Entertainment Inc. MGA Entertainment filed a lawsuit against Mattel, claiming that the line of My Scene Barbies copied the big-headed and slim-bodied physique of Bratz dolls
The Happy Birthday SongThe copyright belongs to Warner Music Group, and the company regularly charges up to $30,000 to anyone who wants to use the song for profit
Trademarks
Name, phrase, sound or symbol used in association with services or products.
Famous Trademarks
• “That’s hot!” “You’re Fired!”
• “Fear the brow” • “Let’s get ready to rumble”
• “There’s an app for that”
• “BAM!”
Profit Topic 8: PERFECT Competition REVIEW
• Many small firms (thousands)• Identical products (perfect substitutes)• Easy for firms to enter the industry• Firms are “Price Takers”
The seller has NO control over price. Can only control Quantity they are producing
111
Demand for Perfectly Competitive Firms
Why are they Price Takers?If a firm charges above the market price, NO ONE will buy. Consumers will go to other firms
There is no reason to lower price because consumers will buy the same amount at the market price.Since the price is the same at all quantities demanded, the demand curve for each firm is… Perfectly Elastic (A Horizontal straight line)
112
P
Q
PRICE
P
Q5000
D
S
Industry Firm(price taker)
$15 $15
The Competitive Firm is a Price TakerPrice is set by the Industry
113
If price changes in the market, it will also change in the FIRM
115
What is the additional revenue for selling an
additional unit? 1st unit earns $152nd unit earns 30 (15 more)
Marginal revenue is constant at $15
Notice: MR=D=AR=P
P
Q
Demand
Firm(price taker)
$15
115
MR=D=AR=P
The Competitive Firm is a Price TakerPrice is set by the Industry
116
What is the additional revenue for selling an
additional unit? 1st unit earns $152nd unit earns $15Marginal revenue is constant at $15Notice:
• Total revenue increases at a constant rate
• MR equal Average Revenue
P
Q
Demand
Firm(price taker)
$15
116
MR=D=AR=P
The Competitive Firm is a Price TakerPrice is set by the Industry
For Perfect Competition:MR=D=AR=P
Topic 9: MaximizingPROFIT in perfect competition
117
Short-Run Profit MaximizationWhat is the goal of every business?
To Maximize Profit!!!!!!
•To maximum profit firms must make the right output
•How does a firm decide the right output????
MR< MC don’t produce MR> MC produce
118
How many products should this perfect competitive firm produce???
Price of item is $20.00 TP TC MC MR 0 20 ---- ----1 30 10 20 2 35 5 20 3 45 10 20 4 60 15 20 5 90 30 20 6 130 40 20
How many products should this perfect competitive firm produce???
Price of item is $20.00 TP TC MC MR 0 20 ---- ----1 30 10 20 2 35 5 20 3 45 10 20 4 60 15 20 5 90 30 20 6 130 40 20
What is the firm’s profit at this point???
TR-TC
$20.00
*Profit would still be made at TP of 5, but profit not maximized
Price of item is $20.00 TP TC MC MR 0 20 ---- ----1 30 10 20 2 35 5 20 3 45 10 20 4 60 15 20 5 90 30 20 6 130 40 20
Profit at TP of 4 = $20
Profit at TP of 5 = $10
122
Profit Maximizing Rule
MR=MC
# of workers
TP MP FC VC TC AFC AVC ATC
MC TR MR profit
1 14 40 100 2.86 7.14 7.14
2 30 40 200 1.33 6.67 6.25
3 40 40 300 1 7.5 10
4 45 40 400 .89 8.89 10
5 43 40 500 .93 11.63 -50
# of workers
TP MP FC VC TC AFC AVC ATC
MC TR MR profit
1 14 14 40 100 2.86 7.14 7.14
2 30 16 40 200 1.33 6.67 6.25
3 40 10 40 300 1 7.5 10
4 45 5 40 400 .89 8.89 10
5 43 -2 40 500 .93 11.63 -50
Increasing, diminishing and negative returns???
# of workers
TP MP FC VC TC AFC AVC ATC
MC TR MR profit
1 14 14 40 100 140 2.86 7.14 7.14
2 30 16 40 200 240 1.33 6.67 6.25
3 40 10 40 300 340 1 7.5 10
4 45 5 40 400 440 .89 8.89 10
5 43 -2 40 500 540 .93 11.63 -50
# of workers
TP MP FC VC TC AFC AVC ATC MC TR MR profit
1 14 14 40 100 140 2.86 7.14 10 7.14
2 30 16 40 200 240 1.33 6.67 8 6.25
3 40 10 40 300 340 1 7.5 8.5 10
4 45 5 40 400 440 .89 8.89 9.78 10
5 43 -2 40 500 540 .93 11.63 12.56
-50
# of workers
TP MP FC VC TC AFC AVC ATC MC TR MR profit
1 14 14 40 100 140 2.86 7.14 10 7.14
140
2 30 16 40 200 240 1.33 6.67 8 6.25
300
3 40 10 40 300 340 1 7.5 8.5 10 400
4 45 5 40 400 440 .89 8.89 9.78 10 450
5 43 -2 40 500 540 .93 11.63 12.56
-50 430
# of workers
TP MP FC VC TC AFC AVC ATC MC TR MR profit
1 14 14 40 100 140 2.86 7.14 10 7.14
140
2 30 16 40 200 240 1.33 6.67 8 6.25
300
3 40 10 40 300 340 1 7.5 8.5 10 400
4 45 5 40 400 440 .89 8.89 9.78 10 450
5 43 -2 40 500 540 .93 11.63 12.56
-50 430
In PC, Marginal revenue = price of product (remember MR=D=AR=P)
# of workers
TP MP FC VC TC AFC AVC ATC MC TR MR profit
1 14 14 40 100 140 2.86 7.14 10 7.14
140 10
2 30 16 40 200 240 1.33 6.67 8 6.25
300 10
3 40 10 40 300 340 1 7.5 8.5 10 400 10
4 45 5 40 400 440 .89 8.89 9.78 10 450 10
5 43 -2 40 500 540 .93 11.63 12.56
-50 430 10
In PC, Marginal revenue = price of product (remember MR=D=AR=P)
# of workers
TP MP FC VC TC AFC AVC ATC MC TR MR profit
1 14 14 40 100 140 2.86 7.14 10 7.14 140 10 0
2 30 16 40 200 240 1.33 6.67 8 6.25 300 10 60
3 40 10 40 300 340 1 7.5 8.5 10 400 10 60
4 45 5 40 400 440 .89 8.89 9.78 20 450 10 10
5 43 -2 40 500 540 .93 11.63
12.56 -50 430 10 -110
# of workers
TP MP FC VC TC AFC AVC ATC MC TR MR profit
1 14 14 40 100 140 2.86 7.14 10 7.14 140 10 0
2 30 16 40 200 240 1.33 6.67 8 6.25 300 10 60
3 40 10 40 300 340 1 7.5 8.5 10 400 10 60
4 45 5 40 400 440 .89 8.89 9.78 20 450 10 10
5 43 -2 40 500 540 .93 11.63
12.56 -50 430 10 -110
How many products should this firm produce to maximize its profits ????
# of workers
TP MP FC VC TC AFC AVC ATC MC TR MR profit
1 14 14 40 100 140 2.86 7.14 10 7.14 140 10 0
2 30 16 40 200 240 1.33 6.67 8 6.25 300 10 60
3 40 10 40 300 340 1 7.5 8.5 10 400 10 60
4 45 5 40 400 440 .89 8.89 9.78 20 450 10 10
5 43 -2 40 500 540 .93 11.63
12.56 -50 430 10 -110
MC in Perfect competition
• Upward sloping part of MC curve = Supply of firm
MC=S
MR = MC in perfect competition
Firm will produce the Q where MR=MC to maximize profit
Topic 10: Perfectly competitive firm in the short
run • 1. It can make a profit
• 2. Break even NORMAL PROFIT
• 3. Have a loss
• Firm will produce where MR=MC
1. Profit P > ATC
profit
2. Break even point price = ATC
ATC
3. LOSS P < ATC
ATCLOSS
Shut Down Rule A firm should continue to produce as long as the price is above the AVC
When the price falls below AVC then the firm should minimize its losses by shutting down
Why? If the price is below AVC the firm is losing more money by producing than they would have
to pay to shut down.
If price changes in the market, it will also change in the FIRM and the firm should
adjust their output
Example: increase in S lowers P
Practice
141
Practice
• What Quantity will this firm produce?
• What is this firm’s total revenue?
• What is this firm’s total cost?
• Is this firm experiencing a profit or loss? How much?
$20
ATC
AVC
`
1 What Quantity will this firm produce?
2 What is the TR at
this quantity? •3 What is the TC at
this quantity? •4 Profit or Loss? How much?
Topic 11:Perfectly competitive firm in the Long run
Perfectly competitive firm in the long run
• P=MR=MC=SRATC= LRATC
• All Perfectly competitive firms in the LORNG RUN earn a NORMAL economic profit (profit is 0)
Perfectly competitive firm in the Long run
In the long-run, what happens when economic
profits are made?• When firms make profits, other firms
enter the industry – this causes supply to increase which causes prices to go down
• When prices go down, profits go down
In the long-run, what happens when losses are
made?• When firms incur a loss, firms start to
leave the industry – this causes supply to decrease which causes prices to go up
• When prices go up, profit goes up
Topic 12: Efficiency
Perfectly competitive markets are perfectly efficient
They have BOTH productive and allocative efficiency in the long
run
149
Productive Efficiency
Price = Minimum ATC
The production of a good in a least costly way.
Graphically it is where…
150
PD=MR
Q
MCATC
Quantity
Pri
ce
Notice that the product is being made at the lowest possible cost (Minimum ATC)
Long-Run Equilibrium
151
Allocative Efficiency
Price = MC
Producers are making the products most wanted by society.
Graphically it is where…
152
P MR
Q
MC
Quantity
Pri
ceLong-Run Equilibrium
Optimal amount being produced
153
PD=MR
Q
MCATC
Quantity
Pri
ce
P = Minimum ATC = MCEXTREMELY EFFICIENT!!!!
Long-Run Equilibrium
154
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