Unit 2.3 2016 students.pdf

8/17/2019 Unit 2.3 2016 students.pdf

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Outcomes

• Explain and illustrate why a firm will maximise profit or mimimiseloss at the output level of MC = MR.

• Calculate, illustrate and explain the short term situations of a perfectcompetive firm under the following situations. (Revision):

Economic profit; Normal profit; Loss & closing down point.

• Explain and illustrate the requirements for a firm to reach long runequilibrium.

• Explain the meaning of production efficiency by referring to perfectcompetition.

• Explain how movements in supply and demand can influence both

the long run and short run situation of the firm.• Illustrate and explain the difference between increasing, decreasing

and constant industries


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Profits• Economic profit: the difference between

total revenue and total cost, where totalcost includes all costs—both explicit andimplicit—associated with resources usedby the firm.

• Accounting profit is simply total revenue

less all explicit costs incurred. – does not subtract the implicit costs.


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The Four Conditions For Perfect

Competition

1. Firms Sell a Standardized ProductThe product sold by one firm is assumed to be a perfect

substitute for the product sold by any other.

2. Firms Are Price TakersThis means that the individual firm treats the market price of

the product as given.

3. Free Entry and ExitWith Perfectly Mobile Factors of Production in the Long Run

4. Firms and Consumers Have Perfect Information


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SR Condition for Profit Maximisation

• Firm only controls output. – But how much must it produce to maximise its profits?

Firm will maximise profits at the output level whereMC=MR

Therefore: when P = MR and MR = MCthen P = MR = MC

• But what of MC > MR of MR > MC? – Must the firm produce less or more? Why?

• Efficient allocation of resources : P = MC – Condition that all possible benefits of trade have been reached.


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The Short-run Condition For

Profit Maximization

• Marginal revenue: the change in total

revenue that occurs as a result of a 1-unitchange in sales.

• To maximize profits the firm shouldproduce a level of output for whichmarginal revenue is equal to marginal coston the rising portion of the MC curve.


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Figure 9.3: The Profit-Maximizing

Output Level in the Short-Run

R/unit output

180

Q* = 74

P q = 180 = MR

0


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Adjustments in the Long Run

Makes a normal profit where P=ATC No incentive for new firms to enter the industry

Produces level of output where P=MC=MR No incentive to produce less or more

No firm has the incentive to change its inputs inorder to change their current output levels

SRATC = LRATC at the level of output where P = MC.


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Figure 9.14: A Step along the Path

Toward Long-Run Equilibrium


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Figure 9.15: The Long-Run Equilibrium

under Perfect Competition


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Reasons why PC markets are

efficient

• Production efficient : firm produces output at

lowest possible cost (lowest ATC)

• Allocative efficient : no wastage – use

resources/inputs effectively• P= MC

• Producer and consumer surplus aremaximized

• Thus P = MC=MR = minimum point on ATC


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The Long-run Competitive Industry

Supply Curve

• Constant cost Industries : long-run

supply curve is a horizontal line at theminimum value of the LAC curve.

• Increasing cost industries : long-runsupply curve is upward sloping.

• Decreasing cost industries : long-run

supply curve is downward-sloping.


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Fig. 9.16: Constant cost industry


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Fig. 9.19: Decreasing cost industry


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Figure 9.18: Long-Run Supply Curve

for an Increasing Cost Industry

Documents

Unit 2.3 2016 students.pdf