 # Chapter11 fi 2010

Nov 22, 2014

• 1. Chapter 11 Managerial Decisions in Competitive Markets
• 2. Perfect Competition
• Firms are price-takers
• Each produces only a very small portion of total market or industry output
• All firms produce a homogeneous product
• Entry into & exit from the market is unrestricted
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• 3. Demand for a Competitive Price-Taker
• Demand curve is horizontal at price determined by intersection of market demand & supply
• Perfectly elastic
• Marginal revenue equals price
• Demand curve is also marginal revenue curve (D = MR)
• Can sell all they want at the market price
• Each additional unit of sales adds to total revenue an amount equal to price
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• 4. Demand for a Competitive Price-Taking Firm (Figure 11.2) 11- Quantity Price (dollars) Quantity Price (dollars) Panel A Market Panel B Demand curve facing a price-taker 0 0 D S P 0 Q 0 P 0 D = MR
• 5. Profit-Maximization in the Short Run
• In the short run, managers must make two decisions:
• Produce or shut down?
• If shut down, produce no output and hires no variable inputs
• If shut down, firm loses amount equal to TFC
• If produce, what is the optimal output level?
• If firm does produce, then how much?
• Produce amount that maximizes economic profit
11- Profit =
• 6. Profit Margin (or Average Profit)
• Level of output that maximizes total profit occurs at a higher level than the output that maximizes profit margin (& average profit)
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• 7. Short-Run Output Decision
• Firms manager will produce output where P = MC as long as:
• TR TVC
• or, equivalently, P AVC
• If price is less than average variable cost (P AVC) , manager will shut down
• Produce zero output
• Lose only total fixed costs
• Shutdown price is minimum AVC
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• 8. Profit Maximization: P = \$36 (Figure 11.3) 11- Total cost = \$19 x 600 = \$11,400 Total revenue =\$36 x 600 = \$21,600 Profit = \$21,600 - \$11,400 = \$10,200
• 9. Short-Run Loss Minimization: P = \$10.50 (Figure 11.5) 11- Total revenue = \$10.50 x 300 = \$3,150 Profit = \$3,150 - \$5,100 = -\$1,950 Total cost = \$17 x 300 = \$5,100
• 10. Irrelevance of Fixed Costs
• Fixed costs are irrelevant in the production decision
• Level of fixed cost has no effect on marginal cost or minimum average variable cost
• Thus no effect on optimal level of output
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• 11.
• AVC tells whether to produce
• Shut down if price falls below minimum AVC
• SMC tells how much to produce
• If P minimum AVC , produce output at which P = SMC
• ATC tells how much profit/loss if produce
Summary of Short-Run Output Decision 11-
• 12. Short-Run Supply Curves
• For an individual price-taking firm
• Portion of firms marginal cost curve above minimum AVC
• For prices below minimum AVC , quantity supplied is zero
• For a competitive industry
• Horizontal sum of supply curves of all individual firms; always upward sloping
• Supply prices give marginal costs of production for every firm
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• 13. Short-Run Firm & Industry Supply (Figure 11.6) 11-
• 14. Long-Run Profit-Maximizing Equilibrium (Figure 11.7) 11- Profit = (\$17 - \$12) x 240 = \$1,200
• 15. Long-Run Competitive Equilibrium
• All firms are in profit-maximizing equilibrium (P = LMC)
• Occurs because of entry/exit of firms in/out of industry
• Market adjusts so P = LMC = LAC
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• 16. Long-Run Competitive Equilibrium (Figure 11.8) 11-
• 17. Long-Run Industry Supply
• Long-run industry supply curve can be flat (perfectly elastic) or upward sloping
• Depends on whether constant cost industry or increasing cost industry
• Economic profit is zero for all points on the long-run industry supply curve for both types of industries
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• 18. Long-Run Industry Supply
• Constant cost industry
• As industry output expands, input prices remain constant, & minimum LAC is unchanged
• P = minimum LAC , so curve is horizontal (perfectly elastic)
• Increasing cost industry
• As industry output expands, input prices rise, & minimum LAC rises
• Long-run supply price rises & curve is upward sloping
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• 19. Long-Run Industry Supply for a Constant Cost Industry (Figure 11.9) 11-
• 20. Long-Run Industry Supply for an Increasing Cost Industry (Figure 11.10) 11- Firms output
• 21. Profit-Maximizing Input Usage
• Profit-maximizing level of input usage produces exactly that level of output that maximizes profit
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• 22. Profit-Maximizing Input Usage
• Marginal revenue product (MRP)
• MRP of an additional unit of a variable input is the additional revenue from hiring one more unit of the input
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• If choose to produce:
• If the MRP of an additional unit of input is greater than the price of input, that unit should be hired
• Employ amount of input where MRP = input price
• 23. Profit-Maximizing Input Usage
• Average revenue product (ARP)
• Average revenue per worker
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• Shut down in short run if ARP < MRP
• When ARP < MRP, TR < TVC
• 24. Profit-Maximizing Labor Usage (Figure
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