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Chapter11 fi 2010

Nov 22, 2014

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Business

 

  • 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
    11-
  • 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
    11-
  • 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)
    11-
  • 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
    11-
  • 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
    11-
  • 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
    11-
  • 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
    11-
  • 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
    11-
  • 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
    11-
  • 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
    11-
  • 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
    11-
    • 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
    11-
    • Shut down in short run if ARP < MRP
      • When ARP < MRP, TR < TVC
  • 24. Profit-Maximizing Labor Usage (Figure
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