12/2/2009 1 Market Structures monopoly monopolistic competition oligopoly Characteristics of Pure Competition 1. Market has SO MANY firms that no single firm has control over market price (price takers). ie. farmers, commodities (gas, rubber, nuts, etc.) 2. Products are homogeneous (aka: fungible) 3. Complete freedom of entry and exit from industry. 4. Consumers know the prices charged by each firm. fungible: interchangeable; in legal terms, something that can be substituted for a like measure or amount of the same thing, as one bushel of apples for another, in order to satisfy an obligation. Output Decisions for a Purely Competitive Firm As price-takers have no control over market price, their decisions are limited to determining the quantity they will produce. Naturally, the quantity produced (output) will be set at a level where profit is maximized. Two methods of determining profit maximization: 1. Total Cost / Total Revenue Approach 2. Marginal Cost / Marginal Revenue Approach Profit will be maximized where total revenue is farthest above total cost. 1. Total Cost / Total Revenue Approach Total Revenue / Cost Approach 0 200 400 600 800 1000 1200 1400 1600 1800 2000 0 10 20 30 40 50 60 70 80 90 10 0 11 0 12 0 Output (units Produced) Costs / Revenue (Dollars) Total Costs Total Revenue Profit Quantity Total Costs Total Revenue Profit 10 120 180 60 20 216 360 144 30 300 540 240 40 380 720 340 50 490 900 410 60 600 1080 480 70 750 1260 510 90 1180 1620 440 100 1460 1800 340 2. Marginal Revenue / Marginal Cost Approach First, a word about marginal revenue… Marginal Revenue 0 50 100 150 200 0 10 20 30 40 50 60 70 80 90 100 110 120 Output (Units Produced) Revenue (Dollars) Marginal Revenue As the price is not affected by output, the extra revenue per unit will be the same. Marginal Revenue: The extra revenue earned per unit produced. MR Thus, the price IS the marginal revenue! = P This curve also serves as the demand curve! (price / quantity) = D
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# Market Structures Total Revenue / Cost Approach … · Market Structures •pure (perfect ... Total Cost / Total Revenue Approach 2. Marginal Cost / Marginal Revenue Approach Profit

Aug 30, 2018

## Documents

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Transcript 12/2/2009

1

Market Structures

• pure (perfect) competition

• monopoly

• monopolistic competition

• oligopoly

Characteristics of Pure Competition

1. Market has SO MANY firms that no single firm has

control over market price (price takers). ie. farmers,

commodities (gas, rubber, nuts, etc.)

2. Products are homogeneous (aka: fungible)

3. Complete freedom of entry and exit from industry.

4. Consumers know the prices charged by each firm.

fungible: interchangeable; in legal terms, something that can be

substituted for a like measure or amount of the same thing, as one

bushel of apples for another, in order to satisfy an obligation.

Output Decisions for a Purely Competitive Firm

As price-takers have no control over market price,

their decisions are limited to determining the

quantity they will produce.

Naturally, the quantity produced (output) will be

set at a level where profit is maximized.

Two methods of determining profit maximization:

1. Total Cost / Total Revenue Approach

2. Marginal Cost / Marginal Revenue Approach

Profit will be

maximized where

total revenue is

farthest above

total cost.

1. Total Cost / Total Revenue Approach

Total Revenue / Cost Approach

0

200

400

600

800

1000

1200

1400

1600

1800

2000

0 10 20 30 40 50 60 70 80 90 10

0

11

0

12

0

Output (units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Total Costs

Total Revenue

Profit

QuantityTotal

Costs

Total

Revenue Profit

10 120 180 60

20 216 360 144

30 300 540 240

40 380 720 340

50 490 900 410

60 600 1080 480

70 750 1260 510

80 930 1440 510

90 1180 1620 440

100 1460 1800 340

2. Marginal Revenue / Marginal Cost Approach

First, a word about marginal revenue…

Marginal Revenue

0

50

100

150

200

0 10 20 30 40 50 60 70 80 90 100 110 120

Output (Units Produced)

Reven

ue (

Do

llars

)

Marginal

Revenue

As the price is not affected by output, the extra revenue per

unit will be the same.

Marginal Revenue:

The extra revenue

earned per unit

produced.

MR

Thus, the price IS the marginal revenue!

= P

This curve also serves as the demand curve! (price / quantity)

= D 12/2/2009

2

Marginal Revenue:

So What’s Marginal Revenue?

Change in Total Revenue

Change in QuantityMR =

refers to the extra revenue earned by

producing each extra unit.

(ie. What do we earn if we make one

more unit.)

TR

QMR =

S

D

Millions of Units

Pri

ce

Market

Perfectly Competitive Firm

0

50

100

150

200

0 10 20 30 40 50 60 70 80 90 100 110 120

Output (Units Produced)

Re

ve

nu

e (

Do

lla

rs)

Marginal

Revenue

MR = D

This curve also serves as the demand curve! (price / quantity)

This firm is

just ONE

player

within a

VERY

large

industry!

As such, its output

represents a virtually irrelevant quantity

in comparison to the output of the entire

industry. Thus, its output cannot possibly

influence market price.

Price will remain the same regardless of how

much output this firm decides to produce.

Need a Metaphor?

If we step back far

enough from the earth,

we can clearly see

that it is round.

Yet if we focus on any

one small piece of

land, we see a flat

surface!

Same thing!!!

If we step back far

enough from a demand

curve, we can clearly

see that it is sloped.

Yet if we focus on just

one small piece of this

curve, we will see a flat

curve!

S

D

Millions of Units

Pri

ce

Market

Perfectly Competitive Firm

0

50

100

150

200

0 10 20 30 40 50 60 70 80 90 100 110 120

Output (Units Produced)

Re

ve

nu

e (

Do

lla

rs)

Marginal

Revenue

MR = D

Demand Curve for A Competitive Industry

0

50

100

150

200

250

0 2000 4000 6000 8000 10000

Quantity

Price

Demand

Yup! For a perfectly competitive firm, the demand curve will

be a flat horizontal line!

Marginal Revenue

0

50

100

150

200

0 10 20 30 40 50 60 70 80 90 100 110 120

Output (Units Produced)

Reven

ue (

Do

llars)

Marginal

Revenue

The small quantity

produced by this one firm

cannot influence overall

supply, and thus cannot

alter the quantity

demanded.

It is a price taker!

QuantityMarginal

Costs

Marginal

RevenueProfit

10 120 180 60

20 96 180 144

30 84 180 240

40 80 180 340

50 110 180 410

60 110 180 480

70 150 180 510

80 180 180 510

90 250 180 440

100 280 180 340

Marginal Approach

0

100

200

300

400

500

600

0 10 20 30 40 50 60 70 80 90 10

0

11

0

12

0

Output (Units Produced)

Co

sts / R

even

ue (

Do

llars)

Marginal

Costs

Marginal

Revenue

Profit will be

maximized where

marginal revenue

equals

marginal cost.

2. Marginal Revenue / Marginal Cost Approach 12/2/2009

3

QuantityMarginal

Costs

Marginal

RevenueProfit

10 120 180 60

20 96 180 144

30 84 180 240

40 80 180 340

50 110 180 410

60 110 180 480

70 150 180 510

80 180 180 510

90 250 180 440

100 280 180 340

Marginal Approach

0

100

200

300

400

500

600

0 10 20 30 40 50 60 70 80 90 10

0

11

0

12

0

Output (Units Produced)

Co

sts / R

even

ue (

Do

llars)

Marginal

Costs

Marginal

Revenue

Profit

Profit will be

maximized where

marginal revenue

equals

marginal cost.

2. Marginal Revenue / Marginal Cost Approach

marginal

profit

marginal loss

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Profit will always

be maximized

where marginal

revenue equals

marginal cost.

Key Output Levels for a Competitive Firm

The distance

above average

total cost

indicates pure

economic profits!

Marginal

Revenue

Economic

Profits

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

After enough

firms enter into

the industry,

price (marginal

revenue) starts to

drop!

Marginal

Revenue

Economic

Profits

Naturally, this

cuts into the

profits earned by

each firm!

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

After enough

time, so many

firms will enter

the industry that

price will fall to

the point where

no economic

Revenue

Economic

Profits

This is called the

break even point!“Where marginal

revenue equals

average total costs.”

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

factors may cause

the price to fall, or

costs to rise, until

price (marginal

revenue) falls

below average

total costs!

Marginal

Revenue

Economic

Profits

Shut Down Point:“Where marginal

revenue equals

average variable

costs.”

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

Economic Profits:

The total profits earned

when marginal revenue

crosses marginal costs

at a point above average

total costs. 12/2/2009

4

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

NOTE!

As more firms enter the

market, price drops and

economic profits

diminish...

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

NOTE!

As more firms enter the

market, price drops and

economic profits

diminish...

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

NOTE!

As more firms enter the

market, price drops and

economic profits

diminish...

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

NOTE!

As more firms enter the

market, price drops and

economic profits

diminish...

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

NOTE!

As more firms enter the

market, price drops and

economic profits

diminish...

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

NOTE!

As more firms enter the

market, price drops and

economic profits

diminish... 12/2/2009

5

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

NOTE!

As more firms enter the

market, price drops and

economic profits

diminish...

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

NOTE!

As more firms enter the

market, price drops and

economic profits

diminish...

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

NOTE!

As more firms enter the

market, price drops and

economic profits

diminish...

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

NOTE!

As more firms enter the

market, price drops and

economic profits

diminish...

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

NOTE!

As more firms enter the

market, price drops and

economic profits

diminish...

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

NOTE!

As more firms enter the

market, price drops and

economic profits

diminish... 12/2/2009

6

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

NOTE!

As more firms enter the

market, price drops and

economic profits

diminish...

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Key Output Levels for a Competitive Firm

In review:

Marginal

Revenue

Economic

Profits

Economic Profits:

As more firms enter the

market, price drops and

economic profits

diminish...

until there are

no more

economic

profits

left!

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Did you notice the Supply Curve in there?

No?!

Marginal

Revenue

Economic

Profits

Well then take another

look!

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve:

Marginal

Revenue

Economic

Profits

The firm will always

supply a quantity where

price is equal to

marginal costs…

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve: Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve: 12/2/2009

7

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve: Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve:

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve: Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve:

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve: Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve: 12/2/2009

8

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve: Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve:

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve: Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve:

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve: Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Loss

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve:

even past the

breakeven point! 12/2/2009

9

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Loss

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve:

even past the

breakeven point!

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Loss

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve:

even past the

breakeven point!

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Loss

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve:

even past the

breakeven point!

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Loss

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve:

even past the

breakeven point!

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Loss

The firm will always

supply a quantity where

price is equal to

marginal costs…

The Short-Run Supply Curve for a Competitive Firm

The Supply Curve:

even past the

breakeven point!

Hence, in the short run

the supply curve (the

various quantities

supplied at various

prices) is represented by

the MC curve above the

AVC curve!

Supply

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Loss

So why would a firm CHOOSE to operate at a loss?!

1. They are still making more

than their variable costs!

????

After all, if they shut down,

they would STILL need to

pay their fixed costs. Ergo,

any revenue above the

variable costs could be put

towards the fixed costs.

2. Eventually good times will

return! Some firms will definitely

leave the industry. This will

cause market supply to fall

and market price to rise.

3. They may in fact be earning

accounting profits!!!

Economic profits consider

opportunity costs as well!

High opportunity costs may

be responsible for the

economic loss. 12/2/2009

10

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

Remember…

In the long-run firms will

not maintain production

when incurring a loss

just so they can pay

towards their fixed

costs, because in the

long run no costs are

fixed!

In the Long-Run a firm

will not operate in this

area, as they will not

choose to operate at a

loss if they have another

alternative.

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

The short-run

supply curve

is actually

the Marginal

Cost curve!As long as it’s above

the Average Variable

Cost curve.

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars

)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Marginal

Revenue

Economic

Profits

Whereas the

long-run supply

curve is only that

part of the

Marginal Cost

curve that is

above the

Average Total

Cost curve.

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

Profit Levels for a Competitive Firm

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

0 1 2 3 4 5 6 7 8 9 10 11

Output (Units Produced)

Co

sts

/ R

even

ue (

Do

llars)

Marginal

Costs

Average

Total Cost

Average

Variable

Cost

In review… supply curves for a firm.

Supply Supply

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