ECON 111 -2 Template PDF

8. Profit Maximization TP = TR - TC TR = pQ TC=cQ MC = ∆𝑐/∆𝑄 MR = ∆𝑇𝑅/∆𝑄 = p Maximum Profit is found where the price (p) is equal to marginal cost (MC) where the slope of the total cost curve is parallel to the total revenue curve after the first break even point. The first time they are parallel is...

8. Profit Maximization TP = TR - TC TR = pQ TC=cQ MC = ∆𝑐/∆𝑄 MR = ∆𝑇𝑅/∆𝑄 = p Maximum Profit is found where the price (p) is equal to marginal cost (MC) where the slope of the total cost curve is parallel to the total revenue curve after the first break even point. The first time they are parallel is maximum loss but you need to keep selling since the marginal cost continues to get lower. At the point where MC meets AR=MR=P, is your maximum profit point. The area under the bold black line is your Total Cost and the one above it is your Profit. Shutting down does not solve your problem as there are still fixed costs. The only way to eliminate those fixed costs would be to close the doors, turn off the electricity, and perhaps even sell off or scrap the machinery. The company would still remain in business and could operate its remaining factories. It might even be able to re-open the factory it had closed, although doing so could be costly if it involved buying new machinery or refurbishing the old machinery. But if you continue, you will eventually be able to pay for your fixed costs when you continue your production. If you have to shut down, do it when your Price is equal to average variable cost as there is no benefit to continuing since fixed costs will be incurred no matter what. Firms no longer make economic profit when TR = TC brought about by P = LRMR = LRAC = LRMC.This means that firms are operating at the maximum efficiency as average cost is at its minimum. Once you reach this point, it means what the firm is earning is the same as what other firms are earning. In some industries the LRAC shifts down as supply becomes greater and firms become more efficient like the computer industry but on the other hand they can also shift up. Short-Run Market Supply Curve curve. In general, the number of firms in an industry is not always a good indicator of the extent to which that industry is competitive. 3. The demand curve and the marginal revenue curve are identical. Therefore, the market supply curve can be obtained by adding the supply curves of each of these firms. Figure 8.9 shows how this is done when there are only three firms, all of which have different short-run pro- duction costs. Each firm’s marginal cost curve is drawn only for the portion that lies above its average variable cost curve. (We have shown only three firms to keep the graph simple, but the same analysis applies when there are many firms.) In the long-run, everyone has the same supply curve. 4. In the short run, a competitive firm maximizes its profit by choosing an output at which price is equal to (short-run) marginal cost. 5. The short-run market supply curve is the horizontal summation of the supply curves of the firms in an industry. It can be characterized by the elasticity of supply: the percentage change in quantity supplied in response to a percentage change in price. 6. In both the short run and the long run, producer surplus is the area under the horizontal price line and above the marginal cost of production. 7. Economic rent is the payment for a scarce factor of production less the minimum amount necessary to hire that factor. In the long run in a competitive market, producer surplus is equal to the economic rent generated by all scarce factors of production. SUMMARY #6 1. Managers can operate in accordance with a complex set of objectives and under various constraints. However, we can assume that firms act as if they are maximizing long-run profit. 2. Many markets may approximate perfect competition in that one or more firms act as if they face a nearly horizontal demand 8. In the long run, profit-maximizing competitive firms choose the output at which price is equal to long-run marginal cost. 9. A long-run competitive equilibrium occurs under these conditions: (a) when firms maximize profit; (b) when all firms earn zero economic profit, so that there is no incentive to enter or exit the industry; and (c) when the quantity of the product demanded is equal to the quantity supplied. 10. The long-run supply curve for a firm is horizontal when the industry is a constant-cost industry (typically farming) in which the increased demand for inputs to production (associated with an increased demand for the product) has no effect on the market price of the inputs. But the long-run supply curve for a firm is upward sloping in an increasing-cost industry, where the increased demand for inputs causes the market price of some or all inputs to rise. (Typically scarce resource companies like gold and oil) If there is a price ceiling… There will be deadweight loss due to inefficiency called “quantity distortion” No one in society benefits from a deadweight loss. The same is true for Price Floor. 9. Welfare Implications of a Competitive Market 1. Higher Consumer Surplus Consumer Surplus is the difference between what the consumer was willing to pay but paid in actuality. 2. Higher Producer Surplus Difference between the price received by the firm and the firm’s willingness to sell the product. 3. Maximized Social Surplus The sum of Producer and Consumer Surplus. It is maximized. One justification for the price floor is something such as the living wage. The question now is whose responsibility is this? The government’s or the firm’s? Putting it on the private sector forces another responsibility on them. Thus, it should be on the government. SUMMARY #7 1. In each case, consumer and producer surplus are used to evaluate the gains and losses to consumers and producers. 2. When the government imposes a tax or subsidy, the price usually does not rise or fall by the full amount of the tax or subsidy. When it comes to the increase in prices for consumers, the reason to blame are institutional failures. If governments made it more accessible for suppliers to sell their wares and not have to pay middlemen, consumers and suppliers would both benefit more. Production Possibilities Curve It is concave because as you ramp up production, you will have to give up some workers making bread to make milk. It will be costly to train them the more you train them. 3. Government intervention generally leads to a deadweight loss; even if consumer surplus and producer surplus are weighted equally, there will be a net loss from government policies that shifts surplus from one group to the other.