Competitive Output
Profit Maximization
Assumption We assume that the only goal of a firm is maximized
profit.
- Profit ()= Revenue ()- Cost ()
- Economic Profit is 0 can be a good thing!
- Economic profit is different from accounting profit.
- In calculating economic profit, opportunity cost is considered
- Marginal Cost > Marginal Revenue → You should decrease your output
- Marginal Cost = Marginal Revenue → Profit maximized
- Assumption: Price doesn’t change
Different Market Structures
- The demand as a whole could be inelastic, but the demand at each individual business is not.
- Price takers vs. price makers
Competitive Output
- Shutdown-or-not situation
- In the short-run, your fixed cost is still out there
- If P < AVC, then you should shutdown
- If P > AVC, we still earn some revenue to cover the fixed cost
- Perfectly competitive market → Price is determined by market and fixed → MC = P → Economic profit is 0, long-run equilibrium
- ==Long-run competitive equilibrium point: P = MC = ATC==
- Firms will enter industry if and only if P > ATC
- At the equilibrium, P = ATC, economic profit is 0, but the accountant profit is positive
- Long-run supply curve
- A horizontal line, the price always goes back, in this case it is constant cost industry
- Increasing cost industry, the more firms participating, the higher the cost, in such case the price will rise steadily. e.g. oil and limited resources
- Decreasing cost industry, long-run supply curve slopes down, as the bigger the industry, the lower the cost, e.g. assembly line, computers and cars