Microeconomics Unit 2 Production, cost, profit and perfect competition

Microeconomics Unit 2

Production, cost, profit and perfect competition

Topic 1: PRODUCTION

Marginal Product (MP)- the additional output generated by additional inputs (workers).

= change in total product

Total Product (TP)- total output or quantity produced

Average Product (AP)- the output per unit of input

Average Product =Total Product

# of workers2

calculate MP and AP

# of Workers

(Input)

Total Product(TP)

PIZZAS

Marginal Product(MP)

Average Product(AP)

0 0

1 10

2 25

3 45

4 60

5 70

6 75

7 75

8 70 3

# of Workers

(Input)

Total Product(TP)

PIZZAS


Average Product(AP)

0 0 - -

1 10 10

2 25 15

3 45 20

4 60 15

5 70 10

6 75 5

7 75 0

8 70 -5

calculate MP and AP

4

# of Workers

(Input)

Total Product(TP)

PIZZAS


Average Product(AP)

0 0 - -

1 10 10 10

2 25 15 12.5

3 45 20 15

4 60 15 15

5 70 10 14

6 75 5 12.5

7 75 0 10.71

8 70 -5 8.75

calculate MP and AP

5

Stages of Production

Increasing returns: workers produce more additional products

Happens because of SPECIALIZATION


Diminishing returns: workers produce less ADDITIONAL products

Happens because more workers are using the same fixed resources

(not enough fixed resources to go around)

Diminishing Marginal Returns

Too many cooks in the kitchen!


Negative returns: workers produce less total product

Happens because workers get in each others way

# of Workers

(Input)

Total Product(TP)

PIZZAS


Average Product(AP)

0 0 - -

1 10 10 10

2 25 15 12.5

3 45 20 15

4 60 15 15

5 70 10 14

6 75 5 12.5

7 75 0 10.71

8 70 -5 8.75

Identify the three stages of returns

10

Graphing

Production

11

Stage I: increasing marginal returns

Total Product

Quantity of Labor

Marginal and

Average Product

Quantity of Labor

Total Product

Due to Specialization

Average Product

12Marginal Product

Stage II: decreasing marginal returnsDue to more workers using same fixed

resources

Total Product

Quantity of Labor

Marginal and

Average Product

Quantity of Labor

Total Product

Average Product

13Marginal Product

Total Product

Quantity of Labor

Marginal and

Average Product

Quantity of Labor

Total Product

Stage III: Negative Marginal Returns

Marginal Product

Average Product

14

Topic 2: short run costs vs. long run costs

Short Run: fixed plant

• Time period in which some resources remain fixed; it is too brief for a firm to change its plant capacity

Long Run: Variable plant

• Time frame in which all resources can be varied; period of time is long enough to change plant size

Topic 3:

Short Run Costs of Production

workers TP Marginal product

Fixed cost

Variable cost

Total cost

Marginal cost

Average fixed cost

Average variable cost

Average total cost

0 0

1 14

0 70 0 70 ---

3.29

---

5

----

3.29

----

8.29

2 42

92 1.64

3 75

138 1.39

4 112

184 1.24

5 150

230 1.21

6 180

276 1.53

7 203

322 2.00

8 216

368 3.54

• Complete MP in chart in notes


1 14 14

2 42 28

3 75 33

4 112 37

5 150 38

6 180 30

7 203 23

8 216 13

Increasing and decreasing returns????

EXPLICIT VS. IMPLICIT COSTS

• Explicit costs = out of pocket expenses

Accountants only look at this

• Implicit costs = opportunity costs (foregone wages, depreciation ect)

Economists consider explicit AND implicit!

Overall costs: What is the overall cost of producing??

Must look at TOTALS

Fixed Costs: (FC) Costs that DON’T change

Variable Costs: (VC) Costs that DO change

Total Costs: FC + VC


Fixed cost

0 0

1 14

0

14

70

2 42 38

3 75 33

4 112 37

5 150 38

6 180 30

7 203 23

8 216 13


Fixed cost

1 14 14 70

2 42 28 70

3 75 33 70

4 112 37 70

5 150 38 70

6 180 30 70

7 203 23 70

8 216 13 70

What happens to FC as more products are produced???


Fixed cost

Variable cost

Total cost

0 0

1 14

0

14

70 0 70

2 42 38 70

92

3 75 33 70

138

4 112 37 70

184

5 150 38 70

230

6 180 30 70

276

7 203 23 70

322

8 216 13 70

368

What happens to VC as more products are produced?


Fixed cost

Variable cost

Total cost

1 14 14 70 46 116

2 42 28 70 92 162

3 75 33 70 138 208

4 112 37 70 184 254

5 150 38 70 230 300

6 180 30 70 276 346

7 203 23 70 322 392

8 216 13 70 368 438

What happens to TC as more products are produced???

Total Costs Cost Graphs

• 1. Fixed cost will always be the same

• 2. VC will always slope up

• 3. Total cost will always slope up

* TC always > VC

*Distance between TC and VC = FC

Marginal Cost:

Additional costs of making ONE more product .

30


Fixed cost

Variable cost

Total cost

Marginal cost

1 14 14 70 46 116 3.29

2 42 28 70 92 162 1.64

3 75 33 70 138 208 1.39

4 112 37 70 184 254 1.24

5 150 38 70 230 300 1.21

6 180 30 70 276 346 1.53

7 203 23 70 322 392 2.00

8 216 13 70 368 438 3.54

What happens to MC as more products are produced???

How much does each product cost to make? Use AVERAGES

Average Fixed Cost (AFC): fixed cost PER PRODUCT

AFC = FC/TP


Fixed cost

Variable cost

Total cost

Marginal cost

Average fixed cost

1 14 14 70 46 116 3.29 5

2 42 28 70 92 162 1.64

3 75 33 70 138 208 1.39

4 112 37 70 184 254 1.24

5 150 38 70 230 300 1.21

6 180 30 70 276 346 1.53

7 203 23 70 322 392 2.00

8 216 13 70 368 438 3.54


Fixed cost

Variable cost

Total cost

Marginal cost

Average fixed cost

1 14 14 70 46 116 3.29 5

2 42 28 70 92 162 1.64 1.67

3 75 33 70 138 208 1.39 .93

4 112 37 70 184 254 1.24 .63

5 150 38 70 230 300 1.21 .47

6 180 30 70 276 346 1.53 .39

7 203 23 70 322 392 2.00 .34

8 216 13 70 368 438 3.54 .32

What happens to AFC as more products are produced???

• Average Variable cost (AVC): variable cost PER PRODUCT

AVC = VC/TP


Fixed cost

Variable cost

Total cost

Marginal cost

Average fixed cost


1 14 14 70 46 116 3.29 5 3.29

2 42 28 70 92 162 1.64 1.67

3 75 33 70 138 208 1.39 .93

4 112 37 70 184 254 1.24 .63

5 150 38 70 230 300 1.21 .47

6 180 30 70 276 346 1.53 .39

7 203 23 70 322 392 2.00 .34

8 216 13 70 368 438 3.54 .32


Fixed cost

Variable cost

Total cost

Marginal cost

Average fixed cost


1 14 14 70 46 116 3.29 5 3.29

2 42 28 70 92 162 1.64 1.67 2.19

3 75 33 70 138 208 1.39 .93 1.84

4 112 37 70 184 254 1.24 .63 1.64

5 150 38 70 230 300 1.21 .47 1.53

6 180 30 70 276 346 1.53 .39 1.53

7 203 23 70 322 392 2.00 .34 1.59

8 216 13 70 368 438 3.54 .32 1.70

What happens to AVC as more products are produced???

• Average total cost (ATC): TOTAL cost PER PRODUCT

ATC = TC/TP or ACT = AFC + AVC


Fixed cost

Variable cost

Total cost

Marginal cost

Average fixed cost


Average total cost

1 14 14 70 46 116 3.29 5 3.29 8.29

2 42 28 70 92 162 1.64 1.67 2.19

3 75 33 70 138 208 1.39 .93 1.84

4 112 37 70 184 254 1.24 .63 1.64

5 150 38 70 230 300 1.21 .47 1.53

6 180 30 70 276 346 1.53 .39 1.53

7 203 23 70 322 392 2.00 .34 1.59

8 216 13 70 368 438 3.54 .32 1.70


Fixed cost

Variable cost

Total cost

Marginal cost

Average fixed cost


Average total cost

1 14 14 70 46 116 3.29 5 3.29 8.29

2 42 28 70 92 162 1.64 1.67 2.19 3.86

3 75 33 70 138 208 1.39 .93 1.84 2.77

4 112 37 70 184 254 1.24 .63 1.64 2.27

5 150 38 70 230 300 1.21 .47 1.53 2

6 180 30 70 276 346 1.53 .39 1.53 1.92

7 203 23 70 322 392 2.00 .34 1.59 1.93

8 216 13 70 368 438 3.54 .32 1.70 2.03

What happen to ATC as more products are produced???

Average costs graph

• AFC will always get smaller as more products are produced

Why??? Fixed cost are spread out among more products

AVC and ATC – always U shaped due to increasing and then diminishing returns

Distance between ATC and AVC gets smaller as more products are produced

Marginal cost with Average costs ***

MC intersects ATC at min. point Gap between ATC and AVC gets smaller as Q increases

Quantity

Co

sts

(do

llar

s)

TC

VC

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

What is the FC?

At 9 units what is the:

VC TC AVC

ATC AFC

800

700

600

500

400

300

200

100

0

45

Quantity

Co

sts

(do

llar

s) AVC

ATC

Practice reading

121110987654321

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

MC

46

At an output of 11, what is the :

AVC MC AFC

ATC TC VC

Practice reading

At output Q, what area represents:

TCVCFC

CDQ0BEQ0AFQ0 or CDEB

47

Co

sts

(d

olla

rs)

Ave

rag

e p

rod

uct

an

dm

arg

inal

pro

du

ct

Quantity of labor

Quantity of output

MP

MC

ATC

•When the marginal cost is below the average, it pulls the average down. •When the marginal cost is above the average, it pulls the average up.

Relationship between ATC and MC

Example:•The average income in the room is $50,000.•An additional (marginal) person enters the room: Bill Gates.•If the marginal is greater than the average it pulls it up.

The MC curve intersects the ATC curve at its lowest point.

48

Things to remember about drawing cost curves:

• 1. Draw MC first (looks like a check mark) • 2. Draw ATC – start at point above MC • 3. Draw AVC – start at point above MC but

below ATC• 4. MC curve always intersects ATC and AVC at

their minimum points • 5. Distance between ATC and AVC gets smaller

as output (quantity) increases• 6.ATC and AVC are U shaped (due to increasing

and then decreasing marginal returns)

TOPIC 4: Long run costs of production

• Long run costs reflect changes in plant size

In the long run all resources are variable. Plant capacity/size can change.

Definition and Purpose of the Long Run

Why is this important?The Long-Run is used for planning. Firms use to identify

which plant size results in the lowest per unit cost.

3 things can happen in the long run 1. Economies of scale 2. Constant returns to scale 3. Diseconomies of scale

51

Long Run AVERAGE Total Cost

52Quantity Cars

CostsATC1

MC1

0 1 100 1,000 100,000 1,000,0000

$9,900,000

$50,000

$6,000

$3,000


53Quantity Cars

CostsATC1

MC1

MC2

0 1 100 1,000 100,000 1,000,0000

$9,900,000

ATC2

Company builds new plant ATC goes down due to mass

production

$50,000

$6,000

$3,000


54Quantity Cars

CostsATC1

MC1

ATC2

MC2

ATC3

MC3

0 1 100 1,000 100,000 1,000,0000

$9,900,000

$50,000

$6,000

$3,000

Company builds new plant ATC goes down due to mass production


55Quantity Cars

CostsATC1

MC1

ATC2

MC2

ATC3

MC3

0 1 100 1,000 100,000 1,000,0000

$9,900,000

$50,000

$6,000

$3,000

MC4

ATC4

Company builds more plants, ATC stays the same


56Quantity Cars

CostsATC1

MC1

ATC2

MC2

ATC3

MC3MC5

0 1 100 1,000 100,000 1,000,0000

$9,900,000MC4 ATC5

$6,000

$3,000

ATC4

Company builds more plants and ATC begins to

increase

$50,000


57Quantity Cars

CostsATC1

MC1

ATC2

MC2

ATC3

MC3MC5

0 1 100 1,000 100,000 1,000,0000

$9,900,000MC4 ATC5

$6,000

$3,000

ATC4 $50,000


58Quantity Cars

CostsATC1

MC1

ATC2

MC2

ATC3

MC3MC5

0 1 100 1,000 100,000 1,000,0000

$9,900,000MC4 ATC5

$6,000

$3,000

ATC4

Where is the Long Run Average Cost Curve?

$50,000

The LRATC curve connects the lowest points on all of the

SRATC curve (envelope)

• Economies of Scale- LRATC curve is decreasing

• Happens due to mass production techniques

Constant Returns to Scale- The ATC to produce is staying the same

LRATC is flat

Diseconomies of Scale- LRATC is increasing

Caused by a firm becoming too big “for own good”

LRATC Simplified

63Quantity

Costs

Long Run Average Cost

Curve

Economies of Scale

Constant Returns to Scale

Diseconomies of Scale

The law of diminishing marginal returns doesn’t apply in the long run because there are no FIXED RESOURCES.

Firm should select the size of firm that has lowest SRATC

Topic 5: Revenue

• Total Revenue = amount of $ a firm takes in from selling a product

TR = P X Q

• Marginal revenue

The increase in revenue that results from selling ONE more unit

Topic 6: PROFIT

• Profit = financial gain

TOTAL REVENUE – TOTAL COST

TR>TC = PROFIT

TR<TC = LOSS

TR = TC = BREAK EVEN (normal profit)

Calculate profit

Total product Total cost Total revenue Profit

50 700 500

80 800 800

100 850 1,000

130 900 1,300

Calculate profit

Total product Total cost Total revenue Profit

50 700 500 -200

80 800 800 0

100 850 1,000 150

130 900 1,300 400

2 ways to improve profit

• 1. Increase revenue

• 2. decrease costs

Making a profit activity

Review:

• What is Revenue????

What are the different types of costs???

FIXED and VARIABLE cost

EXPLICIT cost and an IMPLICIT cost

Profit

Video clip

• Costs??? • Revenue??? • Profit???

PROFIT =

total revenue –

total cost

Marshmallow Towers Objective:

Your goal in this activity is the same goal of every business, to make PROFIT.

Your assignment is to earn the most profit as you make a tower made only of toothpicks and mini-marshmallows. You will have 15 minutes

What does it cost to build the tower???

Fixed Costs

rent $500

property tax $150

Insurance $100

opportunity cost$ $ 50

Total Fixed Cost = $ 800

Variable cost – will depend upon the # of marshmallows and toothpicks you use $50.00 each $100.00 each

How much will we earn for building our tower???

• Revenue will be based on the HEIGHT and STRENGTH of your tower

HEIGHT

• Inches 1-4 = $1,000 in inch

• Every inch over 4 = $2,000 each inch

Strength

• Can stand alone for at least 10 seconds = $2,000

• Can hold a sheet of paper on top for at least 10 seconds = $2,000

Record Sheet

You will record all costs on your record sheet

You may purchase as many toothpicks and marshmallows as you wish RECORD THE NUMBER EACH TIME YOU PURCHASE!

Marshmallows toothpicks

______ ________

_______ ________

_______ ________

_______ ________

Total # marshmallows ___ Total # toothpicks ______

Before tower is judged

Marshmallows Toothpicks

______ ________

_______ ________

_______ ________

_______ ________

Total # marshmallows __ Total # toothpicks ____

X $50 = ______ X $100 = ______

Total Variable cost = ________

• Stop Watch: 15:00

Discuss these questions as a group – answer on your record sheet

1. We could have improved our profit by…..

1. How did your group try to minimize your costs?

2. How did your group try to maximize your revenue?

1. Why is it important to consider both cost and

revenue when making business decisions?

PerfectCompetition

PureMonopoly

MonopolisticCompetition

Oligopoly

TOPIC 7: MARKET STRUCTURES

Imperfect Competition

85

Most competition least competition

Perfect Competition

• Number of firms: Many (thousands) of small firms

• Choice for Consumers: many • Type of Good: identical products; perfect

substitutes to each another• Market Entry: very easy, no barriers to entry• Amount of competition: Great deal; more

than any other structure

Perfect competition

• Example: Agricultural products

Monopolistic Competition

Characteristics of monopolistic competition

Number of firms: hundreds of small companies

Choice for consumers: many

Type of Good: product DIFFERENTIATION

Market Entry: easy, little barriers to entry

Amount of competition: significant amount; non-price competition

Examples: monopolistic competition

• Retail stores • Restaurants• Pizza

Oligopoly Number of firms: Few large companies

Choice for Consumers: Few

Type of Good: similar or different from one another

Market entry: difficult to enter; barriers exist

Amount of Competition: LITTLE

One firm’s actions have impact on other firms

Brand name recognition important

Examples: Oligopoly

• Soft drinks • Cereal • Athletic apparel

Example of how one firm in oligopoly impacts another

94

Monopoly

Number of firms: Single Seller

Choice for consumers: ONE

Type of Good: unique; no substitutes

Amount of Competition: none (usually illegal because of this)

Market Entry: Impossible

Example: Monopoly

• Utility companies

ID the market structure• Business 1: I’ve got plenty of competition.

If I tried to raise my price, I’d lose business to the large firms that dominate our industry. I wait for them to raise prices and I follow along behind.

• Business 2: New shops like mine are opening all the time – there are hundreds of us. I have to spend money on advertising to convince people that my shop is unique and different.

• Business 3: I can’t afford to advertise; it would eat up what little profit I make. Besides, what good would it do? My product is the same as everyone else’s.

Business 4: My product is like no one else’s. I work hard to make sure my firm stays out in front to avoid cutthroat competition.

Intellectual Property

• Intellectual Property includes: secret formulas, ideas, inventions (products and processes), industrial designs, literary and artistic works (novels, films, music, architectural designs and web pages)

Intellectual property is protected by: 1. Patents2. Copyrights3. Trademarks

Patents

• legal right to exclude anyone else from manufacturing or marketing an invention

• Last for 20 years.

Strange patents ???

• Anti-eating face mask

• Gerbil shirt

Copyrights

protect written or artistic expressions - novels, poems, songs or movies.

Lasts for the life of the author plus 50 years.

Famous copyright cases

S. Victor Whitmill v. Warner Bros. Entertainment Inc.Tatoo (like Mike Tyson’s) in The Hangover Part 2. Warner Bros. and Whitmill worked out an agreement of undisclosed terms.

• Mattel Inc. v. MGA Entertainment Inc. MGA Entertainment filed a lawsuit against Mattel, claiming that the line of My Scene Barbies copied the big-headed and slim-bodied physique of Bratz dolls

The Happy Birthday SongThe copyright belongs to Warner Music Group, and the company regularly charges up to $30,000 to anyone who wants to use the song for profit

Trademarks

Name, phrase, sound or symbol used in association with services or products.

Famous Trademarks

• “That’s hot!” “You’re Fired!”

• “Fear the brow” • “Let’s get ready to rumble”

• “There’s an app for that”

• “BAM!”

Profit Topic 8: PERFECT Competition REVIEW

• Many small firms (thousands)• Identical products (perfect substitutes)• Easy for firms to enter the industry• Firms are “Price Takers”

The seller has NO control over price. Can only control Quantity they are producing

111

Demand for Perfectly Competitive Firms

Why are they Price Takers?If a firm charges above the market price, NO ONE will buy. Consumers will go to other firms

There is no reason to lower price because consumers will buy the same amount at the market price.Since the price is the same at all quantities demanded, the demand curve for each firm is… Perfectly Elastic (A Horizontal straight line)

112

P

Q

PRICE

P

Q5000

D

S

Industry Firm(price taker)

$15 $15

The Competitive Firm is a Price TakerPrice is set by the Industry

113

If price changes in the market, it will also change in the FIRM

115

What is the additional revenue for selling an

additional unit? 1st unit earns $152nd unit earns 30 (15 more)

Marginal revenue is constant at $15

Notice: MR=D=AR=P

P

Q

Demand

Firm(price taker)

$15

115

MR=D=AR=P


116

What is the additional revenue for selling an

additional unit? 1st unit earns $152nd unit earns $15Marginal revenue is constant at $15Notice:

• Total revenue increases at a constant rate

• MR equal Average Revenue

P

Q

Demand

Firm(price taker)

$15

116

MR=D=AR=P


For Perfect Competition:MR=D=AR=P

Topic 9: MaximizingPROFIT in perfect competition

117

Short-Run Profit MaximizationWhat is the goal of every business?

To Maximize Profit!!!!!!

•To maximum profit firms must make the right output

•How does a firm decide the right output????

MR< MC don’t produce MR> MC produce

118

How many products should this perfect competitive firm produce???

Price of item is $20.00 TP TC MC MR 0 20 ---- ----1 30 10 20 2 35 5 20 3 45 10 20 4 60 15 20 5 90 30 20 6 130 40 20

How many products should this perfect competitive firm produce???


What is the firm’s profit at this point???

TR-TC

$20.00

*Profit would still be made at TP of 5, but profit not maximized


Profit at TP of 4 = $20

Profit at TP of 5 = $10

122

Profit Maximizing Rule

MR=MC

# of workers

TP MP FC VC TC AFC AVC ATC

MC TR MR profit

1 14 40 100 2.86 7.14 7.14

2 30 40 200 1.33 6.67 6.25

3 40 40 300 1 7.5 10

4 45 40 400 .89 8.89 10

5 43 40 500 .93 11.63 -50

# of workers


MC TR MR profit

1 14 14 40 100 2.86 7.14 7.14

2 30 16 40 200 1.33 6.67 6.25

3 40 10 40 300 1 7.5 10

4 45 5 40 400 .89 8.89 10

5 43 -2 40 500 .93 11.63 -50

Increasing, diminishing and negative returns???

# of workers


MC TR MR profit

1 14 14 40 100 140 2.86 7.14 7.14

2 30 16 40 200 240 1.33 6.67 6.25

3 40 10 40 300 340 1 7.5 10

4 45 5 40 400 440 .89 8.89 10

5 43 -2 40 500 540 .93 11.63 -50

# of workers

TP MP FC VC TC AFC AVC ATC MC TR MR profit

1 14 14 40 100 140 2.86 7.14 10 7.14

2 30 16 40 200 240 1.33 6.67 8 6.25

3 40 10 40 300 340 1 7.5 8.5 10

4 45 5 40 400 440 .89 8.89 9.78 10

5 43 -2 40 500 540 .93 11.63 12.56

-50

# of workers


1 14 14 40 100 140 2.86 7.14 10 7.14

140

2 30 16 40 200 240 1.33 6.67 8 6.25

300

3 40 10 40 300 340 1 7.5 8.5 10 400

4 45 5 40 400 440 .89 8.89 9.78 10 450

5 43 -2 40 500 540 .93 11.63 12.56

-50 430

# of workers


1 14 14 40 100 140 2.86 7.14 10 7.14

140

2 30 16 40 200 240 1.33 6.67 8 6.25

300

3 40 10 40 300 340 1 7.5 8.5 10 400

4 45 5 40 400 440 .89 8.89 9.78 10 450

5 43 -2 40 500 540 .93 11.63 12.56

-50 430

In PC, Marginal revenue = price of product (remember MR=D=AR=P)

# of workers


1 14 14 40 100 140 2.86 7.14 10 7.14

140 10

2 30 16 40 200 240 1.33 6.67 8 6.25

300 10

3 40 10 40 300 340 1 7.5 8.5 10 400 10

4 45 5 40 400 440 .89 8.89 9.78 10 450 10

5 43 -2 40 500 540 .93 11.63 12.56

-50 430 10

In PC, Marginal revenue = price of product (remember MR=D=AR=P)

# of workers


1 14 14 40 100 140 2.86 7.14 10 7.14 140 10 0

2 30 16 40 200 240 1.33 6.67 8 6.25 300 10 60

3 40 10 40 300 340 1 7.5 8.5 10 400 10 60

4 45 5 40 400 440 .89 8.89 9.78 20 450 10 10

5 43 -2 40 500 540 .93 11.63

12.56 -50 430 10 -110

# of workers


1 14 14 40 100 140 2.86 7.14 10 7.14 140 10 0

2 30 16 40 200 240 1.33 6.67 8 6.25 300 10 60

3 40 10 40 300 340 1 7.5 8.5 10 400 10 60

4 45 5 40 400 440 .89 8.89 9.78 20 450 10 10

5 43 -2 40 500 540 .93 11.63

12.56 -50 430 10 -110

How many products should this firm produce to maximize its profits ????

# of workers


1 14 14 40 100 140 2.86 7.14 10 7.14 140 10 0

2 30 16 40 200 240 1.33 6.67 8 6.25 300 10 60

3 40 10 40 300 340 1 7.5 8.5 10 400 10 60

4 45 5 40 400 440 .89 8.89 9.78 20 450 10 10

5 43 -2 40 500 540 .93 11.63

12.56 -50 430 10 -110

MC in Perfect competition

• Upward sloping part of MC curve = Supply of firm

MC=S

MR = MC in perfect competition

Firm will produce the Q where MR=MC to maximize profit

Topic 10: Perfectly competitive firm in the short

run • 1. It can make a profit

• 2. Break even NORMAL PROFIT

• 3. Have a loss

• Firm will produce where MR=MC

1. Profit P > ATC

profit

2. Break even point price = ATC

ATC

3. LOSS P < ATC

ATCLOSS

Shut Down Rule A firm should continue to produce as long as the price is above the AVC

When the price falls below AVC then the firm should minimize its losses by shutting down

Why? If the price is below AVC the firm is losing more money by producing than they would have

to pay to shut down.

If price changes in the market, it will also change in the FIRM and the firm should

adjust their output

Example: increase in S lowers P

Practice

141

Practice

• What Quantity will this firm produce?

• What is this firm’s total revenue?

• What is this firm’s total cost?

• Is this firm experiencing a profit or loss? How much?

$20

ATC

AVC

`

1 What Quantity will this firm produce?

2 What is the TR at

this quantity? •3 What is the TC at

this quantity? •4 Profit or Loss? How much?

Topic 11:Perfectly competitive firm in the Long run

Perfectly competitive firm in the long run

• P=MR=MC=SRATC= LRATC

• All Perfectly competitive firms in the LORNG RUN earn a NORMAL economic profit (profit is 0)

Perfectly competitive firm in the Long run

In the long-run, what happens when economic

profits are made?• When firms make profits, other firms

enter the industry – this causes supply to increase which causes prices to go down

• When prices go down, profits go down

In the long-run, what happens when losses are

made?• When firms incur a loss, firms start to

leave the industry – this causes supply to decrease which causes prices to go up

• When prices go up, profit goes up

Topic 12: Efficiency

Perfectly competitive markets are perfectly efficient

They have BOTH productive and allocative efficiency in the long

run

149

Productive Efficiency

Price = Minimum ATC

The production of a good in a least costly way.

Graphically it is where…

150

PD=MR

Q

MCATC

Quantity

Pri

ce

Notice that the product is being made at the lowest possible cost (Minimum ATC)

Long-Run Equilibrium

151

Allocative Efficiency

Price = MC

Producers are making the products most wanted by society.

Graphically it is where…

152

P MR

Q

MC

Quantity

Pri

ceLong-Run Equilibrium

Optimal amount being produced

153

PD=MR

Q

MCATC

Quantity

Pri

ce

P = Minimum ATC = MCEXTREMELY EFFICIENT!!!!

Long-Run Equilibrium

154

Documents

Microeconomics Unit 2 Production, cost, profit and perfect competition