|The Competitive Firm
|The Profit Motive
- Profit = total revenue - total cost
- The basic incentive for producing goods and services is the
expectation of profit
- Personal reasons, such as the need for control or identity,
also motivate producers.
- Economic Profit: the difference between total
revenues and total economics costs.
- Economic profits account for all resources
- Economic profits represent something over and above
- A productive activity reaps an economic profit only if it
earns more than its opportunity cost.
- Entrepreneurship: the inducement to take on
the added responsibilities of owning and operating a business is the
potential for profit.
- Risk: The potential for profit is not a
guarantee of profit.
- Market structure - The number and relative
size of firms in an industry.
- Perfect competition - A market in which no
buyer or seller has market power.
- a perfectly competitive firm is one whose output is
small relative to the market supply that it has no significant effect
the total quantity or price in the market.
- a perfectly competitive firm confronts a horizontal
demand curve for its own output.
- Monopoly - A firm that produces the entire market
supply of a particular good or service.
- Market Power - The ability to alter the market
price of a good or service.
|The Production Decision
- We want to select the short-run rate of output (with
existing plant and equipment) that will maximize profits.
- Maximizing profits does not mean maximizing revenues!
- To maximize profits a firm must consider how increased
production will affect costs as well as revenues.
- The primary objective of the producer is to find that one
particular rate of output that maximizes profits.
- Profits are maximized when marginal
revenue (price) = marginal cost
- Marginal Revenue (MR) is the change in total revenue that
results from a one-unit increase in the quantity sold.
change in total revenue
marginal revenue = -------------------------
change in output
- short-run profit maximization rules for the competitive
- Price > MC ==> increase output
- Price = MC ==> maintain output because
profits are maximized
- Price < MC ==> decrease output
- The profit-maximizing producer never seeks to maximize
- The profit-maximizing producer has no desire to produce at
that rate of output where ATC is at a minimum.