CDAE 254 - Class 21 Nov. 6 Last class: Result of Quiz 5 6. Costs Today: 7. Profit maximization and...
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Transcript of CDAE 254 - Class 21 Nov. 6 Last class: Result of Quiz 5 6. Costs Today: 7. Profit maximization and...
![Page 1: CDAE 254 - Class 21 Nov. 6 Last class: Result of Quiz 5 6. Costs Today: 7. Profit maximization and supply Quiz 6 (chapter 6) Next class: 7. Profit maximization.](https://reader036.fdocuments.net/reader036/viewer/2022082518/56649f585503460f94c7da7a/html5/thumbnails/1.jpg)
CDAE 254 - Class 21 Nov. 6
Last class: Result of Quiz 5 6. Costs
Today: 7. Profit maximization and supply Quiz 6 (chapter 6)
Next class: 7. Profit maximization and supply
Important date:Problem set 6: due Thursday, Nov. 15
(Problems 6.1., 6.4., 6.6., 6.9., and 6.10 from the textbook)
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6. Costs6. Costs
6.1. Basic concepts of costs
6.2. Cost minimizing input choice
6.3. Cost curves
6.4. Short-run and long-run costs
6.5. Per unit short-run cost curves
6.6. Shifts in cost curves
6.7. An example
6.8. Applications
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7. Profit maximization and supply
7.1. Goals of a firm
7.2. Profit maximization
7.3. Marginal revenue and demand
7.4. Marginal revenue curve
7.5. Alternatives to profit maximization
7.6. Short-run supply
7.7. Applications
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7.1. Goals of a firm
-- Maximize profit
-- Maximize TR to increase market shares
-- Maximize the utility of the manager
-- Maximize the expected profit and reduce the risk
…..
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7.2. Profit maximization
-- Profit = TR – TC = Pq – TC
-- A graphical analysis (TR, TC and ) (Fig. 7.1)
-- is at the maximum level when the slope of the profit curve is equal to zero
Slope of the total profit = M = 0
“M = 0” is equivalent to “MR=MC”
i.e., when the slope of the TR curve is equal to the slope of the TC curve
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7.2. Profit maximization
-- Conclusion: is at the maximum level when
MC=MR
-- Why is this the decision rule?
If MR > MC, can be increased by increasing q
If MR < MC, can be increased by decreasing q
If MR = MC, can not be increased
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7.3. Marginal revenue and demand
-- A small firm vs. a large firm:
A small firm (price taker): A firm whose decisions regarding selling do not affect
the market price of the good.
A large firm: A firm whose decisions regarding selling do affect the market
price of the good.
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7.3. Marginal revenue and demand
-- Marginal revenue of a small firm: MR = P
-- Marginal revenue of a large firm: -- A downward-sloping demand curve: when the firm wants to sell more, it has to reduce the price.
-- MR < P
e.g., a firm has the demand function of
q = 10-P.
When P = 7, q = 3, TR = $21. If the firm wants to sell 4 units, P = 6 and TR = $24. What is the MR of this last unit?
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7.3. Marginal revenue and demand
-- Example
Demand function q = 10 - P
TR and MR (Table 7.2 and Fig. 7.3)
-- Price elasticity of demand and MR:
-- Price elasticity of demand:
-- Range of price elasticity of demand:
< -1 elastic
= -1 unit elastic
> -1 inelastic
Pin change %
qin change %, Pqe
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7.3. Marginal revenue and demand
-- Price elasticity of demand and MR:
< -1 elastic MR > 0
= -1 unit elastic MR = 0
> -1 inelastic MR < 0
-- Summary:
PqePMR
,
11
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7.4. Marginal revenue curve
-- Marginal revenue curve: Relationship between MR and output level (q)
-- MR curve of a small firm (price taking firm):
MR=P
-- MR curve of a large firm with a downward- sloping demand curve:
-- Table 7.1 and Fig. 7.2
-- Fig. 7.3.
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Class exercise
Suppose that the demand function for a company’s product is estimated as q = 8 - 0.5 P where q is the quantity and P is the price.
(1) Draw the demand curve
(2) Derive the MR function and draw the MR curve
(3) What is the price elasticity of demand when P=4?
(4) If the company wants to increase its market share, should it increase or decrease its price?