Chapter 6: The Role of Profit

Chapter Focus

The profit-maximizing rule How businesses in each market structure

maximize profits The effects of profit-maximizing behavior on

consumers in each market structure The short-run and long-run outcomes of

profit-maximizing behavior natural monopolies and how governments regulate them

Perfect Competition:

Average Revenue: • a business's total revenue per unit of output

• AR= Total Revenue (TR)/ Quantity of Output (q)

Marginal Revenue:• The extra total revenue earned from an

additional unit of output

• Marginal Revenue (MR) = ∆ TR/ ∆ q

Relationship Between Revenue Conditions and Demand :

• Price (P) = average revenue (AR) = marginal revenue (MR)

Profit Maximization:

• Profit-maximizing rule: marginal revenue (MR) = Marginal cost (MC)

Breakeven Point:

• The level of out put where price (or AR) equals average cost

• P = AC

Shutdown Point:

• The level of output where price (AR) equals average variable cost

• VC = TR →(AVC x q) = (p x q) → AVC = P

Revenues for a perfect Competitor:

Profit Maximization for a Perfect Competitor:

Supply Curves for a Perfectly Competitive Business and market:

Business’s supply curve:• A curve that shows the quantity of output supplied by a

business at every possible price

Market Supply Curve

The Long Run

Benefits of Perfect Competition:

1. Minimum-Cost Pricing: the practice of setting price where it equals minimum average cost

2. Marginal-Cost Pricing: the practice of setting price where it equals marginal cost

Monopolistic Competition:

Revenues for a Monopolistic Competitor:

Oligopoly:

Monopoly:

Monopoly versus Perfect Competition:

Regulation of Natural Monopolies:

Average-Cost Pricing: the practice of setting price where it equals average cost

Accounting-profit rate: a measure of a business’s profitability, calculated as its accounting profit divided by owner’s equity

Fair Rate of Return: the maximum accounting-profit rate allowed for a regulated monopoly