PROFIT MAXIMISATION BY A FIRM IN A COMPETITIVE MARKET.
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PROFIT MAXIMISATION PROFIT MAXIMISATION BY A FIRM IN A BY A FIRM IN A COMPETITIVE MARKET COMPETITIVE MARKET
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Transcript of PROFIT MAXIMISATION BY A FIRM IN A COMPETITIVE MARKET.
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PROFIT MAXIMISATION BY A FIRM IN A COMPETITIVE MARKET
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MAIN TOPICSDEFINITION OF A COMPETITIVE MARKETMARKET DEMAND AND FIRM DEMANDTOTAL REVENUE OF THE FIRMMARGINAL REVENUE OF THE FIRMTOTAL REVENUE LESS TOTAL COSTSMARGINAL COST AND PROFIT MAXIMISATION
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COMPETITIVE MARKETSLarge number of buyers: None can control the priceLarge number of sellers: None can control the priceUniform commodity: All sellers are selling identical commodities, so they are perfect substitutesEntry to the industry is easy.Established firms do not have an advantage over new firms
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MARKET DEMAND
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QUANTITYPRICE
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MARKET DEMAND AND SUPPLY
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MARKET SUPPLY AND DEMAND
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MBD00164827.xls
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MARKET DEMAND
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DEMAND FOR ONE FIRMS OUTPUTThe firm is a small part of the marketOther firms products are perfect substitutesThe firm can charge no more than the market price
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A FIRMS DEMAND SCHEDULE
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A FIRMS DEMAND CURVE
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FIRM'S DEMAND
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QUANTITY
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FIRM'S DEMAND
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TOTAL REVENUE OF A FIRMThe quantity a firm sells multiplied by the price of the product.
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TOTAL REVENUE OF A FIRM
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QP
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402020
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QUANTITY
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MARKET SUPPLY AND DEMAND
Sheet2
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MBD00164827.xls
Chart1
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QUANTITY
PRICE
MARKET DEMAND
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QUANTITY
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TOTAL REVENUE OF A FIRM
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QUANTITY
REVENUE
A FIRM'S TOTAL REVENUE
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QPTR
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70201400
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QUANTITY
REVENUE
A FIRM'S TOTAL REVENUE
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MBD00164827.xls
Chart1
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QUANTITY
PRICE
MARKET DEMAND
Sheet1
QP
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QUANTITY
PRICE
MARKET DEMAND
Sheet2
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MARGINAL REVENUEThe change in total revenue given the change in quantityIn a competitive industry marginal revenue always equals price.That is, the firm adds the price of one more unit to its total revenue whenever it sells one more unit.This is not true for firms in industries that are not competitive.
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A FIRMS MARGINAL REVENUE SCHEDULE
Sheet1
QUANTITYPRICETRMR
0200
102020020
202040020
302060020
402080020
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6020120020
7020140020
8020160020
Sheet2
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A FIRMS MARGINAL REVENUE CURVE
Chart2
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QUANTITY
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FIRM'S MARGINAL REVENUE
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QUANTITY
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FIRM'S DEMAND
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COMPETITIVE FIRMS PROFIT MAXIMISING DECISIONThe firm is a price taker, so it cannot decide what price to charge.Assume that the firm is producing each output at the minimum possible cost.The firm can only decide how much to produceThe firms goal is to maximise profits
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PROFITS OF A COMPETITIVE FIRM
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10355
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QPTRTCprofitsmcvc
0200100-100-200
1020200150505-1505.00
202040025015010-507.50
30206004002001510010.00
40208006002002030012.50
502010009001003060016.00
602012001300-10040100020.00
702014001800-40050150024.29
802016002400-80060210028.75
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COSTS AND REVENUES
TOTAL COSTS AND REVENUES OF A FIRM
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PROFITS OFA FIRM
MBD00164827.xls
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PRICE
MARKET DEMAND
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QUANTITY
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MARKET DEMAND
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TOTAL REVENUE AND COST CURVES
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TOTAL COSTS AND REVENUES OF A FIRM
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203010
302515
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501525
601030
70535
80040
QPTR
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2020400
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60201200
70201400
80201600
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QUANTITY
REVENUE
A FIRM'S TOTAL REVENUE
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QPTRTCprofitsmcvc
0200100-100-200
1020200150505-150
202040025015010-50
302060040020015100
402080060020020300
5020100090010030600
602012001300-100401000
702014001800-400501500
802016002400-800602100
Sheet2
P
TR
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QUANTITY
COSTS AND REVENUES
TOTAL COSTS AND REVENUES OF A FIRM
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profits
QUANTITY
COSTS AND REVENUES
PROFITS OFA FIRM
MBD00164827.xls
Chart1
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QUANTITY
PRICE
MARKET DEMAND
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705
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Sheet1
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QUANTITY
PRICE
MARKET DEMAND
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PROFITS
Chart10
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40200
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profits
QUANTITY
COSTS AND REVENUES
PROFITS OFA FIRM
Sheet1
QP
0400
10355
203010
302515
402020
501525
601030
70535
80040
QPTR
0200
1020200
2020400
3020600
4020800
50201000
60201200
70201400
80201600
Sheet1
QUANTITY
REVENUE
A FIRM'S TOTAL REVENUE
Sheet2
QPTRTCprofitsmcvc
0200100-100-200
1020200150505-150
202040025015010-50
302060040020015100
402080060020020300
5020100090010030600
602012001300-100401000
702014001800-400501500
802016002400-800602100
Sheet2
P
TR
TC
QUANTITY
COSTS AND REVENUES
TOTAL COSTS AND REVENUES OF A FIRM
Sheet3
P
profits
QUANTITY
COSTS AND REVENUES
PROFITS OFA FIRM
MBD00164827.xls
Chart1
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QUANTITY
PRICE
MARKET DEMAND
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705
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Sheet1
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QUANTITY
PRICE
MARKET DEMAND
Sheet2
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PROFIT MAXIMISATIONProfit is maximised when the difference between the total revenues and total costs is greatestAt outputs where revenues increase by more than costs if output increases, output is too low. Increasing output will increase profit.At outputs where revenues increase by less than costs if output increases, output is too high. Decreasing output will decrease profit
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PROFIT MAXIMISATIONIf marginal revenue equals marginal cost, then profit is maximised.The increase in revenue equals the increase in cost when one more unit is produced.The decrease in revenue equals the decrease in costs when one less unit is producedMaximum profits may occur when average costs are not at a minimum.
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PROFIT MAXIMISATION
Sheet1
QP
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10355
203010
302515
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501525
601030
70535
80040
QPTR
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1020200
2020400
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50201000
60201200
70201400
80201600
Sheet1
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0
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0
0
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0
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QUANTITY
REVENUE
A FIRM'S TOTAL REVENUE
Sheet2
QPTRTCMRMCAVCATCprofits
020010020-100
10202001502055.0015.0050
202040025020107.5012.50150
3020600400201510.0013.33200
4020800600202012.5015.00200
50201000900203016.0018.00100
602012001300204020.0021.67-100
702014001800205024.2925.71-400
802016002400206028.7530.00-800
Sheet2
0000000
0000000
0000000
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P
TR
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MR
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ATC
QUANTITY
COSTS AND REVENUES
TOTAL COSTS AND REVENUES OF A FIRM
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0-100
1050
20150
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50100
60-100
70-400
80-800
P
profits
QUANTITY
COSTS AND REVENUES
PROFITS OFA FIRM
MBD00164827.xls
Chart1
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QUANTITY
PRICE
MARKET DEMAND
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QP
040
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705
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0
QUANTITY
PRICE
MARKET DEMAND
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-
PROFIT MAXIMISATION
Chart1
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P
TR
TC
MR
MC
AVC
ATC
QUANTITY
DOLLARS
PROFIT MAXIMISATION
Sheet1
QPTRTCMRMCAVCATCprofits
020010020-100
10202001502055.0015.0050
202040025020107.5012.50150
3020600400201510.0013.33200
4020800600202012.5015.00200
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602012001300204020.0021.67-100
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Sheet1
P
TR
TC
MR
MC
AVC
ATC
QUANTITY
DOLLARS
PROFIT MAXIMISATION
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