AGENDA Tues 10/13
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Reading Pop Quiz
QOD #22:
HW Review (Q# 7)
Partner Practice (P # 3, 4)
Pure Competition Short-run Wrap-up
HW: Read pp 181-186 Q #1,2,3
Reading Pop Quiz
Period 3
1. Which market structure would clothing most accurately
fit?
2. State why the “Still There” motel remains open.
3. State when a firm will elect to shut down rather than
continue to operate.
Period 5
1. Which market structure would oil most accurately fit?
2. State the profit maximizing rule/guide.
3. What is the difference in the short-run demand curves
between a single firm and the industry?
Reading Pop Quiz
Period 3
1. Which market structure would clothing most accurately
fit?(Monopolistic Competition)
2. State why the “Still There” motel remains open.
(P>AVC)
3. State when a firm will elect to shut down rather than
continue to operate. (P<minimum AVC or R < VC)
Period 5
1. Which market structure would oil most accurately fit?
(oligopoly)
2. State the profit maximizing rule/guide. (MR = MC)
3. What is the difference in the short-run demand curves
between a single firm and the industry? (Firm is
horizontal, Industry is downward sloping Fig 8.7)
QOD #22: Alphabet Soup (AVC, MC, MR)
A purely competitive firm finds that the market price for
its product is $20. It has a fixed cost of $100 and a
variable cost of $10 per unit for the first 50 units and
then $25 per unit for all successive units.
1. Does price exceed average variable cost for the first
50 units? What about for the first 100 units?
2. What is the marginal cost per unit for the first 50
units? What about for units 51 and higher?
3. For each of the first 50 units, does MR exceed MC?
What about for units 51 and higher?
4. What output level will yield the largest possible profit
for this purely competitive firm? (Hint: Draw a graph
similar to Figure 8.2 using data for this firm.)
QOD #22: Alphabet Soup Solution
1. The price ($20) does exceed the average variable
cost ($10) for the first 50 units, as well as the
average variable cost ($17.50) for the first 100 units.
2. The marginal cost per unit for the first 50 units is $10,
while the marginal cost for units 51 and higher is $25.
3. For the first 50 units, marginal revenue ($20)
exceeds the marginal cost ($10); for units 51 and
higher, the marginal revenue ($20) does not exceed
the marginal cost ($25).
4. The output level yielding the largest possible profit for
this purely competitive firm is 50 products, for a profit
of $400 ($1000 - $100 fixed cost - $500 variable
cost).
Average, Total, and Marginal Revenue
• Average Revenue
• Revenue per unit
• AR = TR/Q = P
• Total Revenue
• TR = P X Q
• Marginal Revenue
• Extra revenue from 1 more unit
• MR = ΔTR/ΔQ
LO3
8-6
Average, Total, and Marginal Revenue
Firm’s
Demand
Schedule
(Average
Revenue)
P
QD
Firm’s
Revenue
Data
TR
MR
0 $131
$0
] $131
1 131 131
] 131
2 131 262
] 131
3 131 393
] 131
4 131 524
] 131
5 131 655
] 131
6 131 786
] 131
7 131 917
] 131
8 131 1048
] 131
9 131 1179
131
10 131 1310 ]
LO3
TR
D = MR = AR
8-7
Profit Maximization: TR–TC Approach
• Three questions:
• Should the firm produce?
• If so, what amount?
• What economic profit (loss) will be
realized?
LO3
8-8
Profit Maximization: TR–TC Approach
The Profit-Maximizing Output for a Purely Competitive Firm: Total Revenue –
Total Cost Approach (Price = $131)
(1)
Total Product
(Output) (Q)
(2)
Total Fixed Cost
(TFC)
(3)
Total Variable
Costs (TVC)
(4)
Total Cost
(TC)
(5)
Total Revenue
(TR)
(6)
Profit (+)
or Loss (-)
0
$100
$0
$100
$0
$-100
1
100
90
190
131
-59
2
100
170
270
262
-8
3
100
240
340
393
+53
4
100
300
400
524
+124
5
100
370
470
655
+185
6
100
450
550
786
+236
7
100
540
640
917
+277
8
100
650
750
1048
+298
9
100
780
880
1179
+299
10
100
930
1030
1310
+280
LO3
8-9
Profit Maximization: TR–TC Approach
Total Economic
Profit
Total Revenue and Total Cost
$1800
1700
1600
1500
1400
1300
1200
1100
1000
900
800
700
600
500
400
300
200
100
LO3
Break-Even Point
(Normal Profit)
Total Revenue, (TR)
Maximum
Economic
Profit
$299
Total Cost,
(TC)
P=$131
Break-Even Point
(Normal Profit)
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Quantity Demanded (Sold)
$500
400
300
200
100
Total Economic
Profit
$299
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Quantity Demanded (Sold)
8-10
Profit Maximization: MR-MC Approach
The Profit-Maximizing Output for a Purely Competitive Firm: Marginal
Revenue – Marginal Cost Approach (Price = $131)
(1)
Total
Product
(Output)
(2)
Average
Fixed Cost
(AFC)
(3)
Average
Variable
Costs (AVC)
(4)
Average
Total Cost
(ATC)
(5)
Marginal
Cost
(MC)
(5)
Price =
Marginal
Revenue
(MR)
0
LO3
(6)
Total
Economic
Profit (+)
or Loss (-)
$-100
1
$100.00
$90.00
$190
$90
$131
-59
2
50.00
85.00
135
80
131
-8
3
33.33
80.00
113.33
70
131
+53
4
25.00
75.00
100.00
60
131
+124
5
20.00
74.00
94.00
70
131
+185
6
16.67
75.00
91.67
80
131
+236
7
14.29
77.14
91.43
90
131
+277
8
12.50
81.25
93.75
110
131
+298
9
11.11
86.67
97.78
130
131
+299
10
10.00
93.00
103.00
150
131
+280
8-11
Profit Maximization: MR-MC Approach
Cost and Revenue
$200
MR = MC
150
MC
P=$131
MR = P
ATC
Economic Profit
100
AVC
A=$97.78
50
0
1
2
3
4
5
6
7
8
9
10
Output
LO3
8-12
Loss-Minimizing Case
• Loss minimization
• Still produce because P > minAVC
• Losses at a minimum where
MR=MC
LO3
8-13
Loss-Minimizing Case
Cost and Revenue
$200
MC
150
Loss
A=$91.67
ATC
AVC
100
P=$81
50
0
MR = P
V = $75
1
2
3
4
5
6
7
8
9
10
Output
LO3
8-14
Shutdown Case
Cost and Revenue
$200
MC
150
ATC
V = $74
100
AVC
MR = P
P=$71
Short-Run Shut Down Point
P < Minimum AVC
$71 < $74
50
0
1
2
3
4
5
6
7
8
9
10
Output
LO3
8-15
Three Production Questions
Output Determination in Pure Competition in the Short Run
LO3
Question
Answer
Should this firm produce?
Yes, if price is equal to, or greater than,
minimum average variable cost. This
means that the firm is profitable or that
its losses are less than its fixed cost.
What quantity should this firm produce?
Produce where MR (=P) = MC; there,
profit is maximized (TR exceeds TC by
a maximum amount) or loss is
minimized.
Will production result in economic
profit?
Yes, if price exceeds average total cost
(TR will exceed TC). No, if average
total cost exceeds price (TC will exceed
TR).
8-16
Firm and Industry: Equilibrium
Firm and Market Supply and the Market Demand
LO4
(1)
Quantity
Supplied,
Single
Firm
(2)
Total
Quantity
Supplied,
1000 Firms
(3)
Product
Price
(4)
Total
Quantity
Demanded
10
10,000
$151
4,000
9
9,000
131
6,000
8
8,000
111
8,000
7
7,000
91
9,000
6
6,000
81
11,000
0
0
71
13,000
0
0
61
16,000
8-17
Firm and Industry: Equilibrium
S = ∑ MC’s
s = MC
Economic
Profit
ATC
d
$111
$111
AVC
D
8
LO4
8000
8-18
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2010 FRQ #1: The Problem
2010 FRQ #1:The Video
2006 FRQ #2: The Problem
2006 FRQ #2: The Video