ECON 1100 1nd Edition Lecture 19 Outline of Last Lecture I. Variable & Fixed CostsOutline of Current Lecture I.Perfectly Competitive IndustryII.Looking at GraphsIII.Output for Maximizing ProfitCurrent LectureI. Perfectly Competitive IndustryCharacteristics:Many buyers (consumers) & many sellers (producers)Good/service for sale is the same HomogeneousComplete information in market placeNo secretsNo restrictionsEveryone knows pricesKnow what you’re buyingProducers & consumers have the same amount of info availableFirms act as price-takersFirms producing product cant’ set priceIf leave competitive market, than can set price(In the long-run) firms can enter/exit market freely (no cost)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Theory of the firm: firms make choices seeking to maximize profitsMaximizing example: receive $200 & give $100/$150/$175/$300Student Q# MR TR MC TC Profit Produce?Dalton 1 $200 $200 $100 $100 $100 yesAdam 2 $200 $400 $150 $250 $150 yesLauren 3 $200 $600 $175 $425 $175 yesAndrew 4 $200 $300 noAndrew would not individually make a profit therefore he would not produce, however as a firm the company would still profit $75Why do firms stop selling?At some point costs outweigh the revenueII. Looking at GraphsDemand as viewed by competitive firmPerfectly ElasticIf increase P, sell 0If decrease P, lose a little bit of $D = P = AR (TR/Q) = MR (change MR/ change Q)SymbolsD = demandP = priceAR = average revenue; TR = total revenue; Q = quantityMR = marginal revenueLaw of demand: downward sloping (negative relationship) – consumer Here 0 slope due to looking at point of view of firm, not consumerIII. Output for maximizing profitWhat is the amount of output that maximized firm’s profit? (q*)Answer:P = MC or MR = MC Saying same thingQ1 = MR>MC -> produce moreDalton, Adam, LaurenQ2 = MR<MC -> produce
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