ECON 110Lecture 20Outline of Last Lecture I. Clicker QuestionII. Market StructureIII. Perfect competitionIV. Price Takinga. Exampleb. ImplicationsOutline of Current Lecture I. Clicker QuestionsII. Competitive Marketsa. Marginal Revenueb. Maximizing ProfitIII. Long-Run EquilibriumCurrent Lecture – Firms in the competitive marketClicker question: Suppose a firm in a perfectly competitive market is producing 100 units. At that output, marginal revenue = $200; marginal cost = $300. This firm should A. Shut downB. Increase output C. Decrease outputD. Raise priceAnswer: At the current output level, marginal revenue < marginal cost. Decrease output in orderto reduce marginal cost.Suppose a firm in a perfectly competitive market is producing 100 units. At that output, MR = $200 and MC = $300. The market price A. Cannot be determined from this informationB. $300C. $200D. $100Answer: C. Market price is marginal revenue. 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.Competitive MarketsIn a competitive market, the price will equal the marginal revenue. In order for there to be a profit, marginal revenue must be greater than marginal cost. Marginal Revenue: The additional amount of revenue received when an additional unit is sold. (MR = ∆R /∆Q)Maximizing ProfitProfit is total revenue minus total cost. How do we do this? Selling more output, while causing revenues to rise, also causes costs to rise. If revenues rise by more than costs, profit increases: this means that MR > MC Marginal Costs = ∆Costs / ∆QuantityTo maximize profit, a firm should find where MR = MC. Profit = total revenue - total costIn the Long RunEquilibrium in the long run means that there is no overall economic profit; that way, no firms are encouraged to join or exit the market. If the market has an overall positive profit, firms will be induced to enter the market in the long run, which is not equilibrium. If the overall profit is negative, equilibrium does not exist because firms will be exiting the market. Long-run equilibrium exists where there is no economic profit, which is defined as wherePrice = the minimum average total cost.In this graph, maximum profit is when the blue line, Marginal Cost, intersectswith the green line, Marginal Revenue.NOTE: Average revenue = total revenue / quantityAverage total cost = total cost /
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