ECON 1123 1st Edition Lecture 12 Outline From Previous Lecture I More on Costs II Looking at the Long run Outline of Current Lecture I Supply in Purely Competitive Markets A The Characteristics of Pure competition B The Purely Competitive firm in short run equilibrium C The competitive firm s marginal revenue schedule D Short Run Profits and Average Total Costs Current Lecture Notes I Supply in Purely Competitive Markets Note This does not exist in reality A The Characteristics of Pure competition In Competitive markets we have large numbers of independently action buyers and sellers So many in fact that no individual buyer or seller can really affect market price Homogeneous Products No real or imagined differences i e it s all asprin Firms can easily enter or exit the industry Perfect information concerning prices and products Perfectly mobile resources B The Purely Competitive firm in short run equilibrium short run some resources are fixed capital but some are variable labor Operational objective of the owners and managers maximize profits or minimize losses rule for profit maximization or loss minimization marginal revenue marginal cost Marginal Revenue is the additional revenue a firm receives when it sells an incremental unit of output MR change in total revenue change in output 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 Marginal Cost the additional cost a firm incurs when it produces an incremental unit of output The Rule MR MC If a company can make something for 8 dollars and sell it for 10 for a profit of 2 dollars they will do it If a company can make something for 9 99 and sell it for 10 dollars then they also will do that They will do this until no more profit can be made then they will stop because they want to avoid loss C The competitive firm s marginal revenue schedule Note A firm is a price taker they have to take the price given by the market A firms demand will be perfectly elastic meaning a horizontal line for an individual firm How Large are the firms profits or losses average total cost TC q Total cost firms output E Short Run Profits and Average Total Costs Economic Profit Total Revenue TR minus Total Cost TC TR Revenue per unit x number of units q price per unit MR rectangular area Opaq Total Cost Total Cost per unit x number of units average total cost x number of units TC qaPO If TR TC they will have the exact same rectangle and that means 0 economic profit Zero economic profit does not equal zero accounting profit Recall Total economic costs Explicit Accounting Costs Opportunity implicit costs how much the firms capital and entrepreneurial talent could have earned if employed in an alternative line of production Zero econ profit positive accounting profits Accounting profits would be just high enough to keep capital and entrepreneurial talent in this line of production