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ISU ECON 201 - Firms as Suppliers under Perfect Competition
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Econ 201 1st Edition Lecture 34Outline of Last Lecture 1. From Product to Cost2. 7 concepts 3.Return to Scale Outline of Current Lecture 1.Firms as Suppliers under Perfect Competition2.Revenue Concepts under Perfect CompetitionCurrent LectureFirms as Suppliers under Perfect Competition• Conditions of perfectly competitive markets:– Many buyers and sellers– Identical products from each seller– All have access to information (prices and technology– No barriers to entry• Firms are Price Takers.– Managers take price as given and respond to it.– Raising price drives buyers to other suppliers.– Firms sell as much as they want at prevailing price.• Firms choose output to maximize profit: Π = TR – TCThese 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.– Key decision as supplier is output choice: q.– Firm chooses q* to maximize profit.Revenue Concepts under Perfect Competition• Total, Average and Marginal: TR, AR, MR• Total Revenue is the flow of proceeds from sales: TR = P × q – P = prevailing price in market– q = output from one firm– P does not change if firm adjusts q to new level.• Average Revenue: AR = TR / q = P• Marginal Revenue: MR = ΔTR ⁄ Δq • Analysis of MR– Δq è ΔTR = Δ(P × q) = P × Δq + ΔP × q – Divide by Δq è ΔTR ⁄ Δq = (P × Δq) ⁄ Δq + (ΔP × q) ⁄ Δq – Substitute and simplify: MR = P + (ΔP⁄ Δq) × q– In competitive market P is not affected: MR = PAnalysis of Output Choice ~ Algebra• Marginal analysis strategy to adjust output, q:– Increase q if doing so increases profit, i.e. if marginal profit > 0.– Decrease q if doing so increases profit, i.e. if marginal profit < 0.– Hold q steady if marginal profit = 0. • Finding marginal profit: MΠ = MR – MC– Π = TR – TC Δq è ΔΠ = ΔTR – ΔTC – Divide by Δq è ΔΠ ⁄ Δq = ΔTR ⁄ Δq – ΔTC ⁄ Δq = MR – MC– In competitive market, MR = P. So: MΠ = P – MC• Restate the strategy:– Increase q if P – MC > 0. i.e. If P > MC– Decrease q if P – MC < 0. i.e. If P < MC– Hold q steady if P =


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ISU ECON 201 - Firms as Suppliers under Perfect Competition

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