ECON 202 1nd Edition Lecture 23 Outline of Last Lecture I. Business Costs and Productiona. Long Run Cost Curvesb. Economies of ScaleOutline of Current Lecture II. Perfectly Competitive Industriesa. Characteristics of a Perfectly Competitive Industryb. Profit Maximizationi. In Generalii. In Perfectly Competitive Industries1. Short RunCurrent LecturePerfectly Competitive IndustriesCharacteristics of a Perfectly Competitive Industry1. Lots of Independent Buyers and Sellers2. No Barriers to Entry or Exit3. Homogenous ProductPerfectly Competitive Firms are PRICE TAKERSPrice Taker – firm that must accept the market price for their product- Price is determined at market level and all firms will charge this predetermined priceo Wont charge higher because no one will buy from themo Wont charge lower because they can sell as much as they want at the market priceThese 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. FirmIndustryqQPpP*p*SDdDemand Curve Faced by a perfectly competitive firmPerfectly Competitive Firms are price takers therefore they face a PERFECTLY ELASTIC demand curveProfit Maximization – In GeneralProfit=Total Revenue−TotalCostIn general, firms maximize profits by producing the quantity of output at which marginal revenue equals marginal costMargianl Revenue=∆ Total Revenue∆ OutputMarginalCost=∆ TotalCost∆ OutputMaximum profit occurs when Marginal Revenue = Marginal CostProfit is maximized by producing Q* unitsIf output is to the left of Q*, you could increase profits by producing more unitsIf output is to the right of Q*, you could increase profits byproducing fewer unitsProfit Maximization – In Perfectly CompetitiveIndustries- Short Run Profit Maximization for a PerfectlyCompetitive Firmo Since perfectly competitive firms are price takers, price = marginal revenue so the demand curve and marginal revenue curves are the SAMEPerfectly Competitive Firms maximize profit in the short run by producing q* units of output (where marginal cost = marginal revenue)In General: firms produce Q where MC=MRIn Perfectly Competitive Industries: since p = mr, firms produce q at which p = mcProfit(π)=Total Revenue(TR)−TotalCost(TC)Total Revenue(TR)= price(P)∗quantity(Q)$QMCMRQ*$qmcd = mrq*p*TotalCost(TC)=Average TotalCost(ATC)∗quantity(Q)so π =(P∗Q)−( ATC∗Q)Therefore π =(P− ATC)∗QIf Price > ATC then π > 0If Price = ATC then π = 0If Price < ATC then π < 0π means economic
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