微观经济管理学与财务知识分析课件

LaugherCurveQ. Howmanyeconomistsdoesittaketoscrewinalightbulb?A. Eight. Onetoscrewitinandseventoholdeverythingelseconstant.LaugherCurveQ. Howmanyecono1PerfectCompetitionTheconceptofcompetitionisusedintwowaysineconomics.Competitionasaprocessisarivalryamongfirms.Competitionastheperfectlycompetitivemarketstructure.PerfectCompetitionTheconcept2CompetitionasaProcessCompetitioninvolvesonefirmtryingtotakeawaymarketsharefromanotherfirm.Asaprocess,competitionpervadestheeconomy.CompetitionasaProcessCompet3CompetitionasaMarketStructureItispossibletoimaginesomethingthatdoesnotexist–aperfectlycompetitivemarketinwhichtheinvisiblehandworksunimpeded.CompetitionasaMarketStruct4CompetitionasaMarketStructureCompetitionistheendresultofthecompetitiveprocessunderhighlyrestrictiveassumptions.Aperfectlycompetitivemarketisoneinwhicheconomicforcesoperateunimpeded.CompetitionasaMarketStruct5APerfectlyCompetitiveMarketAperfectlycompetitivemarketisoneinwhicheconomicforcesoperateunimpeded.APerfectlyCompetitiveMarket6APerfectlyCompetitiveMarketAperfectlycompetitivemarketmustmeetthefollowingrequirements:Bothbuyersandsellersarepricetakers.Thenumberoffirmsislarge.Therearenobarrierstoentry.Thefirms'productsareidentical.Thereiscompleteinformation.Firmsareprofitmaximizers.APerfectlyCompetitiveMarket7TheNecessaryConditionsforPerfectCompetitionBothbuyersandsellersarepricetakers.Apricetakerisafirmorindividualwhotakesthemarketpriceasgiven.Inmostmarkets,householdsarepricetakers–theyacceptthepriceofferedinstores.TheNecessaryConditionsforP8TheNecessaryConditionsforPerfectCompetitionBothbuyersandsellersarepricetakers.Theretailerisnotperfectlycompetitive.Astoreisnotapricetakerbutapricemaker.TheNecessaryConditionsforP9TheNecessaryConditionsforPerfectCompetitionThenumberoffirmsislarge.Largemeansthatwhatonefirmdoeshasnobearingonwhatotherfirmsdo.Anyonefirm'soutputisminusculewhencomparedwiththetotalmarket.TheNecessaryConditionsforP10TheNecessaryConditionsforPerfectCompetitionTherearenobarrierstoentry.Barrierstoentryaresocial,political,oreconomicimpedimentsthatpreventotherfirmsfromenteringthemarket.Barrierssometimestaketheformofpatentsgrantedtoproduceacertaingood.TheNecessaryConditionsforP11TheNecessaryConditionsforPerfectCompetitionTherearenobarrierstoentry.Technologymaypreventsomefirmsfromenteringthemarket.Socialforcessuchasbankersonlylendingtocertainpeoplemaycreatebarriers.TheNecessaryConditionsforP12TheNecessaryConditionsforPerfectCompetitionThefirms'productsareidentical.Thisrequirementmeansthateachfirm'soutputisindistinguishablefromanycompetitor'sproduct.TheNecessaryConditionsforP13TheNecessaryConditionsforPerfectCompetitionThereiscompleteinformation.Firmsandconsumersknowallthereistoknowaboutthemarket–prices,products,andavailabletechnology.Anytechnologicaladvancementwouldbeinstantlyknowntoallinthemarket.TheNecessaryConditionsforP14TheNecessaryConditionsforPerfectCompetitionFirmsareprofitmaximizers.Thegoalofallfirmsinaperfectlycompetitivemarketisprofitandonlyprofit.Firmownersreceiveonlyprofitascompensation,notsalaries.TheNecessaryConditionsforP15TheDefinitionofSupplyandPerfectCompetitionIfallthenecessaryconditionsforperfectcompetitionexist,wecantalkformallyaboutthesupplyofaproducedgood.Thisfollowsfromthedefinitionofsupply.TheDefinitionofSupplyandP16TheDefinitionofSupplyandPerfectCompetitionSupplyisascheduleofquantitiesofgoodsthatwillbeofferedtothemarketatvariousprices.TheDefinitionofSupplyandP17TheDefinitionofSupplyandPerfectCompetitionThisdefinitionrequiresthesuppliertobeapricetaker(thefirstconditionforperfectcompetition).Sincemostsuppliersarepricemakers,anyanalysismustbemodifiedaccordingly.TheDefinitionofSupplyandP18TheDefinitionofSupplyandPerfectCompetitionBecauseofthedefinitionofsupply,ifanyoftheconditionsarenotmet,theformaldefinitionofsupplydisappears.TheDefinitionofSupplyandP19TheDefinitionofSupplyandPerfectCompetitionThatthenumberofsuppliersbelarge(thesecondcondition),meansthattheydonothavetheabilitytocollude.TheDefinitionofSupplyandP20TheDefinitionofSupplyandPerfectCompetitionConditions3through5makeitimpossibleforanyfirmtoforgetaboutthehundredsofotherfirmsjustitchingtoreplacetheirsupply.Condition6specifiesafirm'sgoal–profit.TheDefinitionofSupplyandP21TheDefinitionofSupplyandPerfectCompetitionEvenifwecannottechnicallyspecifyasupplyfunction,supplyforcesarestillstrongandmanyoftheinsightsofthecompetitivemodelcanbeappliedtofirmbehaviorinothermarketstructures.TheDefinitionofSupplyandP22DemandCurvesfortheFirmandtheIndustryThedemandcurvesfacingthefirmisdifferentfromtheindustrydemandcurve.Aperfectlycompetitivefirm’sdemandscheduleisperfectlyelasticeventhoughthedemandcurveforthemarketisdownwardsloping.DemandCurvesfortheFirmand23DemandCurvesfortheFirmandtheIndustryThismeansthatfirmswillincreasetheiroutputinresponsetoanincreaseindemandeventhoughthatwillcausethepricetofallthusmakingallfirmscollectivelyworseoff.DemandCurvesfortheFirmand24MarketsupplyMarketdemand

1,0003,000Price$1086420QuantityMarketFirmIndividualfirmdemandMarketDemandVersusIndividualFirmDemandCurve102030Price$1086420QuantityMarketsupplyMarket 1,0003,00025Profit-MaximizingLevelofOutputThegoalofthefirmistomaximizeprofits.Whenitdecideswhatquantitytoproduceitcontinuallyaskshowchangesinquantityaffectprofit.Profit-MaximizingLevelofOut26Profit-MaximizingLevelofOutputSinceprofitisthedifferencebetweentotalrevenueandtotalcost,whathappenstoprofitinresponsetoachangeinoutputisdeterminedbymarginalrevenue(MR)andmarginalcost(MC).AfirmmaximizesprofitwhenMC=MR.Profit-MaximizingLevelofOut27Profit-MaximizingLevelofOutputMarginalrevenue(MR)–thechangeintotalrevenueassociatedwithachangeinquantity.Marginalcost(MC)--thechangeintotalcostassociatedwithachangeinquantity.Profit-MaximizingLevelofOut28MarginalRevenueSinceaperfectcompetitoracceptsthemarketpriceasgiven,foracompetitivefirm,marginalrevenueisprice(MR=P).MarginalRevenueSinceaperfec29MarginalCostInitially,marginalcostfallsandthenbeginstorise.Marginalconceptsarebestdefinedbetweenthenumbers.MarginalCostInitially,margin30HowtoMaximizeProfitTomaximizeprofits,afirmshouldproducewheremarginalcostequalsmarginalrevenue.HowtoMaximizeProfitTomaxim31HowtoMaximizeProfitIfmarginalrevenuedoesnotequalmarginalcost,afirmcanincreaseprofitbychangingoutput.Thesupplierwillcontinuetoproduceaslongasmarginalcostislessthanmarginalrevenue.HowtoMaximizeProfitIfmargi32HowtoMaximizeProfitThesupplierwillcutbackonproductionifmarginalcostisgreaterthanmarginalrevenue.Thus,theprofit-maximizingconditionofacompetitivefirmisMC=MR=P.HowtoMaximizeProfitThesupp33CAP=D=MRCosts12345678910Quantity6050403020100ABMCMarginalCost,MarginalRevenue,andPrice012345678910

$28.0020.0016.0014.0012.0017.0022.0030.0040.0054.0068.00Price=MRQuantityProducedMarginalCost$35.0035.0035.0035.0035.0035.0035.0035.0035.0035.0035.00CAP=D=MRCosts12345678910Qu34TheMarginalCostCurveIstheSupplyCurveThemarginalcostcurveisthefirm'ssupplycurveabovethepointwherepriceexceedsaveragevariablecost.TheMarginalCostCurveIsthe35TheMarginalCostCurveIstheSupplyCurveTheMCcurvetellsthecompetitivefirmhowmuchitshouldproduceatagivenprice.Thefirmcandonobetterthanproducingthequantityatwhichmarginalcostequalspricewhichinturnequalsmarginalrevenue.TheMarginalCostCurveIsthe36TheMarginalCostCurveIstheFirm’sSupplyCurveABCMarginalcostCost,Price$7060504030201001Quantity2345678910TheMarginalCostCurveIsthe37FirmsMaximizeTotalProfitWhenwespeakofmaximizingprofit,werefertomaximizingtotalprofit,notprofitperunit.Firmsdonotcareaboutprofitperunit;aslongasanincreaseinoutputwillincreasetotalprofits,aprofit-maximizingfirmshouldincreaseoutput.FirmsMaximizeTotalProfitWhe38ProfitMaximizationUsingTotalRevenueandTotalCostProfitismaximizedwheretheverticaldistancebetweentotalrevenueandtotalcostisgreatest.Atthatoutput,MR(theslopeofthetotalrevenuecurve)andMC(theslopeofthetotalcostcurve)areequal.ProfitMaximizationUsingTota39TCTR0Totalcost,revenue$3853503152802452101751401057035Quantity123456789ProfitDeterminationUsingTotalCostandRevenueCurvesMaximumprofit=$81$130LossLossProfitTCTR0Totalcost,revenue$3853540TotalProfitattheProfit-MaximizingLevelofOutputWhiletheP=MR=MCconditiontellsushowmuchoutputacompetitivefirmshouldproducetomaximizeprofit,itdoesnottellustheprofitthefirmmakes.TotalProfitattheProfit-Max41DeterminingProfitandLossFromaTableofCostsProfitcanbecalculatedfromatableofcostsandrevenues.Profitisdeterminedbytotalrevenueminustotalcost.DeterminingProfitandLossFr42DeterminingProfitandLossFromaTableofCostsTheprofit-maximizingpositionisnotnecessarilyapositionthatminimizeseitheraveragevariablecostoraveragetotalcost.Itisonlythepositionthatmaximizestotalprofit.DeterminingProfitandLossFr43CostsRelevanttoaFirmCostsRelevanttoaFirm44CostsRelevanttoaFirmCostsRelevanttoaFirm45DeterminingProfitandLossFromaGraphFindoutputwhereMC=MR.TheintersectionofMC=MR(P)determinesthequantitythefirmwillproduceifitwishestomaximizeprofits.DeterminingProfitandLossFr46DeterminingProfitandLossFromaGraphFindprofitperunitwhereMC=MR.Todeterminemaximumprofit,youmustfirstdeterminewhatoutputthefirmwillchoosetoproduce.SeewhereMCequalsMR,andthendropalinedowntotheATCcurve.Thisistheprofitperunit.DeterminingProfitandLossFr47(a)Profitcase(b)Zeroprofitcase(c)LosscaseDeterminingProfitsGraphicallyQuantityQuantityQuantityPrice65605550454035302520151050656055504540353025201510501 2 3 4 5 6 7 8 9 10 121 2 3 4 5 6 7 8 9 10 12DMCAP=MRBATCAVCEProfitCMCATCAVCMCATCAVCLoss656055504540353025201510501 2 3 4 5 67891012P=MRP=MRPricePrice©TheMcGraw-HillCompanies,Inc.,2000Irwin/McGraw-Hill(a)Profitcase(b)Zeroprof48ZeroProfitorLossWhereMC=MRFirmscanalsoearnzeroprofitorevenalosswhereMC=MR.Eventhougheconomicprofitiszero,allresources,includingentrepreneurs,arebeingpaidtheiropportunitycosts.ZeroProfitorLossWhereMC=M49ZeroProfitorLossWhereMC=MRInallthreecases(profit,loss,zeroprofit),determiningtheprofit-maximizingoutputleveldoesnotdependonfixedcostoraveragetotalcost,byonlywheremarginalcostequalsprice.ZeroProfitorLossWhereMC=M50TheShutdownPointThefirmwillshutdownifitcannotcoveraveragevariablecosts.Afirmshouldcontinuetoproduceaslongaspriceisgreaterthanaveragevariablecost.Oncepricefallsbelowthatpointitmakessensetoshutdowntemporarilyandsavethevariablecosts.TheShutdownPointThefirmwil51TheShutdownPointTheshutdownpointisthepointatwhichthefirmwillgainmorebyshuttingdownthanitwillbystayinginbusiness.TheShutdownPointTheshutdown52TheShutdownPointAslongastotalrevenueismorethantotalvariablecost,temporarilyproducingatalossisthefirm’sbeststrategysinceitistakinglessofalossthanitwouldbyshuttingdown.TheShutdownPointAslongast53MCP=MR2468QuantityPrice6050403020100ATCAVCLossA$17.80TheShutdownDecisionMCP=MR2468QuantityPrice6050454Short-RunMarketSupplyandDemandWhilethefirm'sdemandcurveisperfectlyelastic,theindustry'sisdownwardsloping.Fortheindustry'ssupplycurveweuseamarketsupplycurve.Short-RunMarketSupplyandDe55Short-RunMarketSupplyandDemandIntheshortrunwhenthenumberoffirmsinthemarketisfixed,themarketsupplycurveisjustthehorizontalsumofallthefirms'marginalcostcurves,takingaccountofanychangesininputpricesthatmightoccur.Short-RunMarketSupplyandDe56Short-RunMarketSupplyandDemandSinceallfirmshaveidenticalmarginalcostcurves,aquickwayofsummingthequantitiesistomultiplythequantitiesfromthemarginalcostcurveofarepresentativefirmbythenumberoffirmsinthemarket.Short-RunMarketSupplyandDe57Long-RunCompetitiveEquilibriumProfitsandlossesareinconsistentwithlong-runequilibrium.Profitscreateincentivesfornewfirmstoenter,outputwillincrease,andthepricewillfalluntilzeroprofitsaremade.Onlyzeroprofitwillstopentry.Long-RunCompetitiveEquilibri58Long-RunCompetitiveEquilibriumTheexistenceoflosseswillcausefirmstoleavetheindustry.Zeroprofitconditionistherequirementthatinthelongrunzeroprofitsexist.Thezeroprofitconditiondefinesthelong-runequilibriumofacompetitiveindustry.Long-RunCompetitiveEquilibri59Long-RunCompetitiveEquilibriumZeroprofitdoesnotmeanthattheentrepreneurdoesnotgetanythingforhisefforts.Long-RunCompetitiveEquilibri60Long-RunCompetitiveEquilibriumInordertostayinbusinesstheentrepreneurmustreceivehisopportunitycostornormalprofitstheownersofbusinesswouldhavereceivedinthenest-bestalternative.Long-RunCompetitiveEquilibri61Long-RunCompetitiveEquilibriumNormalprofitsareincludedasacostandarenotincludedineconomicprofit.Economicprofitsareprofitsabovenormalprofits.Long-RunCompetitiveEquilibri62Long-RunCompetitiveEquilibriumEvenifsomefirmhassuperefficientworkersormachinesthatproducerent,itwillnottakelongforcompetitorstomatchtheseefficienciesanddrivedowntheprice.Rentisanincomereceivedbyaspecializedfactorofproduction.Long-RunCompetitiveEquilibri63Long-RunCompetitiveEquilibriumThezeroprofitconditionisenormouslypowerful.Itmakestheanalysisofcompetitivemarketsfarmoreapplicabletotherealworldthancanastrictapplicationoftheassumptionofperfectcompetition.Long-RunCompetitiveEquilibri64Long-RunCompetitiveEquilibriumMCP=MR0605040302010Price2468QuantitySRATCLRATCLong-RunCompetitiveEquilibri65AdjustmentfromtheLongRuntotheShortRunIndustrysupplyanddemandcurvescometogethertoleadtolong-runequilibrium.AdjustmentfromtheLongRunt66AnIncreaseinDemandAnincreaseindemandleadstohigherpricesandhigherprofits.Existingfirmsincreaseoutputandnewfirmswillenterthemarket,increasingoutputstillmore,pricewillfalluntilallprofitiscompetedaway.AnIncreaseinDemandAnincrea67AnIncreaseinDemandIfthethemarketisaconstant-costindustry,thenewequilibriumwillbeattheoriginalpricebutwithahigheroutput.Amarketisaconstant-costindustryifthelong-runindustrysupplycurveisperfectlyelastic.AnIncreaseinDemandIftheth68AnIncreaseinDemandTheoriginalfirmsreturntotheiroriginaloutputbutsincetherearemorefirmsinthemarket,thetotalmarketoutputincreases.AnIncreaseinDemandTheorigi69AnIncreaseinDemandIntheshortrun,thepricedoesmoreoftheadjusting.Inthelongrun,moreoftheadjustmentisdonebyquantity.AnIncreaseinDemandInthesh70Profit$910120FirmPriceQuantityBAMarketResponsetoanIncreaseinDemandMarketQuantityPrice0BACMCACSLRS0SRD07700$98401,200D1S1SR7Profit$910120FirmPriceQuantity71Long-RunMarketSupplyTwootherpossibilitiesexist:Increasing-costindustry–factorpricesriseasnewfirmsenterthemarketandexistingfirmsexpandcapacity.Decreasing-costindustry–factorpricesfallasindustryoutputexpands.Long-RunMarketSupplyTwoothe72AnIncreasing-CostIndustryIfinputsarespecialized,factorpricesarelikelytorisewhentheincreaseintheindustry-widedemandforinputstoproductionincreases.AnIncreasing-CostIndustryIf73AnIncreasing-CostIndustryThisriseinfactorcostswouldforcecostsupforeachfirmintheindustryandincreasesthepriceatwhichfirmsearnzeroprofit.AnIncreasing-CostIndustryThi74AnIncreasing-CostIndustryTherefore,inincreasing-costindustries,thelong-runsupplycurveisupwardsloping.AnIncreasing-CostIndustryThe75ADecreasing-CostIndustryIfinputpricesdeclinewhenindustryoutputexpands,individualfirms'marginalcostcurvesshiftdownandthelong-runsupplycurveisdownwardsloping.ADecreasing-CostIndustryIfi76ADecreasing-CostIndustryInputpricesmaydeclinetothezero-profitconditionwhenoutputrisesandwhennewentrantsmakeitmorecost-effectiveforotherfirmstoprovideservicestoallfirmsinthemarket.ADecreasing-CostIndustryInpu77ARealWorldExampleOwnersoftheAmeschainofdepartmentstoresdecidetocloseover100storesafterexperiencingtwoyearsoflosses(ashutdowndecision).ARealWorldExampleOwnersof78ARealWorldExampleInitially,Amesthoughtthelossesweretemporary.Sincepriceexceededaveragevariablecost,itcontinuedtoproduceeventhoughitwaslosingmoney.ARealWorldExampleInitially,79ARealWorldExampleAftertwoyearsoflosses,itsprospectivechanged.Thecompanymovedfromtheshortruntothelongrun.ARealWorldExampleAftertwo80ARealWorldExampleTheybegantothinkthatdemandwasnottemporarilylow,butpermanentlylow.AtthatpointtheyshutdownthosestoresforwhichP<AVC.ARealWorldExampleTheybegan81PriceQuantityMCATCAVCP=MRLossARealWorldExample:

AShutdownDecisionPriceQuantityMCATCAVCP=MRLos82PerfectCompetitionEndofChapter11PerfectCompetitionEndofChap微观经济管理学与财务知识分析课件84LaugherCurveQ. Howmanyeconomistsdoesittaketoscrewinalightbulb?A. Eight. Onetoscrewitinandseventoholdeverythingelseconstant.LaugherCurveQ. Howmanyecono85PerfectCompetitionTheconceptofcompetitionisusedintwowaysineconomics.Competitionasaprocessisarivalryamongfirms.Competitionastheperfectlycompetitivemarketstructure.PerfectCompetitionTheconcept86CompetitionasaProcessCompetitioninvolvesonefirmtryingtotakeawaymarketsharefromanotherfirm.Asaprocess,competitionpervadestheeconomy.CompetitionasaProcessCompet87CompetitionasaMarketStructureItispossibletoimaginesomethingthatdoesnotexist–aperfectlycompetitivemarketinwhichtheinvisiblehandworksunimpeded.CompetitionasaMarketStruct88CompetitionasaMarketStructureCompetitionistheendresultofthecompetitiveprocessunderhighlyrestrictiveassumptions.Aperfectlycompetitivemarketisoneinwhicheconomicforcesoperateunimpeded.CompetitionasaMarketStruct89APerfectlyCompetitiveMarketAperfectlycompetitivemarketisoneinwhicheconomicforcesoperateunimpeded.APerfectlyCompetitiveMarket90APerfectlyCompetitiveMarketAperfectlycompetitivemarketmustmeetthefollowingrequirements:Bothbuyersandsellersarepricetakers.Thenumberoffirmsislarge.Therearenobarrierstoentry.Thefirms'productsareidentical.Thereiscompleteinformation.Firmsareprofitmaximizers.APerfectlyCompetitiveMarket91TheNecessaryConditionsforPerfectCompetitionBothbuyersandsellersarepricetakers.Apricetakerisafirmorindividualwhotakesthemarketpriceasgiven.Inmostmarkets,householdsarepricetakers–theyacceptthepriceofferedinstores.TheNecessaryConditionsforP92TheNecessaryConditionsforPerfectCompetitionBothbuyersandsellersarepricetakers.Theretailerisnotperfectlycompetitive.Astoreisnotapricetakerbutapricemaker.TheNecessaryConditionsforP93TheNecessaryConditionsforPerfectCompetitionThenumberoffirmsislarge.Largemeansthatwhatonefirmdoeshasnobearingonwhatotherfirmsdo.Anyonefirm'soutputisminusculewhencomparedwiththetotalmarket.TheNecessaryConditionsforP94TheNecessaryConditionsforPerfectCompetitionTherearenobarrierstoentry.Barrierstoentryaresocial,political,oreconomicimpedimentsthatpreventotherfirmsfromenteringthemarket.Barrierssometimestaketheformofpatentsgrantedtoproduceacertaingood.TheNecessaryConditionsforP95TheNecessaryConditionsforPerfectCompetitionTherearenobarrierstoentry.Technologymaypreventsomefirmsfromenteringthemarket.Socialforcessuchasbankersonlylendingtocertainpeoplemaycreatebarriers.TheNecessaryConditionsforP96TheNecessaryConditionsforPerfectCompetitionThefirms'productsareidentical.Thisrequirementmeansthateachfirm'soutputisindistinguishablefromanycompetitor'sproduct.TheNecessaryConditionsforP97TheNecessaryConditionsforPerfectCompetitionThereiscompleteinformation.Firmsandconsumersknowallthereistoknowaboutthemarket–prices,products,andavailabletechnology.Anytechnologicaladvancementwouldbeinstantlyknowntoallinthemarket.TheNecessaryConditionsforP98TheNecessaryConditionsforPerfectCompetitionFirmsareprofitmaximizers.Thegoalofallfirmsinaperfectlycompetitivemarketisprofitandonlyprofit.Firmownersreceiveonlyprofitascompensation,notsalaries.TheNecessaryConditionsforP99TheDefinitionofSupplyandPerfectCompetitionIfallthenecessaryconditionsforperfectcompetitionexist,wecantalkformallyaboutthesupplyofaproducedgood.Thisfollowsfromthedefinitionofsupply.TheDefinitionofSupplyandP100TheDefinitionofSupplyandPerfectCompetitionSupplyisascheduleofquantitiesofgoodsthatwillbeofferedtothemarketatvariousprices.TheDefinitionofSupplyandP101TheDefinitionofSupplyandPerfectCompetitionThisdefinitionrequiresthesuppliertobeapricetaker(thefirstconditionforperfectcompetition).Sincemostsuppliersarepricemakers,anyanalysismustbemodifiedaccordingly.TheDefinitionofSupplyandP102TheDefinitionofSupplyandPerfectCompetitionBecauseofthedefinitionofsupply,ifanyoftheconditionsarenotmet,theformaldefinitionofsupplydisappears.TheDefinitionofSupplyandP103TheDefinitionofSupplyandPerfectCompetitionThatthenumberofsuppliersbelarge(thesecondcondition),meansthattheydonothavetheabilitytocollude.TheDefinitionofSupplyandP104TheDefinitionofSupplyandPerfectCompetitionConditions3through5makeitimpossibleforanyfirmtoforgetaboutthehundredsofotherfirmsjustitchingtoreplacetheirsupply.Condition6specifiesafirm'sgoal–profit.TheDefinitionofSupplyandP105TheDefinitionofSupplyandPerfectCompetitionEvenifwecannottechnicallyspecifyasupplyfunction,supplyforcesarestillstrongandmanyoftheinsightsofthecompetitivemodelcanbeappliedtofirmbehaviorinothermarketstructures.TheDefinitionofSupplyandP106DemandCurvesfortheFirmandtheIndustryThedemandcurvesfacingthefirmisdifferentfromtheindustrydemandcurve.Aperfectlycompetitivefirm’sdemandscheduleisperfectlyelasticeventhoughthedemandcurveforthemarketisdownwardsloping.DemandCurvesfortheFirmand107DemandCurvesfortheFirmandtheIndustryThismeansthatfirmswillincreasetheiroutputinresponsetoanincreaseindemandeventhoughthatwillcausethepricetofallthusmakingallfirmscollectivelyworseoff.DemandCurvesfortheFirmand108MarketsupplyMarketdemand

1,0003,000Price$1086420QuantityMarketFirmIndividualfirmdemandMarketDemandVersusIndividualFirmDemandCurve102030Price$1086420QuantityMarketsupplyMarket 1,0003,000109Profit-MaximizingLevelofOutputThegoalofthefirmistomaximizeprofits.Whenitdecideswhatquantitytoproduceitcontinuallyaskshowchangesinquantityaffectprofit.Profit-MaximizingLevelofOut110Profit-MaximizingLevelofOutputSinceprofitisthedifferencebetweentotalrevenueandtotalcost,whathappenstoprofitinresponsetoachangeinoutputisdeterminedbymarginalrevenue(MR)andmarginalcost(MC).AfirmmaximizesprofitwhenMC=MR.Profit-MaximizingLevelofOut111Profit-MaximizingLevelofOutputMarginalrevenue(MR)–thechangeintotalrevenueassociatedwithachangeinquantity.Marginalcost(MC)--thechangeintotalcostassociatedwithachangeinquantity.Profit-MaximizingLevelofOut112MarginalRevenueSinceaperfectcompetitoracceptsthemarketpriceasgiven,foracompetitivefirm,marginalrevenueisprice(MR=P).MarginalRevenueSinceaperfec113MarginalCostInitially,marginalcostfallsandthenbeginstorise.Marginalconceptsarebestdefinedbetweenthenumbers.MarginalCostInitially,margin114HowtoMaximizeProfitTomaximizeprofits,afirmshouldproducewheremarginalcostequalsmarginalrevenue.HowtoMaximizeProfitTomaxim115HowtoMaximizeProfitIfmarginalrevenuedoesnotequalmarginalcost,afirmcanincreaseprofitbychangingoutput.Thesupplierwillcontinuetoproduceaslongasmarginalcostislessthanmarginalrevenue.HowtoMaximizeProfitIfmargi116HowtoMaximizeProfitThesupplierwillcutbackonproductionifmarginalcostisgreaterthanmarginalrevenue.Thus,theprofit-maximizingconditionofacompetitivefirmisMC=MR=P.HowtoMaximizeProfitThesupp117CAP=D=MRCosts12345678910Quantity6050403020100ABMCMarginalCost,MarginalRevenue,andPrice01