Figure 8 1 The Demand Revenue Curves for

Figure 8 -1 The Demand Revenue Curves for a Firm in Perfect Competition Firm’s Demand Schedule (Average Revenue) P QD Firm’s Revenue Data TR 0 $131 $0 ] 1 131 ] 2 131 262 ] 3 131 393 ] 4 131 524 ] 5 131 655 ] 6 131 786 ] 7 131 917 ] 8 131 1048 ] 9 131 1179 ] 10 1310 LO 3 © 2013 Mc. Graw-Hill Ryerson Ltd. TR MR $131 131 131 D = MR = AR Chapter 8, LO 2 1

8. 3 Profit Maximization in the Short Run Perfectly competitive firm can maximize its profit (minimize its loss) only by adjusting output Two Approaches: § Total revenue-total cost approach § Marginal revenue-marginal cost approach © 2013 Mc. Graw-Hill Ryerson Ltd. Chapter 8, LO 3 2

Total-Revenue - Total-Cost Approach to Profit Maximization for a Firm in a Perfectly Competitive Industry (Price = $131) (1) Total Product (Output) (Q) (2) Total Fixed Cost (TFC) (3) Total Variable Costs (TVC) (4) Total Cost (TC) (5) Total Revenue (TR) (6) Profit (+) or Loss (-) 0 $100 $0 $-100 1 100 90 131 -59 2 100 170 262 -8 3 100 240 393 +53 4 100 300 400 524 +124 5 100 370 470 655 +185 6 100 450 550 786 +236 7 100 540 640 917 +277 8 100 650 750 1048 +298 9 100 780 880 1179 +299 10 100 930 1030 1310 +280 © 2013 Mc. Graw-Hill Ryerson Ltd. Chapter 8, LO 3 3

Total Economic Profit Total Revenue and Total Cost Figure 8 -2 Total-Revenue - Total-Cost Approach to Profit Maximization for a Firm in a Perfectly Competitive Industry (Price = $131) $1800 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 $500 400 300 200 100 Break-Even Point (Normal Profit) Total Revenue, (TR) Maximum Economic Profit $299 Total Cost, (TC) P=$131 Break-Even Point (Normal Profit) 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Quantity Demanded (Sold) Total Economic Profit $299 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Quantity Demanded (Sold) © 2013 Mc. Graw-Hill Ryerson Ltd. Chapter 8, LO 3 4

Short-Run Profit-Maximizing for a Firm in a Perfectly Competitive Industry (1) Total Product (Output) (2) Average Fixed Cost (AFC) (3) Average Variable Costs (AVC) (4) Average Total Cost (ATC) (5) Marginal Cost (MC) (5) Price = Marginal Revenue (MR) 0 (6) Total Economic Profit (+) or Loss (-) $-100 1 $100. 00 $90. 00 $190 $131 -59 2 50. 00 85. 00 135 80 131 -8 3 33. 33 80. 00 113. 33 70 131 +53 4 25. 00 75. 00 100. 00 60 131 +124 5 20. 00 74. 00 94. 00 70 131 +185 6 16. 67 75. 00 91. 67 80 131 +236 7 14. 29 77. 14 91. 43 90 131 +277 8 12. 50 81. 25 93. 75 110 131 +298 9 11. 11 86. 67 97. 78 130 131 +299 10 10. 00 93. 00 103. 00 150 131 +280 © 2013 Mc. Graw-Hill Ryerson Ltd. Chapter 8, LO 3 5

Figure 8 -3 Short-Run Profit-Maximizing for a Firm in a Perfectly Competitive Industry Cost and Revenue $200 MR = MC 150 P=$131 Economic Profit MC MR = P ATC 100 AVC A=$97. 78 50 0 1 2 3 4 5 6 7 8 9 10 Output © 2013 Mc. Graw-Hill Ryerson Ltd. Chapter 8, LO 3 6

Loss-Minimizing Case Loss minimization § Still produce because P > min. AVC § Losses at a minimum where MR=MC © 2013 Mc. Graw-Hill Ryerson Ltd. Chapter 8, LO 3 7

Short-Run Profit-Maximizing for a Firm in a Perfectly Competitive Industry (1) (2) Total Average product fixed cost, /output AFC 0 1 2 3 4 5 6 7 8 9 10 $100. 00 50. 00 33. 33 25. 00 20. 00 16. 67 14. 29 12. 50 11. 11 10. 00 (3) Average variable cost, AVC $90. 00 85. 00 80. 00 75. 00 74. 00 75. 00 77. 14 81. 25 86. 67 93. 00 © 2013 Mc. Graw-Hill Ryerson Ltd. (4) Average total cost, ATC $190. 00 135. 00 113. 33 100. 00 94. 00 91. 67 91. 43 93. 75 97. 78 103. 00 (6) (7) (8) (9) (5) P =$81 Profit (+) P = $71 Profit (+) Margin marginal or loss (– al cost, revenue, ), $81 revenue, ), $71 MC MR price $ 90 80 70 60 70 80 90 110 130 150 Chapter 8, LO 3 $81 81 81 $– 100 – 109 – 108 – 97 – 76 – 65 – 64 – 73 – 102 – 151 – 220 $71 71 71 $– 100 – 119 – 128 – 127 – 116 – 115 – 124 – 143 – 182 – 241 – 320 8

Figure 8 -4 The Short-Run Loss-Minimizing Position of a Firm in a Perfectly Competitive Industry MC A=$91. 67 Loss ATC AVC P=$81 MR = P V = $75 © 2013 Mc. Graw-Hill Ryerson Ltd. Chapter 8, LO 3 9

Figure 8 -5 The Short-Run Shutdown Position of a Firm in Perfect Competition MC ATC V = $74 AVC MR = P P=$71 Short-Run Shut Down Point P < Minimum AVC $71 < $74 © 2013 Mc. Graw-Hill Ryerson Ltd. Chapter 8, LO 3 8 -1010