Microeconomics in Modules and Economics in Modules Third

Microeconomics in Modules and Economics in Modules Third Edition Krugman/Wells Module 25 Perfect Competition

What Will You Learn 1 How a price-taking firm determines its profit-maximizing quantity of output 2 How to assess whether a competitive firm is profitable 2 of 11

Maximizing Profit TR = P × Q Profit = TR – TC 3 of 11

Maximizing Profit 4 of 11

Using Marginal Analysis to Choose the Profit -Maximizing Quantity of Output • Marginal revenue is the change in total revenue generated by an additional unit of output. MR = ∆TR/∆Q 5 of 11

The Optimal Output Rule • The optimal output rule says that profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to its marginal revenue. 6 of 11

Short-Run Costs for Jennifer and Jason’s Farm 7 of 11

Marginal Analysis Leads to Profit. Maximizing Quantity of Output • The firm’s optimal output rule says that a firm’s profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to the market price. • The marginal revenue curve shows how marginal revenue varies as output varies. 8 of 11

Production and Profits • The price-taking firm’s optimal output rule says that profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to the market price. • The marginal revenue curve shows how marginal revenue varies as output varies. 9 of 11

Short-Run Costs for Jennifer and Jason’s Farm 10 of 11

The Price-Taking Firm’s Profit. Maximizing Quantity of Output Price, cost of bushel MC Optimal point $24 20 E Market 18 price 16 The profit-maximizing point is where MC crosses MR curve at an output of 5 bushels of tomatoes. 12 8 6 0 MR = P 1 2 3 4 5 Profitmaximizing quantity 6 7 Quantity of tomatoes (bushels) 11 of 11

When Is Production Profitable? • If TR > TC, the firm is profitable. • If TR = TC, the firm breaks even. • If TR < TC, the firm incurs a loss. 12 of 11

Short-Run Average Costs for Jennifer and Jason’s Farm 13 of 11

Costs and Production in the Short Run Price, cost of bushel $30 MC Minimum average total cost 18 Market price ATC C 14 MR = P At point C (the minimum average total cost), the market price is $14 and output is four bushels of tomatoes (the minimum-cost output). 0 1 2 3 4 Minimum-cost output 5 6 7 Quantity of tomatoes (bushels) This is where MC cuts the ATC curve at its minimum. Minimum average total cost is equal to the firm’s break-even price. 14 of 11

Profit, Break-Even or Loss • The break-even price of a price-taking firm is the market price at which it earns zero profits. 15 of 11

Profit, Break-Even or Loss • Whenever market price exceeds minimum average total cost, the producer is profitable. • Whenever the market price equals minimum average total cost, the producer breaks even. • Whenever market price is less than minimum average total cost, the producer is unprofitable. 16 of 11

Summary 1. A producer follows the optimal output rule: produce the quantity at which marginal revenue equals marginal cost. 2. For a price-taking firm, marginal revenue is equal to price, and its marginal revenue curve is a horizontal line at the market price. It follows the price-taking firm’s optimal output rule: produce the quantity at which price equals marginal cost. 3. A firm is profitable if total revenue exceeds total cost. 17 of 11