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Profit Maximization Competitive Supply (Final One)

This document discusses profit maximization and competitive supply in a perfectly competitive market. It defines key terms like marginal revenue, marginal cost, producer surplus, and long-run competitive equilibrium. It provides an example showing how a firm determines its profit-maximizing output level by setting marginal revenue equal to marginal cost and earns producer surplus from selling additional units above marginal cost. In long-run equilibrium, no firms earn economic profits as entry and exit drive the price down until all firms earn zero profit.

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Arefin Ferdous
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47 views20 pages

Profit Maximization Competitive Supply (Final One)

This document discusses profit maximization and competitive supply in a perfectly competitive market. It defines key terms like marginal revenue, marginal cost, producer surplus, and long-run competitive equilibrium. It provides an example showing how a firm determines its profit-maximizing output level by setting marginal revenue equal to marginal cost and earns producer surplus from selling additional units above marginal cost. In long-run equilibrium, no firms earn economic profits as entry and exit drive the price down until all firms earn zero profit.

Uploaded by

Arefin Ferdous
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Profit Maximization &

Competitive Supply
Presented By
Name ID

Woykell Ahmmed Sobuj 193 5220 060

Mohiuddin Mohammad 192 5244 660


Zawad
Aminul Islam Sagor 193 5141 060

Mohammad Mohaiminul 183 5031 660


Rashid
Md. Arefin Ferdous 192 5323 660
What is a Perfectly Competitive Market
• Produce identical products.
• Have no effects on markets price.
When the Market Is Called Highly Competitive?

1. No Monopolies

2. Cheap and Efficient Transport and Communication

3. Wide Extent

4. Absence of Government or artificial restrictions


Characteristics of a Competitive Market.
• A Large Number of Buyers and Sellers.

• An Identical or a Homogeneous Product.

• No Individual Control over the Market Supply and Price.

• No Buyers’ Preferences.

• Perfect Knowledge

• Free Entry and Free Exit of Firms.


What is Profit Maximization?
• Set marginal revenue equal
to marginal cost (MR=MC).
• Profit will occur if P>ATC.
• Loss will occur if P<ATC.
• In Short Run: Profit will
occur if P>ATC.
What is Profit Maximization?
• In the Long-run: If earning positive economic profits- Firms enter the
market- shift the supply curve to the right- equilibrium price will go
down- economic profits will decrease.
• In the Long-run: If making loss-Firms will leave the market- shift the
supply curve to the left- equilibrium price will go up- economic profits
will increase.
The Concept of Marginal Revenue

• The increase in revenue that results from the sale of one additional
unit of output.

• Remain constant over a certain level of output,

• Follows the law of diminishing returns.


The Concept of Marginal Cost

• Change in total production cost that comes from making or producing


one additional unit.

• To determine at what point an organization can achieve economies of


scale.

• If the marginal is lower than the per-unit price.


Profit Maximization Condition
• Selects the output for
which the difference
between revenue and cost
is the greater.
• At q* output, profit (the
difference AB between
revenue R and cost C), is
maximized and MR= MC.
Short Run Profit Maximization Choosing
the Output Rule
What About The Producer Surplus?
• The difference between the
amount the producer is willing
to supply goods for and the
actual amount received by him
when he makes the trade.
• A measure of producer welfare.
• The differences between the
market price of the good and
the marginal cost of production
Producer Surplus Vs. Profit
• Closely related to profit but is
not equal to it.
• In the short run
Producer surplus = PS = R – VC
• Total profit
Profit = π = R - VC - FC
Mathematical Example of Producer
Surplus
• Suppose that a competitive firm’s marginal cost of producing output
q is given by MC(q) = 3 + 2q. Assume that the market price of the
firm’s product is $9.
a) What level of output will the firm produce?
b) What is the firm’s producer surplus?
c) Suppose that the average variable cost of the firm is given by
AVC(q) = 3 + q. Suppose that the firm’s fixed costs are known to be
$3. Will the firm be earning a positive, negative, or zero profit in
the short run?
Mathematical Example of Producer
Surplus
a) P= MC Producer Surplus
Price
$9 = 3+2q MC
q= (9-3)/2
q= 3
$9 d= MR=P
c) Profit = π =TR– TC
= (P*Q)- (FC+VC)
= (9*3) – {3+ (AVC*Q)} FC= $3 Producer Surplus (PS)= ½ * 3 * (9-3)= 18

= 27- [3+ ({3+3}*3)]


= 27-21 q=3 Output
= $6
Does It Also Applicable For The Long Run
Too?
• In the short run, one or more of Per Dollars
Unit
LMC LAC

the firm’s inputs are fixed. of


Output SAC
• In the long run, a firm can alter SMC
D A E
all its inputs, including plant size. $40 P= MR

• The long-run output of a profit- C


G
B
F
maximizing competitive firm is $30
the point at which long-run
marginal cost equals the price.

q1 q2 q3 Output
Entry & Exit From The Market
• $40 price induces a firm to Dollars
Per Unit
LMC LAC

increase output and realize a of


positive profit (calculated after Output SMC SAC

subtracting the opportunity cost D A E


P= MR
$40
of capital) C B
F
• High return causes investors to G
$30
direct resources away from
other industries and into this
one—there will be entry into the
market.
q1 q2 q3 Output
Entry & Exit From The Market
Long Run Competitive Equilibrium
Occurs when three conditions hold:
• All firms in the industry are maximizing profit.
• No firm has an incentive either to enter or exit the industry because
all
firms are earning zero economic profit.
• The price of the product is such that the quantity supplied by the
industry is equal to the quantity demanded by consumers

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