tailieunhanh - Lecture Managerial economics (10/e): Chapter 11 - Christopher R. Thomas, S. Charles Maurice

In this chapter you will: Discuss three characteristics of perfectly competitive markets; apply the basic principles of marginal analysis to determine either (1) the profitmaximizing (or loss-minimizing) level of output, or (2) the profit-maximizing (or loss-minimizing) level of input usage; Explain why the demand curve facing an individual firm in a perfectly competitive industry is perfectly elastic, and why this demand curve is also the marginal revenue curve for a competitive firm;. | Chapter 11: Managerial Decisions in Competitive Markets McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Perfect Competition Firms are price-takers Each produces only a very small portion of total market or industry output All firms produce a homogeneous product Entry into & exit from the market is unrestricted Demand for a Competitive Price-Taker Demand curve is horizontal at price determined by intersection of market demand & supply Perfectly elastic Marginal revenue equals price Demand curve is also marginal revenue curve (D = MR) Can sell all they want at the market price Each additional unit of sales adds to total revenue an amount equal to price Demand for a Competitive Price-Taking Firm (Figure ) D S Quantity Price (dollars) Quantity Price (dollars) P0 Q0 Panel A – Market Panel B – Demand curve facing a price-taker 0 0 P0 D = MR Profit-Maximization in the Short Run In the short run, managers must make two decisions: . | Chapter 11: Managerial Decisions in Competitive Markets McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Perfect Competition Firms are price-takers Each produces only a very small portion of total market or industry output All firms produce a homogeneous product Entry into & exit from the market is unrestricted Demand for a Competitive Price-Taker Demand curve is horizontal at price determined by intersection of market demand & supply Perfectly elastic Marginal revenue equals price Demand curve is also marginal revenue curve (D = MR) Can sell all they want at the market price Each additional unit of sales adds to total revenue an amount equal to price Demand for a Competitive Price-Taking Firm (Figure ) D S Quantity Price (dollars) Quantity Price (dollars) P0 Q0 Panel A – Market Panel B – Demand curve facing a price-taker 0 0 P0 D = MR Profit-Maximization in the Short Run In the short run, managers must make two decisions: Produce or shut down? If shut down, produce no output and hires no variable inputs If shut down, firm loses amount equal to TFC If produce, what is the optimal output level? If firm does produce, then how much? Produce amount that maximizes economic profit Profit = π = TR - TC In the short run, the firm incurs costs that are: Unavoidable and must be paid even if output is zero Variable costs that are avoidable if the firm chooses to shut down In making the decision to produce or shut down, the firm considers only the (avoidable) variable costs & ignores fixed costs Profit-Maximization in the Short Run Profit Margin (or Average Profit) Level of output that maximizes total profit occurs at a higher level than the output that maximizes profit margin (& average profit) Managers should ignore profit margin (average profit) when making optimal decisions Short-Run Output Decision Firm will produce output where P = SMC as long as: Total revenue ≥ total avoidable cost or total variable