microchap8

Microeconomics Overview

• Textbook: Microeconomics by Robert S. Pindyck and Daniel Rubinfeld, Ninth Edition, Global Edition

• Copyright © 2018 Pearson Education, Ltd

Chapter 8: Profit Maximization and Competitive Supply

Chapter Outline

• 8.1 Perfectly Competitive Markets

• 8.2 Profit Maximization

• 8.3 Marginal Revenue, Marginal Cost, and Profit Maximization

• 8.4 Choosing Output in the Short Run

• 8.5 The Competitive Firm’s Short-Run Supply Curve

• 8.6 The Short-Run Market Supply Curve

• 8.7 Choosing Output in the Long Run

• 8.8 The Industry’s Long-Run Supply Curve

List of Examples

• Example 8.1: Condominiums versus Cooperatives in New York City

• Example 8.2: Short-Run Output Decision of an Aluminum Smelting Plant

• Example 8.3: Cost Considerations for Managers

• Example 8.4: Short-Run Production of Petroleum Products

• Example 8.5: Short-Run World Supply of Copper

• Example 8.6: Cost Industries: Coffee, Oil, and Automobiles

• Example 8.7: Supply of Taxicabs in New York

• Example 8.8: Long-Run Supply of Housing

Introduction

• A cost curve indicates the minimum cost for various amounts of output for a firm.

• Key question: How much should the firm produce?

  • The analysis includes how firms choose output levels to maximize profit and how these choices lead to industry supply curves.

8.1 Perfectly Competitive Markets

Basic Assumptions

• Price Taking: Firms have no control over market price due to small market share.

• Product Homogeneity: Products are identical across firms, ensuring a single market price.

• Free Entry and Exit: No barriers for firms to enter or exit the market.

Price Taking

• Definition: A firm that takes market price as given due to its small output.

• Example: An electric lightbulb distributor sells at market-determined prices without influence.

Product Homogeneity

• Homogeneous products cause firms to compete mostly on price.

  • Examples of Homogeneous Products: Agricultural products like corn, oil, and raw materials.

  • Heterogeneous Products: Premium goods like specific brands of ice cream that can command higher prices.

Free Entry and Exit

• Definition: Conditions where firms face no special barriers to enter or exit a market.

  • Examples of Barriers: Pharmaceuticals require significant R&D investments and patents; aircraft manufacturing requires high capital investment.

8.2 Profit Maximization

• Profit Maximization: Assumes firms seek to maximize profits, guiding business decisions.

• Larger firms may be managed with revenue growth or short-run profit maximization as primary objectives.

• Alternative Organizations: Cooperatives and condominiums operate differently, sometimes prioritizing mutual benefit over profit.

Example - Condominiums vs. Cooperatives

• Condominiums allow individual decisions while cooperatives often require collective governance decisions, affecting property value maximization.

• Familiarity with co-op vs. condo dynamics in real estate markets can affect perceptions of value and governance burdens.

8.3 Marginal Revenue, Marginal Cost, and Profit Maximization

Key Concepts

• Profit: Difference between total revenue and total cost.

• Marginal Revenue (MR): Change in total revenue from selling one additional unit.

• The profit-maximizing output is where the difference between revenue and cost is greatest.

Short-Run Profit Maximization

• Firms maximize profit where Marginal Cost (MC) = Marginal Revenue (MR).

• Figures demonstrate profit maximization visually, highlighting the interaction between revenue and cost under varying outputs.

8.4 Choosing Output in the Short Run

Competitive Firm Scenarios

• Firms must adjust output based on MC relative to price.

• Maximizing output occurs when profit between price and cost is greatest, illustrated with figures indicating changes in output levels.

• Shutdown Decision: Firms may continue operating if prices cover some fixed costs before shutting down.

8.5 The Competitive Firm’s Short-Run Supply Curve

• Short-run supply curves reflect how much output a firm will produce at various prices based on the relationship between MC and AVC (Average Variable Cost).

8.6 The Short-Run Market Supply Curve

• The short-run market supply curve aggregates individual firm supply curves for various prices, determining overall industry output.

8.7 Choosing Output in the Long Run

Long-Run Dynamics

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• Firms aim to maximize profits where Long-Run Marginal Cost (LMC) = Price.

• Entry and Exit: Firms adjust output based on profits, which leads to equilibrium over time.

8.8 The Industry’s Long-Run Supply Curve

Supply Shape Types

• Constant Cost Industry: Horizontal supply curve; input prices remain stable.

• Increasing Cost Industry: Upward-sloping; input prices rise with output.

• Decreasing Cost Industry: Downward-sloping; input prices decline with increased output.