Transcript View Slide Show for Lesson 9-2 - Mansfield University of Pennsylvania

PERFECT COMPETITION
IN THE SHORT RUN
Microeconomics Made Easy
by
William Yacovissi
Mansfield University
©William Yacovissi All Rights Reserved
TOTAL & MARGINAL
REVENUE
 Profit is the difference between total
revenue and total cost.
 Total revenue is the price of the product
times the number of units sold.
 Marginal revenue is the change in total
revenue if one more unit is sold
TOTAL & MARGINAL
REVENUE
 If a firm faces intense competition, it is
basically forced to sell the product at the
prevailing market price.
 Because these companies are small relative
to the market, they generally can sell all that
they produce at the prevailing market price.
TOTAL & MARGINAL
REVENUE
 Think midwestern wheat farmers. The
market determines the price of wheat. The
farmer can sell the whole crop at the market
price.
 Whether the farmer planted 2,000 acres or
4,000 acres is irrelevant. The whole crop
will still be sold at the market price.
TOTAL & MARGINAL
REVENUE
 For a firm in a competitive market, the
marginal revenue is simply the price of the
product and is constant over the feasible
range of production.
PROFIT MAXIMIZATION
 What a company is looking for is the level of
production that generates the largest gap between
total revenue and total cost
 It turns out that the level of production at which
marginal revenue equals marginal cost generates
the largest profits.
 For a competitive firm P = MR so for a
competitive firm profit is maximized when
P = MC
FIRM EQUILIBRIUM
 The Problem facing a competitive firm is
illustrated on the following graph.
 The firm compares the prevailing market price to
its marginal cost curve to determine the profit
maximizing level of production
 Profit per unit is the difference between the price
and the average cost.
FIRM EQUILIBRIUM
FIRM EQUILIBRIUM
 One important point form the diagram
above is the finding that the firm should
adjust output whenever market price
changes.
 When market price increases, production
should increase and when market price falls,
production should be decreased.