Transcript Chapter 6: The Role of Profit

Chapter 6: The Role of
Profit
Chapter Focus
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The profit-maximizing rule
How businesses in each market structure
maximize profits
The effects of profit-maximizing behavior on
consumers in each market structure
The short-run and long-run outcomes of
profit-maximizing behavior natural
monopolies and how governments regulate
them
Perfect Competition:
Average Revenue:
• a business's total revenue per unit of output
• AR= Total Revenue (TR)/ Quantity of Output
(q)
Marginal Revenue:
• The extra total revenue earned from an
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additional unit of output
Marginal Revenue (MR) = ∆ TR/ ∆ q
Relationship Between Revenue Conditions and Demand :
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Price (P) = average revenue (AR) = marginal revenue (MR)
Profit Maximization:
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Profit-maximizing rule: marginal revenue (MR) = Marginal cost (MC)
Breakeven Point:
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The level of out put where price (or AR) equals average cost
P = AC
Shutdown Point:
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The level of output where price (AR) equals average variable cost
VC = TR →(AVC x q) = (p x q) → AVC = P
Revenues for a perfect Competitor:
Profit Maximization for a Perfect
Competitor:
Supply Curves for a Perfectly
Competitive Business and market:
Business’s supply curve:
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A curve that shows the quantity of output supplied by a
business at every possible price
Market Supply Curve
The Long Run
Benefits of Perfect Competition:
1. Minimum-Cost Pricing: the practice of setting
price where it equals minimum average cost
2. Marginal-Cost Pricing: the practice of setting
price where it equals marginal cost
Monopolistic Competition:
Revenues for a Monopolistic Competitor:
Oligopoly:
Monopoly:
Monopoly versus Perfect
Competition:
Regulation of Natural Monopolies:
Average-Cost Pricing: the practice of setting
price where it equals average cost
Accounting-profit rate: a measure of a
business’s profitability, calculated as its
accounting profit divided by owner’s equity
Fair Rate of Return: the maximum accountingprofit rate allowed for a regulated monopoly