University:
McMaster University
Course:
ECON 1BA3 | Introductory Macroeconomics for Economics Students
Academic year:

2024
Views:

149

Pages:

2
Author:

Sabrina S.

Demand: In a purely competitive market Demand of an individual firm in a purely competitive market is Perfectly elastic Why? Because a firm cannot: Increase sales volume by increasing price Obtain a higher price by restricting its output Nor has it any price control (price taker) Purely Competitive firms demand + revenue curves Total revenue: Straight upward sloping curve, found by price and quantity (TR = P x Q) Demand curve: Horizontal line / perfectly elastic b/c firm can sell as much output as it wants at market price Demand curve is also the Average revenue curve: Price buyer pays per unit = revenue received per unit, AR = TR / Q Demand curve is also the marginal revenue curve: MR = ΔTR / ΔQ Profit maximization in short run Purely comp. market: Is a price taker It can only maximize economic profit by adjusting output Things to consider: Should product be produced? What output level? What economic profit will be realized? 2 ways to determining the level of output at which a competitive firm will max profit / min loss Total Revenue Approach: Profit / Loss = TR - TC Profit maximizing case: If MR = MC, firm should produce product If MR < MC, firm will shut down Marginal Revenue (MR:MC Rule) or PMC Approach: Firm should produce product if MR = MC Firm will shut down if MR < MCEconomic profit is at its max when firm produces 4 units NOTE: Firm wants to max total profit (not profit per unit) Per unit profit is greatest at 2 units (when P=ATC) TR is a straight line TC increases with output (production requires more resources) Graphically Rectangle shows economic profit Profit = (Price - ATC) x Q Any output between break even points where firm makes economic profit Profit = area between TR and TC Loss Minimizing case P exceeds min AVC but less than ATC Firm will produce loss is less than fixed cost but they can still cover all variable costs Economic Profit curve: Total economic profit 0 1234567891011121314 Quantity demanded TC Area between break even points Shutdown case P falls below min AVC Firm will shutdown there is no level of output where firm can produce and realize a loss that is less than total fixed cost ATC A