market structures total revenue / cost approach … · market structures •pure (perfect ... total...
TRANSCRIPT
12/2/2009
1
Market Structures
• pure (perfect) competition
• monopoly
• monopolistic competition
• oligopoly
Characteristics of Pure Competition
1. Market has SO MANY firms that no single firm has
control over market price (price takers). ie. farmers,
commodities (gas, rubber, nuts, etc.)
2. Products are homogeneous (aka: fungible)
3. Complete freedom of entry and exit from industry.
4. Consumers know the prices charged by each firm.
fungible: interchangeable; in legal terms, something that can be
substituted for a like measure or amount of the same thing, as one
bushel of apples for another, in order to satisfy an obligation.
Output Decisions for a Purely Competitive Firm
As price-takers have no control over market price,
their decisions are limited to determining the
quantity they will produce.
Naturally, the quantity produced (output) will be
set at a level where profit is maximized.
Two methods of determining profit maximization:
1. Total Cost / Total Revenue Approach
2. Marginal Cost / Marginal Revenue Approach
Profit will be
maximized where
total revenue is
farthest above
total cost.
1. Total Cost / Total Revenue Approach
Total Revenue / Cost Approach
0
200
400
600
800
1000
1200
1400
1600
1800
2000
0 10 20 30 40 50 60 70 80 90 10
0
11
0
12
0
Output (units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Total Costs
Total Revenue
Profit
QuantityTotal
Costs
Total
Revenue Profit
10 120 180 60
20 216 360 144
30 300 540 240
40 380 720 340
50 490 900 410
60 600 1080 480
70 750 1260 510
80 930 1440 510
90 1180 1620 440
100 1460 1800 340
2. Marginal Revenue / Marginal Cost Approach
First, a word about marginal revenue…
Marginal Revenue
0
50
100
150
200
0 10 20 30 40 50 60 70 80 90 100 110 120
Output (Units Produced)
Reven
ue (
Do
llars
)
Marginal
Revenue
As the price is not affected by output, the extra revenue per
unit will be the same.
Marginal Revenue:
The extra revenue
earned per unit
produced.
MR
Thus, the price IS the marginal revenue!
= P
This curve also serves as the demand curve! (price / quantity)
= D
12/2/2009
2
Marginal Revenue:
So What’s Marginal Revenue?
Change in Total Revenue
Change in QuantityMR =
refers to the extra revenue earned by
producing each extra unit.
(ie. What do we earn if we make one
more unit.)
TR
QMR =
S
D
Millions of Units
Pri
ce
Market
Perfectly Competitive Firm
0
50
100
150
200
0 10 20 30 40 50 60 70 80 90 100 110 120
Output (Units Produced)
Re
ve
nu
e (
Do
lla
rs)
Marginal
Revenue
MR = D
This curve also serves as the demand curve! (price / quantity)
This firm is
just ONE
player
within a
VERY
large
industry!
As such, its output
represents a virtually irrelevant quantity
in comparison to the output of the entire
industry. Thus, its output cannot possibly
influence market price.
Price will remain the same regardless of how
much output this firm decides to produce.
Need a Metaphor?
If we step back far
enough from the earth,
we can clearly see
that it is round.
Yet if we focus on any
one small piece of
land, we see a flat
surface!
Same thing!!!
If we step back far
enough from a demand
curve, we can clearly
see that it is sloped.
Yet if we focus on just
one small piece of this
curve, we will see a flat
curve!
S
D
Millions of Units
Pri
ce
Market
Perfectly Competitive Firm
0
50
100
150
200
0 10 20 30 40 50 60 70 80 90 100 110 120
Output (Units Produced)
Re
ve
nu
e (
Do
lla
rs)
Marginal
Revenue
MR = D
Demand Curve for A Competitive Industry
0
50
100
150
200
250
0 2000 4000 6000 8000 10000
Quantity
Price
Demand
Yup! For a perfectly competitive firm, the demand curve will
be a flat horizontal line!
Marginal Revenue
0
50
100
150
200
0 10 20 30 40 50 60 70 80 90 100 110 120
Output (Units Produced)
Reven
ue (
Do
llars)
Marginal
Revenue
The small quantity
produced by this one firm
cannot influence overall
supply, and thus cannot
alter the quantity
demanded.
It is a price taker!
QuantityMarginal
Costs
Marginal
RevenueProfit
10 120 180 60
20 96 180 144
30 84 180 240
40 80 180 340
50 110 180 410
60 110 180 480
70 150 180 510
80 180 180 510
90 250 180 440
100 280 180 340
Marginal Approach
0
100
200
300
400
500
600
0 10 20 30 40 50 60 70 80 90 10
0
11
0
12
0
Output (Units Produced)
Co
sts / R
even
ue (
Do
llars)
Marginal
Costs
Marginal
Revenue
Profit will be
maximized where
marginal revenue
equals
marginal cost.
2. Marginal Revenue / Marginal Cost Approach
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3
QuantityMarginal
Costs
Marginal
RevenueProfit
10 120 180 60
20 96 180 144
30 84 180 240
40 80 180 340
50 110 180 410
60 110 180 480
70 150 180 510
80 180 180 510
90 250 180 440
100 280 180 340
Marginal Approach
0
100
200
300
400
500
600
0 10 20 30 40 50 60 70 80 90 10
0
11
0
12
0
Output (Units Produced)
Co
sts / R
even
ue (
Do
llars)
Marginal
Costs
Marginal
Revenue
Profit
Profit will be
maximized where
marginal revenue
equals
marginal cost.
2. Marginal Revenue / Marginal Cost Approach
marginal
profit
marginal loss
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Profit will always
be maximized
where marginal
revenue equals
marginal cost.
Key Output Levels for a Competitive Firm
The distance
above average
total cost
indicates pure
economic profits!
Marginal
Revenue
Economic
Profits
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
After enough
firms enter into
the industry,
price (marginal
revenue) starts to
drop!
Marginal
Revenue
Economic
Profits
Naturally, this
cuts into the
profits earned by
each firm!
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
After enough
time, so many
firms will enter
the industry that
price will fall to
the point where
no economic
profits are made!Marginal
Revenue
Economic
Profits
This is called the
break even point!“Where marginal
revenue equals
average total costs.”
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
Sadly, external
factors may cause
the price to fall, or
costs to rise, until
price (marginal
revenue) falls
below average
total costs!
Marginal
Revenue
Economic
Profits
Shut Down Point:“Where marginal
revenue equals
average variable
costs.”
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
Economic Profits:
The total profits earned
when marginal revenue
crosses marginal costs
at a point above average
total costs.
12/2/2009
4
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
NOTE!
As more firms enter the
market, price drops and
economic profits
diminish...
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
NOTE!
As more firms enter the
market, price drops and
economic profits
diminish...
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
NOTE!
As more firms enter the
market, price drops and
economic profits
diminish...
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
NOTE!
As more firms enter the
market, price drops and
economic profits
diminish...
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
NOTE!
As more firms enter the
market, price drops and
economic profits
diminish...
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
NOTE!
As more firms enter the
market, price drops and
economic profits
diminish...
12/2/2009
5
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
NOTE!
As more firms enter the
market, price drops and
economic profits
diminish...
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
NOTE!
As more firms enter the
market, price drops and
economic profits
diminish...
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
NOTE!
As more firms enter the
market, price drops and
economic profits
diminish...
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
NOTE!
As more firms enter the
market, price drops and
economic profits
diminish...
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
NOTE!
As more firms enter the
market, price drops and
economic profits
diminish...
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
NOTE!
As more firms enter the
market, price drops and
economic profits
diminish...
12/2/2009
6
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
NOTE!
As more firms enter the
market, price drops and
economic profits
diminish...
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Key Output Levels for a Competitive Firm
In review:
Marginal
Revenue
Economic
Profits
Economic Profits:
As more firms enter the
market, price drops and
economic profits
diminish...
until there are
no more
economic
profits
left!
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Did you notice the Supply Curve in there?
No?!
Marginal
Revenue
Economic
Profits
Well then take another
look!
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve:
Marginal
Revenue
Economic
Profits
The firm will always
supply a quantity where
price is equal to
marginal costs…
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve: Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve:
12/2/2009
7
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve: Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve:
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve: Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve:
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve: Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve:
12/2/2009
8
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve: Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve:
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve: Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve:
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve: Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Loss
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve:
even past the
breakeven point!
12/2/2009
9
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Loss
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve:
even past the
breakeven point!
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Loss
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve:
even past the
breakeven point!
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Loss
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve:
even past the
breakeven point!
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Loss
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve:
even past the
breakeven point!
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Loss
The firm will always
supply a quantity where
price is equal to
marginal costs…
The Short-Run Supply Curve for a Competitive Firm
The Supply Curve:
even past the
breakeven point!
Hence, in the short run
the supply curve (the
various quantities
supplied at various
prices) is represented by
the MC curve above the
AVC curve!
Supply
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Loss
So why would a firm CHOOSE to operate at a loss?!
1. They are still making more
than their variable costs!
????
After all, if they shut down,
they would STILL need to
pay their fixed costs. Ergo,
any revenue above the
variable costs could be put
towards the fixed costs.
2. Eventually good times will
return! Some firms will definitely
leave the industry. This will
cause market supply to fall
and market price to rise.
3. They may in fact be earning
accounting profits!!!
Economic profits consider
opportunity costs as well!
High opportunity costs may
be responsible for the
economic loss.
12/2/2009
10
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
Remember…
In the long-run firms will
not maintain production
when incurring a loss
just so they can pay
towards their fixed
costs, because in the
long run no costs are
fixed!
In the Long-Run a firm
will not operate in this
area, as they will not
choose to operate at a
loss if they have another
alternative.
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
The short-run
supply curve
is actually
the Marginal
Cost curve!As long as it’s above
the Average Variable
Cost curve.
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars
)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Marginal
Revenue
Economic
Profits
Whereas the
long-run supply
curve is only that
part of the
Marginal Cost
curve that is
above the
Average Total
Cost curve.
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
Profit Levels for a Competitive Firm
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0 1 2 3 4 5 6 7 8 9 10 11
Output (Units Produced)
Co
sts
/ R
even
ue (
Do
llars)
Marginal
Costs
Average
Total Cost
Average
Variable
Cost
In review… supply curves for a firm.
Supply Supply