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Lecture 6

Ecn Week 6.docx

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ECN 104
Debapriya Sen

Ecn Week 6 October 9, 2013 7:48 AM • 1 seller is a monopoly, few competing firms is an oligopoly and many sellers is a perfect competition • Perfect competition o In a perfectly competitive market, there is a large number of competing firms o Each firm is small compared to the market size and can't control the price o Price Taking Behaviour each firm takes the market price as given. Any firm can sell at any price without altering the price • Objective of a Firm o To maximize profit o Profit function at any Q≥ 0 Q= number of units to sell o Let price = P o C Q cost of producing Q units o The profit function Q = P*Q - CQ o Objective: Choose Q to maximize πQ • Average Revenue: (AR) o Total revenue = P*Q o Average revenue = P*Q/Q = P • Marginal Revenue (MR) o Revenue from the last unit sold o For perfect competition, MR=AR=P • Average & Marginal Cost o Avg Cost (AC) = total cost of producing Q units/Q o Marginal Cost (MC) = cost of producing the last unit • Average Marginal costs Cost o For small values of Q, AC falls then it reaches a minimum & rises again o Firms achieve the "most efficient point" (minimum avg cost) • We know for a perfectly competitive market AR = MR = P • Total cost of producing Q units = area under the MC curve until point Q o Suppose we are given a u-shaped MC curve. Total cost of producing Q1 units = ? • Now we put both graphs together… Price /Cost What is the value of Q where profit (difference between reve
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