Class Notes (905,092)
CA (538,354)
UTSG (45,721)
ECO (1,632)
ECO101H1 (575)
Jack Carr (83)
Lecture 15

Lecture 15-Perfect Competition pt.2

4 Pages
87 Views

Department
Economics
Course Code
ECO101H1
Professor
Jack Carr

This preview shows page 1. Sign up to view the full 4 pages of the document.
Thursday, November 5th, 2009.
Perfect Competition
MR = MC => q* is profit-maximizing level of output
Question: Is firm earning economic profits?
Is firm breaking even (zero economic profits)?
Is firm suffering economic loss?
To answer: add ATC schedule Ù compare P to ATC
Economic Profit = Total Revenue
Minus
Total Opportunity Cost (Explicit + Implicit)
Most Important Implicit Opportunity Cost: Invested Capital (Equity)
,QYHVWHG&DSLWDOHDUQV³QRUPDOUDWHRISURILW´Æ Economic Profit = Zero
(and Accounting Profit is Positive)
Level of profits:
1. Firm maximizes profits by producing where P = MC
2. Levels of profits:
TR > TC => profits => TR/Q > TC/Q Ù P > ATC
TR = TC => breakeven Ù P = ATC
TR < TC => loss => TR/Q < TC/Q Ù P < ATC
P
MR [= P]
q*
MC
q
www.notesolution.com

Loved by over 2.2 million students

Over 90% improved by at least one letter grade.

Leah — University of Toronto

OneClass has been such a huge help in my studies at UofT especially since I am a transfer student. OneClass is the study buddy I never had before and definitely gives me the extra push to get from a B to an A!

Leah — University of Toronto
Saarim — University of Michigan

Balancing social life With academics can be difficult, that is why I'm so glad that OneClass is out there where I can find the top notes for all of my classes. Now I can be the all-star student I want to be.

Saarim — University of Michigan
Jenna — University of Wisconsin

As a college student living on a college budget, I love how easy it is to earn gift cards just by submitting my notes.

Jenna — University of Wisconsin
Anne — University of California

OneClass has allowed me to catch up with my most difficult course! #lifesaver

Anne — University of California
Description
Thursday, November 5th, 2009. Perfect Competition MR = MC => q* is profit-maximizing level of output Question: Is firm earning economic profits? Is firm breaking even (zero economic profits)? Is firm suffering economic loss? To answer: add ATC schedule Ù compare P to ATC Economic Profit = Total Revenue Minus Total Opportunity Cost (Explicit + Implicit) Most Important Implicit Opportunity Cost: Invested Capital (Equity) ,QYHVWHG&DSLWDOHDUQV³QRUPDOUDWHRISURILW´Æ Economic Profit = Zero (and Accounting Profit is Positive) Level of profits: 1. Firm maximizes profits by producing where P = MC 2. Levels of profits: TR > TC => profits => TR/Q > TC/Q Ù P > ATC TR = TC => breakeven Ù P = ATC TR < TC => loss => TR/Q < TC/Q Ù P < ATC P MR [= P] q* MC q www.notesolution.com Case 1: Economic Profit (P > ATC) Profit-maximizing output: 10 (P = MC) Profit: (P ± ATC) * q = (25 ± 20) * 10 = 50 Case 3: Economic Loss (P < ATC) Economic Profit: (P ± ATC) * q = (25 ± 30) * 10 = -50 Decisions of Perfectly Competitive Firm: Summary 1. Choose output (q) that maximizes profit P = MC 2. Determine if should shut down in short-run* P < AVC Æ shut down (Otherwise, continue to produce q) P P = MR 10 MC q ATC 25 20 P = MR 10 q ATC 25 30 MC P www.notesolution.com Individual Firm q0 MC dd Q1 P0 Market SS DD ATC P1 Q0 DD1 q1 dd1 3. Determine whether to exit industry in long-run P < ATC Æ exit industry (Otherwise, continue to produce q) Long-Run Equilibrium 1. Firm is maximizing profits (produces q0 where MR = MC) 2. Zero economic profit (Ù ³QRUPDOUDWHRISURILW´EHFDXVHDWT0, P = ATC 3. No incentive for firms to enter or exit the industry Entry and Exit 1. If firms in industry are earning (economic) profits, other firms enter (and industry supply curve shifts to right) 2. If firms in industry are suffering (economic) losses, firms exit (and industry supply curve shifts to left) Short-Run versus Long-Run Impact of An Increase in Demand Short-Run Firm q0 MC P0 = MR Q0 P0 Market SS DD ATC www.notesolution.com Prior to study of competitive markets analysis ends with market adjustment in short-run Yet firms now earn economic profits (P1 > ATC) => in long run, new firms enter industry and SS shifts right to SS1 and price falls ,IWKLVLV³FRQVWDQWFRVW´LQGXVWU\SULFHIDOOVWR30 (initial price) and industry output rises Long-Run Q1 P0 Market SS DD P1 Q2 Q0 DD1 SS1 (New Firms Enter) www.notesolution.comth Thursday, November 5 , 2009. Perfect Competition P MC MR [= P] q* q MR = MC => q* is profit-maximizing level of output Question: Is firm earning economic profits? Is firm breaking even (zero economic profits)? Is firm suffering economic loss? To answer: add ATC schedule compare P to ATC Economic Profit = Total Revenue Minus Total Opportunity Cost (Explicit + Implicit) Most Important Implicit Opportunity Cost: Invested Capital (Equity) ,3;0890,5L9,O0,7383472,O7,90415741L9 Economic Profit = Zero (and Accounting Profit is Positive) Level of profits: 1. Firm maximizes profits by producing where P = MC 2. Levels of profits: TR > TC => profits => TRQ > TCQ P > ATC TR = TC => breakeven P = ATC TR < TC => loss => TRQ < TCQ P < ATC www.notesolution.com
More Less
Unlock Document


Only page 1 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


OR

Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit