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Lecture 14

ECO101H1 Lecture 14: Perfect Competition

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ECO100 Lecture 14 : Perfect Competition Profit Maximizing by a perfectly competitive firm in the short run (fixed cost) review: What is the profit maximizing level of output q (quantity)? Produce q (quantity) wher R [ = P ] = MC Firms dd schedule is perfectly elastic at market price P Should the firm produce q or shut down [produce no output, and suffer loss = fixed cost]? If P < AVC (average variable c hut down otherwise produce q Source: MR = MC q* The profit maximizing output Is the firm earning economic profits if it is maximizing output? Add ATC (average total cost) schedule and compare P to ATC Digression: If commodity is infinitely divisible, t nique profit maximizing level of output at MR = MC Graphs (implicit) There is only one point where MR = MC Calculus If commodity is not infinitely divisible, there must be 2 levels of output where profit is the same Before MR = MC After MR = MC Level of profit: TR > TC Profit TR Q > TC Q P > ATC TR = TC Breakeven P = ATC TR < TC Loss P < ATC
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