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Department
Economics for Management Studies
Course
MGEB02H3
Professor
A.Mazaheri
Semester
Summer

Description
Chapter 8 Profit Maximization and Competitive Supply Notes 8.1 Perfectly Competitive Markets N model of perfect competition rests on 3 basic assumptions: (1) price taking, (2) product homogeneity, and (3) free entry and exit N price taker firm that has no influence over market price and thus takes the price as given N in a perfectly competitive market, each consumer buys such a small proportion of total industry output that he or she has no impact on the market price, and therefore takes the price as given as well N when the products of all the firms in a market are perfectly substitutable with one anotherthat is, when they are homogenous no firm can raise the price of its product above the price of other firms without losing most or all of its business N when products are heterogeneous, each firm has opportunity to raise its price above its competitors without losing all of its sales N free entry (or exit) condition under which there are no special costs that make it difficult for firm to enter (or exit) an industry N as a result, buyers can easily switch from one supplier to another, and suppliers can easily enter or exit a market 8.2 Profit Maximization Do Firms Maximize Profit? N for smaller firms managed by their owners, profit is likely to dominate almost all decisions N in larger firms, managers may make day-to-day decisions usually have little contact with the owners (i.e., the stockholders) N as a result, owners cannot monitor the managers behaviour on a regular basis N managers then have some leeway in how they run the firm and can deviate from profit-maximizing behaviour N managers may be more concerned with such goals as revenue maximization, revenue growth, or the payment of dividends N they might also be overly concerned with the firms short-term profit (perhaps to earn a promotion or a large bonus) at the expense of is longer-run profit, even though long-run profit maximization better serves the interests of the stockholders Alternative Forms of Organization N some forms of organizations have objectives that are quite different from profit maximization N cooperative association of businesses or people jointly owned and operated by members for mutual benefit 8.3 Marginal Revenue, Marginal Cost, and Profit Maximization N profit difference between total revenue and total cost N marginal revenue change in revenue resulting from a one-unit increase in output N (q) = R(q) C(q), which is maximized at q = 0: q = R q C q = 0 N q is marginal revenue (MR) and C q is marginal cost MC MR MC = 0 MR(q) = MC(q) Demand and Marginal Revenue for a Competitive Firm N because each firm in a competitive i
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