Chapter 12: Perfect Competition



Dr. Tara Westerhold

Econ 330

Short Run Decision Making

Maximize Profit = TR – TC

OR Per unit Profit (P-ATC)

Total profit (P-ATC)* Q

“MR: marginal revenue: the additional revenue the firm generates by producing and selling one more unit of output”

“MC: marginal cost: the additional cost the firm incurs by producing and selling one more unit of output”

A firm with market power (monopoly, monopolistic competition, oligopoly) will maximize profits by operating where MR=MC.

• If MR> MC then the next unit contributes more to revenue than costs and improves profit so the firm should increase Q to produce this unit.

• If MR < MC then the next unit contributed more to costs than to revenue and worsens profit so the firm should decrease Q to not produce this unit.

• If MR=MC then every profitable unit has been produced and at this point producing more neither helps nor hurts so the firm has reached its profit maximizing point.

• If there is no Q for which MR=MC, the firm will choose the highest Q where MR > MC.

A firm without market power (perfect competition must adopt the current market price because each firm is so small in relation to the industry…for example, corn, soybeans, etc) will operate where P=MC (or P > MC if there is no quantity where P=MC)

Example 1: Price varies at different production levels

|Price |Output (Q) |Total Revenue |Marginal Revenue |Total Cost |Marginal Cost |Profit |

|$700 |0 | |----- |$300 |----- | |

|$650 |1 | | |$700 | | |

|$600 |2 | | |$900 | | |

|$550 |3 | | |$1000 | | |

|$500 |4 | | |$1150 | | |

|$450 |5 | | |$1350 | | |

|$400 |6 | | |$1600 | | |

|$350 |7 | | |$1900 | | |

|$300 |8 | | |$2250 | | |

|$250 |9 | | |$2650 | | |

(1) Determine Total Revenue for the firm at each output level (TR=Price * Quantity)

(2) Determine MR and MC

(3) Determine the profit at each output level (Profit= TR-TC)

(4) What is the profit maximizing output level for a monopoly? What price will the monopolist charge? How much profit will they make?

(5) What is the profit maximizing output level for the industry of perfect competition? What price will they charge? How much profit will they make?

Show graphically monopoly outcome vs. perfect competition:

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