Summer Semester 2012

 Objective of a firm in a competitive market is to maximize profit.  Profit is equal to total revenue minus total cost of production. So the requirements are  Prevent waste, encourage worker morale, choose efficient production processes i.e. efficient production process, and  buy correct quantity of inputs at least cost and choose the optimal level of output.

 Graphs P dd Firm output Perfects competition occurs when no producer can affect the market price. Under perfect competition, there are many small firms, each producing an identical product and each too small to affect the market price. Under such conditions, each producer faces a completely horizontal demand curve (or dd) curve.

 Obviously depend upon the costs of production, specifically marginal cost of production.  Because the maximum profit output comes at that output where marginal cost equals price i.e. P=MC. The reason underlying this propositions is that the firm can always make additional profit as long as the price is greater than the marginal cost of the last unit. Total profit reaches its peak, when there is no extra profit to be earned by selling extra output.

Qua ntityFCVCTCAVCATC∆TC∆QMC

 Firm’s supply curve Price MC A d B d’ C O (thousand) Quantity AC

The Figure illustrate a firm’s supply decision. Here price is given. For a profit maximizing competitive firm, the upward sloping marginal cost curve is the firm’s supply curve. When the market price of output is od the firm find that it’s marginal cost (MC) is equal to price od. So the firm decide to supply only 7000 units of output. For a market price dd’, firm will supply output at intersection point at A. Similarly, for price d’d and d’’ d’’ supply will be at point A and C respectively.

 When market price of the product produced by a competitive firm is so low that it can no longer covers its total cost, the firm decide to shut down or not depend upon one condition only:-  (i) whether MC cover variable costs.  For example, a firm face a market price Tk 35 as shown by the curve dd’. At that price, the firm face MC that is equal point B, a point at which the price actually less than average cost of production. Under such a circumstances,

The rule governing when the firm should shutdown: ** When price falls so low that total revenues are less than variable cost, and price is less than average variable cost, the firm will minimize its losses by shutting down.

Critically, low market price at which revenues just equal variable cost is called the shutdown point. For prices above the shutdown point the firm will produce along the marginal cost curve, because even though the firm might be losing money, it would lose more money by shutting down. For prices below the shutdown point, the firm will produce nothing at all because by shutting down, the firm will lose only its fixed costs.