Chapter 6: The Role of Profit

Chapter Focus The profit-maximizing rule How businesses in each market structure maximize profits The effects of profit-maximizing behavior on consumers in each market structure The short-run and long-run outcomes of profit-maximizing behavior natural monopolies and how governments regulate them

Perfect Competition: Average Revenue: a business's total revenue per unit of output AR= Total Revenue (TR)/ Quantity of Output (q) Marginal Revenue: The extra total revenue earned from an additional unit of output Marginal Revenue (MR) = ∆ TR/ ∆ q

Relationship Between Revenue Conditions and Demand : Price (P) = average revenue (AR) = marginal revenue (MR) Profit Maximization: Profit-maximizing rule: marginal revenue (MR) = Marginal cost (MC) Breakeven Point: The level of out put where price (or AR) equals average cost P = AC Shutdown Point: The level of output where price (AR) equals average variable cost VC = TR →(AVC x q) = (p x q) → AVC = P

Revenues for a perfect Competitor:

Profit Maximization for a Perfect Competitor:

Supply Curves for a Perfectly Competitive Business and market: Business’s supply curve: A curve that shows the quantity of output supplied by a business at every possible price

Market Supply Curve

The Long Run Benefits of Perfect Competition: 1. Minimum-Cost Pricing: the practice of setting price where it equals minimum average cost 2. Marginal-Cost Pricing: the practice of setting price where it equals marginal cost

Monopolistic Competition:

Revenues for a Monopolistic Competitor:

Oligopoly:

Monopoly:

Monopoly versus Perfect Competition:

Regulation of Natural Monopolies:

Average-Cost Pricing: the practice of setting price where it equals average cost Accounting-profit rate: a measure of a business’s profitability, calculated as its accounting profit divided by owner’s equity Fair Rate of Return: the maximum accounting- profit rate allowed for a regulated monopoly