1. Firms in a Competitive Market 9

2. Profit Maximizing Rule Quantity (Q) –How many driveways did Mr. Plow clear? Price (P) –Price charged per driveway Total Revenue (TR) –TR = P  Q Total Costs (TC) –Sum of all production costs at a certain level of output Profit (π) – π = TR – TC

3. Profit Maximizing Rule Marginal Revenue (MR) –MR = ΔTR ÷ ΔQ –Δ = change in –For a competitive firm, MR = P Marginal Cost (MC) –MC = ΔTC ÷ ΔQ –Additional costs of producing additional units

4. Profit Maximizing Rule Change in Profit –ΔProfit = MR – MC Profit maximizing rule: –To maximize profits, the firm should use a marginal analysis –Profit is maximized by choosing the level of output such that MR = MC

5. Profit Maximizing Rule Profit is maximized by choosing the level of output such that MR = MC If MR > MC –The firm can increase profits by producing more Q If MR < MC –The firm has produced “too much” Q, and profits are not maximized

6. Calculating Profits Quantity TR P  Q TC Profit TR – TC MR Δ TR ÷ Δ Q MC Δ TC ÷ Δ Q Change in Profit MR – MC Δ TR ÷ Δ Q 0$0$250-$250 10100340-240$100$9010 20200410-2101007030 300460-16010050 40400490-901003070 50500510-101002080 60600540601003070 700600100 6040 80800700100 0 90900950-50100250-150 10010001250-250100300-200

7. Profit Maximization

8. Calculating Profit To find profit, we need to know revenues and costs –For a perfectly competitive firm, revenues can be found by looking at the price (determined by the market) and the quantity sold –Costs are determined by the quantity sold For the firm, Intuition: Profit = (units sold) ×(average profit per unit)

9. When to Operate or Shut Down

10. Profit and Loss in the Short Run ConditionOutcome P > ATCThe firm makes a profit ATC > P > AVC The firm will operate to minimize loss AVC > P The firm will temporarily shut down

11. Short Run Supply Curve

12. Long Run Supply Curve Kapital – Not Changed

13. Long Run Shut Down Criteria ConditionOutcome P > ATCThe firm makes a profit P < ATCThe firm should shut down