1. PROFIT MAXIMISATION BY A FIRM IN A COMPETITIVE MARKET

2. MAIN TOPICS DEFINITION OF A COMPETITIVE MARKET MARKET DEMAND AND FIRM DEMAND TOTAL REVENUE OF THE FIRM MARGINAL REVENUE OF THE FIRM TOTAL REVENUE LESS TOTAL COSTS MARGINAL COST AND PROFIT MAXIMISATION

3. COMPETITIVE MARKETS Large number of buyers: None can control the priceLarge number of buyers: None can control the price Large number of sellers: None can control the priceLarge number of sellers: None can control the price Uniform commodity: All sellers are selling identical commodities, so they are perfect substitutesUniform commodity: All sellers are selling identical commodities, so they are perfect substitutes Entry to the industry is easy.Entry to the industry is easy. Established firms do not have an advantage over new firmsEstablished firms do not have an advantage over new firms

4. MARKET DEMAND

5. MARKET DEMAND AND SUPPLY

6. DEMAND FOR ONE FIRM’S OUTPUT The firm is a small part of the marketThe firm is a small part of the market Other firm’s products are perfect substitutesOther firm’s products are perfect substitutes The firm can charge no more than the market priceThe firm can charge no more than the market price

7. A FIRM’S DEMAND SCHEDULE

8. A FIRM’S DEMAND CURVE

9. TOTAL REVENUE OF A FIRM The quantity a firm sells multiplied by the price of the product.The quantity a firm sells multiplied by the price of the product.

10. TOTAL REVENUE OF A FIRM

12. MARGINAL REVENUE The change in total revenue given the change in quantityThe change in total revenue given the change in quantity In a competitive industry marginal revenue always equals price.In a competitive industry marginal revenue always equals price. That is, the firm adds the price of one more unit to its total revenue whenever it sells one more unit.That is, the firm adds the price of one more unit to its total revenue whenever it sells one more unit. This is not true for firms in industries that are not competitive.This is not true for firms in industries that are not competitive.

13. A FIRM’S MARGINAL REVENUE SCHEDULE

14. A FIRM’S MARGINAL REVENUE CURVE

15. COMPETITIVE FIRM’S PROFIT MAXIMISING DECISION The firm is a price taker, so it cannot decide what price to charge.The firm is a price taker, so it cannot decide what price to charge. Assume that the firm is producing each output at the minimum possible cost.Assume that the firm is producing each output at the minimum possible cost. The firm can only decide how muchto produceThe firm can only decide how much to produce The firm’s goal is to maximise profitsThe firm’s goal is to maximise profits

16. PROFITS OF A COMPETITIVE FIRM

17. TOTAL REVENUE AND COST CURVES

18. PROFITS

19. PROFIT MAXIMISATION Profit is maximised when the difference between the total revenues and total costs is greatestProfit is maximised when the difference between the total revenues and total costs is greatest At outputs where revenues increase by more than costs if output increases, output is too low. Increasing output will increase profit.At outputs where revenues increase by more than costs if output increases, output is too low. Increasing output will increase profit. At outputs where revenues increase by less than costs if output increases, output is too high. Decreasing output will decrease profitAt outputs where revenues increase by less than costs if output increases, output is too high. Decreasing output will decrease profit

20. PROFIT MAXIMISATION If marginal revenue equals marginal cost, then profit is maximised.If marginal revenue equals marginal cost, then profit is maximised. The increase in revenue equals the increase in cost when one more unit is produced.The increase in revenue equals the increase in cost when one more unit is produced. The decrease in revenue equals the decrease in costs when one less unit is producedThe decrease in revenue equals the decrease in costs when one less unit is produced Maximum profits may occur when average costs are not at a minimum.Maximum profits may occur when average costs are not at a minimum.

21. PROFIT MAXIMISATION