❖All firms produce a homogeneous product
❖Entry into & exit from the market is unrestricted
11-3
Demand for a Competitive Price-Taker
❖Demand curve is horizontal at price determined by intersection of market demand & supply
ignores fixed costs
11-7
Profit Margin (or Average Profit)
❖Level of output that maximizes total profit occurs at a higher level than the output that maximizes profit margin
11-8
Short-Run Output Decision
❖Firm will produce output where P = SMC as long as:
~ Total revenue ≥ total avoidable cost or
total variable cost (TR TVC)
~ Variable costs that are avoidable if the firm chooses to shut down
❖In making the decision to produce or
shut down, the firm considers only
the (avoidable) variable costs &
~ Perfecnue equals price
~ Demand curve is also marginal revenue curve
(D = MR)
❖Can sell all they want at the market price
~ Each additional unit of sales adds to total revenue an amount equal to price
~ If shut down, firm loses amount equal to TFC
2. If produce, what is the optimal output level?
~ If firm does produce, then how much? ~ Produce amount that maximizes economic profit
Chapter 11 Managerial Decisions in
Competitive Markets
11-1
Learning Objectives
❖ Discuss 3 characteristics of perfectly competitive markets
❖ Explain why the demand curve facing a perfectly competitive firm is perfectly elastic and serves as the firm’s marginal revenue curve
Profit-Maximization in the Short Run
❖ In the short run, managers must make two decisions:
1. Produce or shut down?
~ If shut down, produce no output and hires no variable inputs
Profit = π = TR 11-6
Profit-Maximization in the Short Run
❖In the short run, the firm incurs costs that are:
~ Unavoidable and must be paid even if output is zero
(& average profit)
~ Managers should ignore profit margin
(average profit) when making optimal
dA ev ce isria og ne s profit
(PA T C)Q
QQ
P A T C P r o fit m a r g in
❖ Find short‐run profit‐maximizing output, derive firm and industry supply curves, and identify producer surplus
❖ Explain characteristics of long‐run competitive equilibrium for a firm, derive long‐run industry supply, and identify economic rent and producer surplus
11-4
Demand for a Competitive Price-Taking Firm (Figure
11.2)
S
Price (dollars) Price (dollars)
P0
P0
D = MR
D
0
Q0
Quantity
0
Quantity
Panel A – Market
Panel B – Demand curve facing a price-taker 11-5
❖ Find the profit‐maximizing level of a variable 11-2 input
Perfect Competition
❖Firms are price-takers
~ Each produces only a very small portion of total market or industry output