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FOURTH EDITION
N. G R E G O R Y M A N K I W
PowerPoint Slides
by Ron Cronovich
2007 Thomson South-Western, all rights reserved
Introduction: A Scenario
Three years after graduating, you run your own
business.
CHAPTER 14
TR = P x Q
TR
=P
AR =
Q
CHAPTER 14
TR
MR =
Q
ACTIVE LEARNING
Exercise
1:
TR
$10
n.a.
$10
$10
$10
$10
$10
$40
$10
$50
AR
MR
$10
6
ACTIVE LEARNING
Answers
1:
TR = P x Q
$10
$0
n.a.
$10
$10
$10
$10
Notice
Notice that
that
$20
$10
MR
=
P
MR = P
$10
$30
$10
$10
$40
$10
$10
$50
$10
AR =
MR =
TR
Q
$10
$10
$10
$10
$10
7
CHAPTER 14
Profit Maximization
What Q maximizes the firms profit?
To find the answer,
Think at the margin.
If increase Q by one unit,
revenue rises by MR,
cost rises by MC.
CHAPTER 14
Profit Maximization
(continued from earlier exercise)
At any Q with
MR > MC,
increasing Q
raises profit.
At any Q with
MR < MC,
reducing Q
raises profit.
CHAPTER 14
TR
TC
Profit MR MC
$0
$5
$5
10
20
15
30
23
40
33
50
45
Profit =
MR MC
$10 $4
$6
10
10
10
10
10
12
10
Costs
MC
MR
P1
At Q1, MC = MR.
Changing Q
would lower profit.
CHAPTER 14
Qa Q1 Qb
Q
11
Costs
MC
P2
MR2
P1
MR
Hence,
Q1
Q2
Q
12
Exit:
A long-run decision to leave the market.
CHAPTER 14
13
revenue falls by TR
costs fall by VC
So, the firm should shut down if TR < VC.
Divide both sides by Q: TR/Q < VC/Q
So we can write the firms decision as:
Shut down if P < AVC
CHAPTER 14
14
MC
ATC
AVC
Q
15
CHAPTER 14
16
revenue falls by TR
costs fall by TC
So, the firm should exit if TR < TC.
Divide both sides by Q to rewrite the firms
decision as:
Exit if P < ATC
CHAPTER 14
17
CHAPTER 14
18
Costs
MC
LRATC
Q
CHAPTER 14
19
2A:
Identifying a firms profit
ACTIVE LEARNING
A competitive firm
Determine
this firms
total profit.
Identify the
area on the
graph that
represents
the firms
profit.
Costs, P
MC
MR
ATC
P = $10
$6
50
Q
20
ACTIVE LEARNING
Answers
2A:
A competitive firm
Costs, P
MC
MR
ATC
P = $10
Total profit
= (P ATC) x Q
= $4 x 50
= $200
profit
$6
50
Q
21
2B:
Identifying a firms loss
ACTIVE LEARNING
A competitive firm
Determine
this firms
total loss.
Identify the
area on the
graph that
represents
the firms
loss.
Costs, P
MC
ATC
$5
MR
P = $3
30
Q
22
ACTIVE LEARNING
Answers
2B:
A competitive firm
Costs, P
MC
Total loss
= (ATC P) x Q
= $2 x 30
= $60
ATC
$5
P = $3
loss
30
Q
23
CHAPTER 14
24
CHAPTER 14
25
One firm
MC
Market
P3
P3
P2
P2
AVC
P1
P1
10 20 30
Q
(firm)
Q
(market)
10,000
CHAPTER 14
20,000 30,000
26
CHAPTER 14
27
CHAPTER 14
28
29
One firm
MC
LRATC
long-run
supply
Q
(firm)
CHAPTER 14
Market
Q
(market)
30
CHAPTER 14
31
One firm
MC
Profit
ATC
P2
P2
P1
P1
Q
(firm)
CHAPTER 14
Market
S1
S2
B
A
long-run
supply
D1
Q1 Q2
Q3
D2
Q
(market)
32
CHAPTER 14
33
CHAPTER 14
34
CHAPTER 14
35
Profit-maximization:
MC = MR
Perfect competition:
P = MR
So, in the competitive eqm:
P = MC
Recall, MC is cost of producing the marginal unit.
P is value to buyers of the marginal unit.
36
CHAPTER SUMMARY
For a firm in a perfectly competitive market,
price = marginal revenue = average revenue.
37