Short-run Profit Maximization Flashcards
How is a purely competitive market defined?
Short-run profit maximization - Pure competition
For a product being sold in a purely competitive market, marginal revenue = average revenue = market price (a firm in pure competition must accept the market price)
A purely competitive market is characterized by a large number of buyers and sellers acting independently and a homogeneous or standardized product (i.e. agricultural commodities)
The revenue relationships for a purely competitive firm is total revenue (TR) is a straight line with a constant positive slope. The price, MR and AR curves are identical
How does short-run profit maximization work for a purely competitive firm?
(Short-run profit maximization - Pure competition)
Short-run profit maximization is achieved when marginal revenue = marginal cost. As long as the next unit of output adds more in revenue (MR) than in cost (MC), the firm will increase total profit or decrease total losses
For a purely competitive firm, price = MC is the same as MR = MC
Price taking for a purely competitive firm graph shows the following:
a. Being in a purely competitive industry, the firm has no choice but to find its price along the horizontal MR curve
b. The profit-maximizing quantity to produce is found at the point where the MC curve crosses MR
How is a Monopoly defined?
In a monopoly market, the industry consists of one firm and the product has no close substitutes
To encourage more sales of its product, a monopolist must lower its price
Thus, a monopolist’s marginal revenue continuously decreases as it raises output. Past the point where MR = $0, the monopolist’s total revenue begins to decrease
The monopolist has the power to set output at the level where profits are maximized, where MR = MC (this is called “price searching”)
What are characteristics of Monopolistic competition?
An industry in monopolistic competition has a large number of firms. The number is fewer than in pure competition, but it is great enough that firms cannot collude. That is, they cannot act together to restrict output and fix the price
What are characteristics of an Oligopoly?
An oligopoly is an industry with a few large firms. Firms operating in an oligopoly are mutually aware and mutually interdependent. Their decisions as to price, advertising, etc. are to a very large extend dependent on the actions of the other firms
Prices tend to be rigid (sticky) because of the interdependence among firms
