Supply Flashcards
What is profit?
Profit = revenue - cost
To maximise profits firms must answer what two questions?
- Output decision: what output level (q*) maximised its profit or minimises its loss?
- Shutdown decision: is it more profitable to produce q* or shut down?
Mathematically, when are profits maximised?
(Pi is the signal for Profit)
When marginal profit is 0.
Find q where d(pi)/dq = 0
At optimum quantity q* we must have what?
Marginal cost = marginal revnue
MC(q) = MR(q)
When does the firm continue to produce and when does it shut down?
Firm only shirts down is revenue < variable cost
When does the firm produce q*?
Only if it makes more profits at q* than at q = 0 (shut down)
What is marginal revenue?
Change in revenue for a small increase in output , dR(q)/dq
Does the price a firm gets for its output change as output goes up?
Depends on market structure
Perfect competition rules
Both buyers and sellers are price takers
Perfect knowledge
Freedom of entry and exit
Homogenous goods
Firms are likely to be price takers if:
There are a large no. Of firms - each firms decision doesn’t influence market supply by much
Identical products - consumers can easily switch to a competitor
Full information - easy for consumers to buy elsewhere if firm raises price
Negligible transaction costs - buyers and sellers waste little time or money finding each other
Free entry and exit - leads to a large no. Of firms
What are some real world markets that are almost perfectly competitive
- stock markets
- retail
- commodity markets
Where is profit max?
MC = MR
Draw me a perfect competition short run profit and loss
When should a firm shut down in the short run?
If P < AVC (aka if MR and MC meet at a point lower than AVC)
What is the market supply curve?
The horizontal sum of the supply curves of all individual firms
