Chapter 11 Notes Profit Maximisation and Cost Under Competition

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I WILL DO A MASSIVE REVIEW OF IB NOTES FOR THIS CHAPTER ESPECIALLY

BECAUSE THE ASSUMPTIONS ARE VERY IMPORTANT.

SUPER IMPORTANT TO READ CHAPTER FOR THIS.

Profit Maximisation:

- A firm’s typical overarching goal is to maximise its profits.

- Three main decisions:

- What price to set?

- Perfect Competition don’t think of this.

- Monopolies, oligopolies do think about price decisions.

- What quantity to produce?

- When to enter or exit the industry?

Perfect Competition:

- Many buyers, many sellers.

- Uniform product across sellers.

- Homogenous because they all sell the same products.

- No individual market participant is large enough to affect the equilibrium price.

- From the perspective of an individual firm, this means that the price at which it can sell

its goods is already determined by the market.

- Under perfect competition, firms are price takers.

Marginal Revenue:

- We know that perfectly competitive firms will always receive the same price per unit

regardless of how many units they produce.

- The additional revenue generated by the last unit sold is equal to its price.

- Because the price is the same regardless of quantity, the revenue generated by the last

unit is equal to the revenue generated by the second to last unit, which is equal to the

revenue generated by the third to last unit.. And so on.

- Under perfect competition, marginal revenue equals price regardless of how many units

are sold.

Costs:

- Profit = Revenue - Cost

- Since the actions of a perfectly competitive firm do not affect price, revenue is

easy to figure out.

- Costs can be split in fixed costs and variable costs.

Opportunity Cost:

- Opportunity costs are the value of the most valuable foregone use of a resource.

- The interest is the money I invested in a firm could have earned in a savings

account instead.

- The value I place on spending time with my children rather than running the firm.

- Opportunity costs - both fixed and variable - must be included in the calculation of a

firm’s total costs in order to make profit-maximising decisions.

The Marginal Cost Curve:

- The Marginal Cost is the increase in total cost as a result of producing one additional

unit.

- Note that, because fixed costs do not change, this is the same as the increase in

variable cost as a result of producing one additional unit.

LOOK AT UPLOADED SLIDES AND PUT GRAPH 1 AND GRAPH 2 HERE.

- If Marginal Revenue exceeds Marginal Cost, the firm will increase its profits by

expanding production. (MR > MC)

- If Marginal Cost exceeds Marginal Revenue, the firm will increase its profits by cutting

production. (MC > MR).

- The Average Cost Curve

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I WILL DO A MASSIVE REVIEW OF IB NOTES FOR THIS CHAPTER ESPECIALLY BECAUSE THE ASSUMPTIONS ARE VERY IMPORTANT. SUPER IMPORTANT TO READ CHAPTER FOR THIS. Profit Maximisation: - A firm’s typical overarching goal is to maximise its profits. - Three main decisions: - What price to set? - Perfect Competition don’t think of this. - Monopolies, oligopolies do think about price decisions. - What quantity to produce? - When to enter or exit the industry? Perfect Competition: - Many buyers, many sellers. - Uniform product across sellers. - Homogenous because they all sell the same products. - No individual market participant is large enough to affect the equilibrium price. - From the perspective of an individual firm, this means that the price at which it can sell its goods is already determined by the market. - Under perfect competition, firms are price takers. Marginal Revenue: - We know that perfectly competitive firms will always receive the same price per unit regardless of how many units they produce. - The additional revenue generated by the last unit sold is equal to its price. - Because the price is the same regardless of quantity, the revenue generated by the last unit is equal to the revenue generated by the second to last unit, which is equal to the revenue generated by the third to last unit.. And so on. - Under perfect competition, marginal revenue equals price regardless of how many units are sold. Costs: - Profit = Revenue - Co ...
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