bab 9b

nuhfil hanani : web site : www.nuhfil.com, email :

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BAB 9b

Maksimisasi keuntungan

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Topics to be Discussed Perfectly Competitive Markets

Profit Maximization

Marginal Revenue, Marginal Cost, and Profit Maximization

Choosing Output in the Short-Run

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Topics to be Discussed The Competitive Firm’s Short-Run

Supply Curve

Short-Run Market Supply

Choosing Output in the Long-Run

The Industry’s Long-Run Supply Curve

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Perfectly Competitive Markets

Characteristics of Perfectly Competitive Markets

1) Price taking

2) Product homogeneity

3) Free entry and exit

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Price Taking

– The individual firm sells a very small share of the total market output and, therefore, cannot influence market price.

– The individual consumer buys too small a share of industry output to have any impact on market price.

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Product Homogeneity

– The products of all firms are perfect substitutes.

– Examples

Agricultural products, oil, copper, iron, lumber

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Free Entry and Exit

– Buyers can easily switch from one supplier to another.

– Suppliers can easily enter or exit a market.

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Discussion Questions

– What are some barriers to entry and exit?

– Are all markets competitive?

– When is a market highly competitive?

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Profit Maximization Do firms maximize profits?

– Possibility of other objectivesRevenue maximizationDividend maximizationShort-run profit maximization

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– Implications of non-profit objectiveOver the long-run investors

would not support the companyWithout profits, survival unlikely

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– Long-run profit maximization is valid and does not exclude the possibility of altruistic behavior.

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Marginal Revenue, Marginal Cost,and Profit Maximization

Determining the profit maximizing level of output– Profit ( ) = Total Revenue - Total

Cost– Total Revenue (R) = Pq– Total Cost (C) = Cq– Therefore:

)()()( qCqRq

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Profit Maximization in the Short Run

Cost,Revenue,

Profit($s per year)

Output (units per year)

R(q)Total Revenue

Slope of R(q) = MR

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Cost,Revenue,

Profit$ (per year)

Profit Maximization in the Short Run

Total Cost

Slope of C(q) = MC

Why is cost positive when q is zero?

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Marginal revenue is the additional revenue from producing one more unit of output.

Marginal cost is the additional cost from producing one more unit of output.

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Comparing R(q) and C(q)– Output levels: 0-

q0: C(q)> R(q)

– Negative profit

FC + VC > R(q) MR > MC

– Indicates higher profit at higher output 0

Cost,Revenue,

Profit($s per year)

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Comparing R(q) and C(q)– Question: Why is

profit negative when output is zero?

Cost,Revenue,

Profit$ (per year)

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Comparing R(q) and C(q)– Output levels: q0 -

R(q)> C(q) MR > MC

– Indicates higher profit at higher output

– Profit is increasing

Cost,Revenue,

Profit$ (per year)

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Comparing R(q) and C(q)– Output level: q*

R(q)= C(q) MR = MC Profit is

maximized

Cost,Revenue,

Profit$ (per year)

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Question

– Why is profit reduced when producing more or less than q*?

Cost,Revenue,

Profit$ (per year)

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Comparing R(q) and C(q)– Output levels

beyond q*: R(q)> C(q) MC > MR Profit is

decreasing

Cost,Revenue,

Profit$ (per year)

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Therefore, it can be said:

– Profits are maximized when MC = MR.

Cost,Revenue,

Profit$ (per year)

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: whenmaximized are Profits

MC(q)MR(q)MCMR

thatso0

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The Competitive Firm

– Price taker

– Market output (Q) and firm output (q)

– Market demand (D) and firm demand (d)

– R(q) is a straight line

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Demand and Marginal Revenue Facedby a Competitive Firm

Output (bushels)

Price$ per bushel

Output (millions of bushels)

100 200 100

Firm Industry

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– The competitive firm’s demand Individual producer sells all units

for $4 regardless of the producer’s level of output.

If the producer tries to raise price, sales are zero.

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– The competitive firm’s demand If the producers tries to lower

price he cannot increase salesP = D = MR = AR

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– Profit MaximizationMC(q) = MR = P

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Choosing Output in the Short Run

We will combine production and cost analysis with demand to determine output and profitability.

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Lost profit forqq < q*

Lost profit forq2 > q*

A Competitive FirmMaking a Positive Profit

Price($ per

0 1 2 3 4 5 6 7 8 9 10 11

ATCAR=MR=P

Outputq*

At q*: MR = MCand P > ATC

ABCDorqx AC) -(P *

q1 : MR > MC andq2: MC > MR andq0: MC = MR but

MC falling

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Would this producercontinue to produce with a loss?

A Competitive FirmIncurring Losses

Price($ per

Output

P = MR

DAt q*: MR = MCand P < ATCLosses = P- AC) x q* or ABCD

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Choosing Output in the Short Run Summary of Production Decisions

– Profit is maximized when MC = MR

– If P > ATC the firm is making profits.

– If AVC < P < ATC the firm should produce at a loss.

– If P < AVC < ATC the firm should shut-down.

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The Short-Run Output ofan Aluminum Smelting Plant

Output (tons per day)

Cost(dollars per item)

300 600 9000

Observations•Price between $1140 & $1300: q = 600•Price > $1300: q = 900•Price < $1140: q = 0

QuestionShould the firm stay in businesswhen P < $1140?

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Some Cost Considerations for Managers

Three guidelines for estimating marginal cost:

1) Average variable cost should not be used as a substitute for marginal cost.

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2) A single item on a firm’s accounting ledger may have two components, only one of which involves marginal cost.

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3) All opportunity cost should be included in

determining marginal cost.

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A Competitive Firm’sShort-Run Supply Curve

Price($ per

Output

P = AVCWhat happens

if P < AVC?

The firm chooses theoutput level where MR = MC,as long as the firm is able to

cover its variable cost of production.

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Observations:– P = MR– MR = MC– P = MC

Supply is the amount of output for every possible price. Therefore:– If P = P1, then q = q1

– If P = P2, then q = q2

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Price($ per

Output

P = AVC

S = MC above AVC

Shut-down

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Observations:– Supply is upward sloping due to

diminishing returns.– Higher price compensates the firm

for higher cost of additional output and increases total profit because it applies to all units.

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Firm’s Response to an Input Price Change– When the price of a firm’s product

changes, the firm changes its output level, so that the marginal cost of production remains equal to the price.

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Input cost increases and MC shifts to MC2

and q falls to q2.

The Response of a Firm toa Change in Input Price

Price($ per

Output

Savings to the firmfrom reducing output

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The Short-Run Productionof Petroleum Products

Cost($ per

barrel)

Output(barrels/day)8,000 9,000 10,000 11,000

27 SMC

How much wouldbe produced if

P = $23? P = $24-$25?

The MC of producinga mix of petroleum products

from crude oil increasessharply at several levelsof output as the refinery

shifts from one processingunit to another.

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Stepped SMC indicates a different production (cost) process at various capacity levels.

Observation:– With a stepped MC function, small

changes in price may not trigger a change in output.

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The short-run market supply curve shows the amount of output that the industry will produce in the short-run for every possible price.

Consider, for simplicity, a competitive market with three firms:

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Industry Supply in the Short Run$ perunit

0 2 4 8 105 7 15 21

SSThe short-runindustry supply curve

is the horizontalsummation of the supply

curves of the firms.

Quantity

Question: If increasingoutput raises inputcosts, what impactwould it have on market supply?

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The Short-Run Market Supply Curve

Elasticity of Market Supply

)//()/( PPQQEs

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Perfectly inelastic short-run supply arises when the industry’s plant and equipment are so fully utilized that new plants must be built to achieve greater output.

Perfectly elastic short-run supply arises when marginal costs are constant.

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Questions

1) Give an example of a perfectly inelastic supply.

2) If MC rises rapidly, would the supply be more or less elastic?

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The World Copper Industry (1999)

Annual Production Marginal CostCountry (thousand metric tons) (dollars/pound)

Australia 600 0.65Canada 710 0.75Chile 3660 0.50Indonesia 750 0.55Peru 450 0.70Poland 420 0.80Russia 450 0.50United States 1850 0.70Zambia 280 0.55

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The Short-Run World Supply of Copper

Production (thousand metric tons)

Price($ per pound)

0 2000 4000 6000 8000 100000.40

MCC,MCR

MCJ,MCZ

MCP,MCUS

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Producer Surplus in the Short Run– Firms earn a surplus on all but the

last unit of output.– The producer surplus is the sum

over all units produced of the difference between the market price of the good and the marginal cost of production.

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ProducerProducerSurplusSurplus

Alternatively, VC is thesum of MC or ODCq* .R is P x q* or OABq*.Producer surplus =

R - VC or ABCD.

Producer Surplus for a FirmPrice($ per

unit ofoutput)

Output

AVCAVCMCMC

At q* MC = MR.Between 0 and q ,

MR > MC for all units.

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Producer Surplus in the Short-Run

VC- R PS Surplus Producer

FC - VC- R - Profit

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Observation

– Short-run with positive fixed cost

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ProducerProducerSurplusSurplus

Market producer surplus isthe difference between P*

and S from 0 to Q*.

Producer Surplus for a MarketPrice

($ perunit of

output)

Output

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Choosing Output in the Long Run

In the long run, a firm can alter all its inputs, including the size of the plant.

We assume free entry and free exit.

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In the short run, thefirm is faced with fixedinputs. P = $40 > ATC.Profit is equal to ABCD.

Output Choice in the Long RunPrice($ per

unit ofoutput)

Output

P = MR$40

SACSMC

In the long run, the plant size will be increased and output increased to q3.

Long-run profit, EFGD > short runprofit ABCD.

G F$30

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Output Choice in the Long RunPrice($ per

unit ofoutput)

Output

P = MR$40

SACSMC

Question: Is the producer makinga profit after increased output

lowers the price to $30?

G F$30

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Accounting Profit & Economic Profit– Accounting profit = R - wL– Economic profit = R = wL - rK

wl = labor cost rk = opportunity cost of capital

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Zero-Profit– If R > wL + rk, economic profits are positive– If R = wL + rk, zero economic profits, but

the firms is earning a normal rate of return; indicating the industry is competitive

– If R < wl + rk, consider going out of business

Long-Run Competitive Equilibrium

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Entry and Exit– The long-run response to short-run

profits is to increase output and profits.

– Profits will attract other producers.– More producers increase industry

supply which lowers the market price.

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Output Output

$ per unit ofoutput

$40LAC

Firm Industry

•Profit attracts firms•Supply increases until profit = 0

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Choosing Output in the Long Run Long-Run Competitive Equilibrium

1) MC = MR

2) P = LACNo incentive to leave or enterProfit = 0

3) Equilibrium Market Price

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Choosing Output in the Long Run Questions

1) Explain the market adjustment when P < LAC and firms have identical costs.

2) Explain the market adjustment when firms have different costs.

3) What is the opportunity cost of land?

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Choosing Output in the Long Run Economic Rent

– Economic rent is the difference between what firms are willing to pay for an input less the minimum amount necessary to obtain it.

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Choosing Output in the Long Run An Example

– Two firms A & B

– Both own their land

– A is located on a river which lowers A’s shipping cost by $10,000 compared to B.

– The demand for A’s river location will increase the price of A’s land to $10,000

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Choosing Output in the Long Run An Example

– Economic rent = $10,000 $10,000 - zero cost for the land

– Economic rent increases

– Economic profit of A = 0

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Firms Earn Zero Profit inLong-Run Equilibrium

TicketPrice

Season TicketsSales (millions)

1.01.0

A baseball teamin a moderate-sized city

sells enough tickets so that price is equal to marginal

and average cost(profit = 0).

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1.31.3

$10$10

Economic Rent

TicketPrice

A team with the samecost in a larger citysells tickets for $10.

Season TicketsSales (millions)

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With a fixed input such as a unique location, the difference between the cost of production (LAC = 7) and price ($10) is the value or opportunity cost of the input (location) and represents the economic rent from the input.

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If the opportunity cost of the input (rent) is not taken into consideration it may appear that economic profits exist in the long-run.

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The shape of the long-run supply curve depends on the extent to which changes in industry output affect the prices the firms must pay for inputs.

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To determine long-run supply, we assume:

– All firms have access to the available production technology.

– Output is increased by using more inputs, not by invention.

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To determine long-run supply, we assume:

– The market for inputs does not change with expansions and contractions of the industry.

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Economic profits attract newfirms. Supply increases to S2 and

the market returns to long-run equilibrium.

Long-Run Supply in aConstant-Cost Industry

Output Output

$ per unit ofoutput

Q1 increase to Q2.Long-run supply = SL = LRAC.

Change in output has no impact on input cost.

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In a constant-cost industry, long-run supply is a horizontal line at a price that is equal to the minimum average cost of production.

Long-Run Supply in aConstant-Cost Industry

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Long-Run Supply in anIncreasing-Cost Industry

Output Output

$ per unit ofoutput

$ per unit ofoutput S1

Due to the increasein input prices, long-runequilibrium occurs at

a higher price.

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In a increasing-cost industry, long-run supply curve is upward sloping.

Long-Run Supply in aIncreasing-Cost Industry

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The Industry’sLong-Run Supply Curve

Questions

1) Explain how decreasing-cost is possible.

2) Illustrate a decreasing cost industry.

3) What is the slope of the SL in a decreasing-cost industry?

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Due to the decreasein input prices, long-runequilibrium occurs at

a lower price.

Long-Run Supply in anDecreasing-Cost Industry

Output Output

$ per unit ofoutput

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In a decreasing-cost industry, long-run supply curve is downward sloping.

Long-Run Supply in aIncreasing-Cost Industry

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The Effects of a Tax– In an earlier chapter we studied

how firms respond to taxes on an input.

– Now, we will consider how a firm responds to a tax on its output.

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Effect of an Output Tax on a Competitive Firm’s Output

Price($ per

unit ofoutput)

Output

The firm willreduce output to

the point at whichthe marginal cost

plus the tax equalsthe price.

MC2 = MC1 + tax

An output taxraises the firm’s

marginal cost by theamount of the tax.

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Effect of an OutputTax on Industry Output

Price($ per

unit ofoutput)

Output

SS2 = S1 + t

Tax shifts S1 to S2 andoutput falls to Q2. Price

increases to P2.

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Long-Run Elasticity of Supply

1) Constant-cost industryLong-run supply is horizontalSmall increase in price will

induce an extremely large output increase

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1) Constant-cost industryLong-run supply elasticity is

infinitely large Inputs would be readily available

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2) Increasing-cost industryLong-run supply is upward-sloping and

elasticity is positiveThe slope (elasticity) will depend on the

rate of increase in input costLong-run elasticity will generally be

greater than short-run elasticity of supply

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Question:– Describe the long-run elasticity of

supply in a decreasing -cost industry.

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The Long-Run Supply of Housing

Scenario 1: Owner-occupied housing– Suburban or rural areas– National market for inputs

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Questions– Is this an increasing or a constant-

cost industry?– What would you predict about the

elasticity of supply?

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Scenario 2: Rental property– Zoning restrictions apply– Urban location– High-rise construction cost

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Questions– Is this an increasing or a constant-

cost industry?– What would you predict about the

elasticity of supply?

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Summary The managers of firms can operate in

accordance with a complex set of objectives and under various constraints.

A competitive market makes its output choice under the assumption that the demand for its own output is horizontal.

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Summary In the short run, a competitive firm

maximizes its profit by choosing an output at which price is equal to (short-run) marginal cost.

The short-run market supply curve is the horizontal summation of the supply curves of the firms in an industry.

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Summary The producer surplus for a firm is the

difference between revenue of a firm and the minimum cost that would be necessary to produce the profit-maximizing output.

Economic rent is the payment for a scarce resource of production less the minimum amount necessary to hire that factor.

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Summary In the long-run, profit-maximizing

competitive firms choose the output at which price is equal to long-run marginal cost.

The long-run supply curve for a firm can be horizontal, upward sloping, or downward sloping.

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