# When Profit Maximizing Firms In Competitive Markets Are Earning Profits

When Profit Maximizing Firms In Competitive Markets Are Earning Profits – Harry chooses between washing dishes for \$6/hour and collecting containers for 2 cents. The opportunity cost of collecting cans is \$6/hour. Chapter 6: Perfect competition

4 Examples Search time (hours/days) Total number of containers found Maximum number of containers found 0 0 1 600 2 1,000 3 1,300 4 1,500 5 1,600 600 400 300 200 600 600

## When Profit Maximizing Firms In Competitive Markets Are Earning Profits Cost and Profit for 1 hour of collecting cans = (600)(.02) = \$12 Profit (\$12) > Opportunity cost (\$6) 2nd hour profit (\$8) > Opportunity cost (\$6) 3rd hour profit (\$6) = Cost opportunity (\$6) ) Chapter 6: Complete Competition Competition

#### Solved Refer To Figure 14 6. When Market Price Is P5,

Question What is the lowest redemption price that will make Harry recover 1 hour/day? Solution 600 containers x 1 cent = \$6 = opportunity cost of washing dishes Chapter 6: Perfectly Competitive Supply

Break-even price 1 hour of recycling = p(600) = \$6 = 1 cent 2 hours of recycling = p(400) = \$6 = 1.5 cents 3 hours of recycling = p(300) = \$6 = 2 cents 4 hours of recycling = p(200) = \$6 = 3 cents 5 hours of recycling = p(100) = \$6 = 6 cents Chapter 6: Perfectly Competitive Supply

Harry’s Supply Curve 6 10 13 16 3 2 1 1 1.5 15 Warehouse (cents/can) Recycling cans (100 corners/day) Chapter 6: Perfectly Competitive Supply

6 10 13 16 3 2 1 1.5 15 Harry’s Supply Curve 6 10 13 16 3 2 1 1.5 15 Barry’s Supply Curve Deposit (cents/can) + Deposit (cents/can) + recycled wells (100 holes) 100 wells/can days) Chapter 6: Perfect competition

12 20 26 32 6 3 2 1 1.5 30 Deposits (cents/min) = = Recycled mines (100 bins/day) Chapter 6: Perfectly Competitive Supply

6 10 13 16 3 2 1 2

Profit Maximizing Profit Total Revenue – All Costs (obvious and implicit) Profit Maximizing Firms The objective of the firm is to maximize the difference between total revenues and total costs Chapter 6: Perfectly Competitive Supply Perfectly Competitive Market A market in which no individual supplier has a significant influence on the market price of the product.

#### Profit Maximization: Meanings, Objection, Limitations

Characteristics of Perfect Competition All firms sell the same standardized product. The market has many buyers and sellers, each of whom buys or sells only a small fraction of the total that has been exchanged. Chapter 6: Perfect competition

Characteristics of Perfect Competitiveness Productive Resources are mobile Buyers and sellers are well informed. Chapter 6: Perfect competition

Market supply and demand S D Price (\$/unit) P0 Q0 Market quantity (units/month) Chapter 6: Perfectly Competitive Supply

Concepts of Production Factor of Production An input used in the production of a good or service Short run A period of time short enough that at least some of the firm’s factors of production are fixed Chapter 6: Perfectly Competitive Competition

## Marginal Revenue Explained, With Formula And Example

Concepts of Production Fixed factor of production Input whose quantity does not change in the short run Variable factor of production Input whose quantity can change in the short run Chapter 6: Perfectly Competitive Supply

Consider a Company that manufactures glass bottles Two factors of production Labor (variable) Capital (fixed) Bottle making machinery Chapter 6: Perfectly Competitive Supply

Total number of workers per day Total number of sunglasses 1 80 3 260 4 300 5 330 6 350 7 362 Observations Output gains per additional worker begin to decrease with the third worker Chapter 6: Perfectly Competitive Supply Law of Diminishing Returns A property of the relationship between the amount of a good or service produced and the amount of a variable factor required to produce it. It states that when certain factors of production are held constant, increasing production of the good always requires a greater amount in the end. increases in the variable factor

## Class Activity Chapter Firms In Competitive Markets

Consider Some Important Cost Concepts The cost of a bottle making machine is \$40/day and it is a fixed cost. Fixed cost The sum of all payments made to the firm’s fixed factors of production Chapter 6: Perfectly Competitive Supply

Consider Some Important Cost Concepts Labor cost is \$12/worker and is a variable cost. Variable Cost The sum of all payments made to the firm for the variable factors of production Chapter 6: Perfectly Competitive Competition

Workers per day Bottles Fixed cost (\$/day) Variable cost Total cost Marginal cost (\$/bottle) 0.15 0.10 0.20 0.30 0.40 0.60 1.00 Chapter 6: Perfectly Competitive Supply

Some Important Cost Concepts Fixed Total Cost + Variable Cost Marginal Cost Measures how total cost changes with changes in output Chapter 6: Perfectly Competitive Supply

## Monopolistic Competition: Definition, How It Works, Pros And Cons

Employees per day Output (bottles/day) Total revenue (\$/day) Profit Total cost MB = .35 MC = .15 MC = .10 MC = .20 MC = .30 MC = .40 MC = .60 MC = 1.00 What will happen to the profit-maximizing output if: (a) workers are paid \$6/day; (b) are fixed costs \$45? Chapter 6: Perfect competition

A Note on the Firm’s Liquidity Situation When producing at a loss, a firm must cover its variable cost to minimize losses. The short-run case Chapter 6: Perfect competition

Average Variable Cost and Average Total Cost Variable Cost Total Variable Cost Dividend Productivity Chapter 6: Perfectly Competitive Supply Average Variable Cost and Average Total Cost Average Total Cost Total Cost Total Productivity Chapter 6: Perfectly Competitive Supply

## Solved Suppose Existing Firms Are Experiencing One Of The

Average Variable Cost and Average Total Cost Profit = TR – TC or (P x Q) – (ATC x Q) For profit: P > ATC Chapter 6: Perfectly Competitive Supply

(\$/unit of output) Average total cost (\$/unit of output) Variable cost (\$/day) total cost (\$/day) marginal cost (\$/bottle) Daily workers Bottles per day 0.15 0.10 0.20 0.30 0.40 0.60 1.00 Chapter 6: Perfect Competition

Average Variable and Average Total Cost for a Bottle Producer 80 200 260 300 330 350 362 An upward trending MC corresponds to diminishing returns MC = AVC & ATC at their lowest points MC 0.65 TC6500000. 40 Cost (\$/bottle) 0.35 0.30 0.25 0.20 0.15 0.10 0.05 Output (bottle/day) Chapter 6: Perfectly Competitive Supply

Price = Marginal Cost: The Perfectly Competitive Firm’s Profit Maximizing Rule MC ATC AVC 0.07 160 0.10 0.12 0.15 0.20 0.25 0.30 0.33 0.35 200 Lek 260 P and 200 260 bottles increase by 30 More than 260 bottles/day P < MC and output should be reduced Profit-maximizing yield: P = MC Cost (\$/bottle) Output (bottles/day) Chapter 6: Perfect Competition

## Solved: Question 54 1 Pts Profit Maximizing Firms Hiring In Competitive Labor Markets Employ Labor Up To The Point Where The Wage Rate Equals The: O Average Revenue From The Sale Of

Price = Marginal Cost: The Perfectly Competitive Firm’s Profit Making Method MC ATC AVC 0.12 Price = MC at 260 bottles/day ATC = .12/bottle TR = (.20)(260) = \$52/day TC = (. 12 )(26) = \$31.20/day Profit = \$52 – \$31.20 = \$20.80/day Cost (\$/bottle) 0.20 260 Price Production (bottle/day) Chapter 6: Complete Supply Competition

Negative Profit 0.10 Price = .08/bottle P = MC at 180 bottles/day ATC = .10/bottle P < ATC at .02/bottle Profit = -.02 x 180 = -3.60//day MC ATC AVC Cost (\$/bottle) 180 Price 0.08 Output (bottle/day) Chapter 6: Perfectly Competitive Supply

Law of Supply The perfectly competitive firm’s supply curve is its marginal cost curve Each quantity of output on the market supply represents the sum of all the quantities that individual sellers offer at the relevant price Chapter 6: Perfectly Competitive Supply The Law of Supply At any point along the market supply curve, price measures what it would cost producers to expand output by one unit. Remember Demand measures the profit side of the market.

### Beyond Perfect Competition

Technology Input Prices Number of Suppliers Expected Changes in Other Product Prices Chapter 6: Perfect Competition

Economic Environmentalist Why are more aluminum beverage containers recycled than glass ones when recycling is left to private market forces? Chapter 6: Perfect competition

Container Recycling Services Provider for Burlington, Vermont 60,000 citizens will pay 6 cents per container whose marginal benefit Local government pays 6 cents/container The optimal number of containers is 16,000/day where MC(.06 ) = marginal benefit 6 10 13 16 3 2 1 1.5 15 Market supply curve for container recycling services

What do you think? Will all containers be removed from the environment at \$0.06/container? Why is the best withdrawal amount 16,000/day? Will private individuals choose to lift 16,000 containers/day? Chapter 6: Ensuring Perfect Competition

#### Solution: Economics Society Lecture 12 Perfect Competition

Equilibrium P = \$2 & Q = 4,000 Producer surplus is the difference between \$2 and the breakeven price per quantity Producer surplus = (1/2)(4,000 gallons/day) (\$2/gallon) = 4,000 \$/day S D 3.00 2.50 Price (\$/gallon) 2.00 1.50 1.00 .50 1 2 3 4 5 6 7 8 9 10 11 12 Volume (1,000 gallons/day) Chapter 6 : Total Competition

Quantity (1,000 gallons/day) Price (\$/gallon) 1 .50

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