44 terms

Profit Maximization

STUDY
PLAY
An _______________ is where no one has an incentive to change their production.
equilibrium
In market systems:
if a firm can ______________________ by changing the price of quantity of their goods, they will.
increase their profit
In market systems:
They will stop changing their _____________________ when they have reached the maximum amount of profit they possibly can achieve, given the current conditions of the market.
price and quantity
In market systems:
The profit maximizing output and price is the ____________.
equilibrium
In a competitive market, Firms will produce where __________
MC=MR
Recall, _______________________ is the additional cost of producing one more unit of output.
Marginal Cost (MC)
____________________________ is the additional revenue acquired by producing (and as we assume selling) one more unit of output.
Marginal Revenue (MR)
MR formula =
Change in TR/ Change in Q = (TR1-TR2)/(Q1-Q2)
MR=P in a __________________
competitive market
MR<P in a _______________
monopoly
If MC<MR, a firm can make a higher profit by _____________ their output.
The additional revenue from selling one more unit is ______ than the extra cost to produce that unit.
So, a firm's profit will increase if output ______________, therefore the firm producing where MC<MR has an incentive to __________ their price and/or output.
increasing, more, increases, change
If MC>MR, a firm can make a higher profit by ______________ their output.
The additional revenue from selling one more unit is less that the extra cost to produce that unit.
So, a firm's profit will increase if output decreases, therefore the firm producing where MC>MR has an incentive to ____________ their price and/or output.
decreasing, change
If ____________, a firm is making the highest profit possible.
At this point, each firm does not have a way to increase profit more, so they have no incentive to change their price and/or output.
MC=MR
Perfectly competitive market:

There are an ________________ of buyers and sellers in the market
A competitive firm takes the price as given or they are a _____________________.
Products sold by the firms in a competitive industry are _______________________. They are perfect substitutes.
Any firm can enter/exit the market without serious impediments.
Both Buyers and Sellers have equal access to information.
infinite number, price taker, homogenous
Note, because a perfectly competitive firm is a price taker, a Competitive Firm maximizes profits by choosing the optimal _____________________.
amount to produce
The Profit Maximizing Quantity is determined by using one of two strategies:
1. ____________
Profit maximizing output is where TR exceeds TC the most.
2. ______
TR>TC, MC=P
To find the competitive firm's profit maximizing output and price numerically, set price = ___.
MC
If at equilibrium quantity, ATC is higher than P, you have a _____.
loss
In the short run,
A firm enters the market by _________________________
a firm can not exit the industry as a whole but can _______________, or __________________ the good for a period of time
providing output to sell, shut down, not manufacture
If the firm enters the market in the short run:
Profit = _________________
TR-VC-FC
If the firm enters the market in the short run:

In the short run, a firm will ____________ incur fixed costs.
Fixed costs in this case are called ___________. Sunk costs are costs already committed to.
ALWAYS, sunk costs
If a firm shuts down (exits the market) in the SR:
Profit = ________
They produce 0 output and incur a loss equal to its __________________.
Shutting down prevents them from losing any more ________.
0-0-FC, fixed costs, profit
If _________, firm should produce because TR-VC will be positive. If this was negative, should stop producing.
TR>VC
If FC>(TR-VC), in SR profit could be _________
negative
The long run competitive equilibrium is where economic profit = ____
Called the _____________ Condition
Note this is economic profit.
0, Zero Profit
LR Competitive Equilibrium is where _________________
everything is equal
LR competitive equilibrium graphically:

MC intersects ______ at its minimum
SRAC intersects ______ at its minimum
SRAC, LRAC
LR competitive equilibrium graphically:

Price is set where MC intersects SRAC and LRAC at their minimum which is ______
MR=P
In the long run,

A firm enters the market by choosing to ________________________________
provide the good to sell
In the long run,

A firm will enter the market as long as the current firms are making a _______________________
positive profit
In the long run,

A firm exits the industry by choosing to ____________________________ any more.
Once firms stop making a ________________, firms will no longer choose to enter the market.
not produce a good to sell, positive profit
In the long run,

If firms are making a ___________________, firms will exit the market.
They will exit the market until LR profits = 0.
negative profit
Conditions in the market for a monopoly:

Condition 1 - There exists a __________ for other firms to enter the market.

Natural Monopoly
Exclusive right monopoly
Ownership of resources
barrier
Natural Monopoly: way the good is, makes sense for ______________________ to produce
only one firm
______________________ monopoly: legal barrier preventing other firms from entering market
Exclusive right
Ownership of resources monopolist: monopolist owns a resource that ____________________________
no one else has access to
Conditions in the market for a monopoly:

2. Monopolist is a price __________:

Price and quantity changes by the monopolist has a ____ effect on the market.

The monopolist faces the entire industry's demand.

The Marginal Revenue curve will thus be ____________
sloping.
searcher, big, downward
Profit maximizing Q and P for a Monopolist: 2 approaches:

1. _________ Approach
The Monopolist's Profit Maximizing P and Q is where Profit= TR - TC is the highest.

2. ___________ Approach
Note: Monopolist MR is ALWAYS < P
TR - TC, MR = MC
In a competitive market, ___________ are constant
P and MR
Monopolist economic profit = _____________________
(P - ATC at Q)(Q*)
Producer ________ How much extra $ per unit
Surplus:
MR is different between competitive mkt and Monopoly because monopolist is a _____________
price maker.
In a monopoly ___________ is lower, _________ is higher
Quantity, Price
Welfare of monopoly is _____. Incurs social cost.
less
YOU MIGHT ALSO LIKE...