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BAB 9b Maksimisasi keuntungan nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Topics to be Discussed Perfectly Profit Competitive Markets Maximization Marginal Revenue, Marginal Cost, and Profit Maximization Choosing Output in the Short-Run nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Topics to be Discussed The Competitive Firm’s Short-Run Supply Curve Short-Run Choosing Market Supply Output in the Long-Run The Industry’s Long-Run Supply Curve nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Perfectly Competitive Markets Characteristics of Perfectly Competitive Markets 1) Price taking 2) Product homogeneity 3) Free entry and exit nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Perfectly Competitive Markets 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Perfectly Competitive Markets Product Homogeneity – The products of all firms are perfect substitutes. – Examples Agricultural products, oil, copper, iron, lumber nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Perfectly Competitive Markets Free Entry and Exit – Buyers can easily switch from one supplier to another. – Suppliers can easily enter or exit a market. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Perfectly Competitive Markets Discussion Questions – What are some barriers to entry and exit? – Are all markets competitive? – When is a market highly competitive? nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Profit Maximization Do firms maximize profits? – Possibility of other objectives Revenue maximization Dividend maximization Short-run profit maximization nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Profit Maximization Do firms maximize profits? – Implications of non-profit objective Over the long-run investors would not support the company Without profits, survival unlikely nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Profit Maximization Do firms maximize profits? – Long-run profit maximization is valid and does not exclude the possibility of altruistic behavior. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] 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: (q) R(q) C (q) nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Profit Maximization in the Short Run Total Revenue Cost, Revenue, Profit ($s per year) R(q) Slope of R(q) = MR 0 Output (units per year) nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Profit Maximization in the Short Run C(q) Cost, Revenue, Profit $ (per year) Total Cost Slope of C(q) = MC Why is cost positive when q is zero? 0 Output (units per year) nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Marginal Revenue, Marginal Cost, and Profit Maximization 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Marginal Revenue, Marginal Cost, and Profit Maximization Comparing R(q) and C(q) – Output levels: 0q0: C(q)> Cost, Revenue, Profit ($s per year) C(q) A R(q) B – Negative profit FC + VC > R(q) MR > MC – Indicates higher profit at higher output R(q) 0 q0 q* (q) Output (units per year) nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Marginal Revenue, Marginal Cost, and Profit Maximization Comparing R(q) and C(q) – Question: Why is profit negative when output is zero? Cost, Revenue, Profit $ (per year) C(q) A R(q) B 0 q0 q* (q) Output (units per year) nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Marginal Revenue, Marginal Cost, and Profit Maximization Comparing R(q) and C(q) – Output levels: q0 q* R(q)> MR – – Cost, Revenue, Profit $ (per year) C(q) A C(q) R(q) B > MC Indicates higher profit at higher output Profit is increasing 0 q0 q* (q) Output (units per year) nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Marginal Revenue, Marginal Cost, and Profit Maximization Comparing R(q) and C(q) – Output level: q* R(q)= MR Cost, Revenue, Profit $ (per year) C(q) A C(q) = MC R(q) B Profit is maximized 0 q0 q* (q) Output (units per year) nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Marginal Revenue, Marginal Cost, and Profit Maximization Question – Why is profit reduced when producing more or less than q*? Cost, Revenue, Profit $ (per year) C(q) A R(q) B 0 q0 q* (q) Output (units per year) nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Marginal Revenue, Marginal Cost, and Profit Maximization Comparing R(q) and C(q) – Output levels beyond q*: R(q)> MC Cost, Revenue, Profit $ (per year) C(q) A C(q) > MR R(q) B Profit is decreasing 0 q0 q* (q) Output (units per year) nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Marginal Revenue, Marginal Cost, and Profit Maximization Therefore, it can be said: Cost, Revenue, Profit $ (per year) C(q) – Profits are maximized when MC = MR. A R(q) B 0 q0 q* (q) Output (units per year) nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Marginal Revenue, Marginal Cost, and Profit Maximization R-C R MR q C MC q nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Marginal Revenue, Marginal Cost, and Profit Maximization Profits are maximized when : R C 0 or q q q MR MC 0 so that MR(q) MC(q) nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Marginal Revenue, Marginal Cost, and Profit Maximization The Competitive Firm – Price taker – Market output (Q) and firm output (q) – Market demand (D) and firm demand (d) hananiis : weba sitestraight : www.nuhfil.com, email : [email protected] –nuhfil R(q) line Demand and Marginal Revenue Faced by a Competitive Firm Price $ per bushel Price $ per bushel Firm $4 d Industry $4 D 100 200 Output (bushels) 100 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Output (millions of bushels) Marginal Revenue, Marginal Cost, and Profit Maximization The Competitive Firm – The competitive firm’s demand Individual producer sells all units for $4 regardless of the producer’s level of output. If the producer tries to raise price, sales are zero. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Marginal Revenue, Marginal Cost, and Profit Maximization The Competitive Firm – The competitive firm’s demand If the producers tries to lower price he cannot increase sales P = D = MR = AR nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Marginal Revenue, Marginal Cost, and Profit Maximization The Competitive Firm – Profit Maximization MC(q) = MR = P nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Choosing Output in the Short Run We will combine production and cost analysis with demand to determine output and profitability. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] A Competitive Firm Making a Positive Profit MC Price 60 ($ per unit) 50 40 Lost profit for q q < q* A D Lost profit for q2 > q* ATC C B AVC 30 At q*: MR = MC and P > ATC q1 : MR > MC and q2: MC > MR20 and q0: MC = MR but MC falling 10 0 AR=MR=P (P - AC) x q* or ABCD 1 q0 2 3 4 5 6 7 q1 8 q* 9 10 11 q2 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Output A Competitive Firm Incurring Losses MC Price ($ per unit) C D At q*: MR = MC and P < ATC Losses = P- AC) x q* or ABCD F ATC B A P = MR AVC E Would this producer continue to produce with a loss? q* nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Output 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 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] shut-down. The Short-Run Output of an Aluminum Smelting Plant Cost (dollars per item) 1400 Observations •Price between $1140 & $1300: q = 600 •Price > $1300: q = 900 •Price < $1140: q = 0 P2 1300 P1 1200 Question Should the firm stay in business when P < $1140? 1140 1100 0 300 600 900 Output (tons per day) nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Some Cost Considerations for Managers Three guidelines for estimating marginal cost: 1) Average variable cost should not be used as a substitute for marginal cost. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Some Cost Considerations for Managers Three guidelines for estimating marginal cost: 2) A single item on a firm’s accounting ledger may have two components, only one of which involves marginal cost. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Some Cost Considerations for Managers Three guidelines for estimating marginal cost: 3) All opportunity cost should be included in determining marginal cost. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] A Competitive Firm’s Short-Run Supply Curve Price ($ per unit) The firm chooses the output level where MR = MC, as long as the firm is able to cover its variable cost of production. MC P2 ATC P1 AVC What happens if P < AVC? P = AVC q1 q2 Output nuhfil hanani : web site : www.nuhfil.com, email : [email protected] A Competitive Firm’s Short-Run Supply Curve 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 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] A Competitive Firm’s Short-Run Supply Curve Price ($ per unit) S = MC above AVC MC P2 ATC P1 AVC P = AVC Shut-down q1 q2 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Output A Competitive Firm’s Short-Run Supply Curve 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. – nuhfil hanani : web site : www.nuhfil.com, email : [email protected] A Competitive Firm’s Short-Run Supply Curve 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Response of a Firm to a Change in Input Price Price ($ per unit) MC2 Input cost increases and MC shifts to MC2 and q falls to q2. Savings to the firm from reducing output MC1 $5 q2 q1 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Output The Short-Run Production of Petroleum Products Cost ($ per barrel) 27 The MC of producing a mix of petroleum products from crude oil increases sharply at several levels of output as the refinery shifts from one processing unit to another. SMC 26 How much would be produced if P = $23? P = $24-$25? 25 24 23 8,000 9,000 10,000 11,000 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Output (barrels/day) The Short-Run Production of Petroleum Products 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Short-Run Production of Petroleum Products 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: nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Industry Supply in the Short Run MC1 MC2 $ per unit MC3 The short-run industry supply curve is the horizontal summation of the supply curves of the firms. P3 P2 P1 0 Question: If increasing output raises input costs, what impact would it have on market supply? 2 4 5 7 8 10 15 Quantity 21 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] S The Short-Run Market Supply Curve Elasticity of Market Supply Es (Q / Q) /( P / P) nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Short-Run Market Supply Curve 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Short-Run Market Supply Curve Questions 1) Give an example of a perfectly inelastic supply. 2) If MC rises rapidly, would the supply be more or less elastic? nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The World Copper Industry (1999) Country Annual Production (thousand metric tons) Australia Canada Chile Indonesia Peru Poland Russia United States Zambia Marginal Cost (dollars/pound) 600 710 3660 750 450 420 450 1850 280 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] 0.65 0.75 0.50 0.55 0.70 0.80 0.50 0.70 0.55 The Short-Run World Supply of Copper Price ($ per pound) 0.90 MCPo 0.80 MCCa 0.70 MCA 0.60 MCP,MCUS MCJ,MCZ MCC,MCR 0.50 0.40 0 2000 4000 6000 8000 Production (thousand metric tons) nuhfil hanani : web site : www.nuhfil.com, email : [email protected] 10000 The Short-Run Market Supply Curve 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Producer Surplus for a Firm Price ($ per unit of output) At q* MC = MR. Between 0 and q , MR > MC for all units. Producer Surplus MC AVC B A D 0 P C q* Alternatively, VC is the sum of MC or ODCq* . R is P x q* or OABq*. Producer surplus = R - VC or ABCD. Output nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Short-Run Market Supply Curve Producer Surplus in the Short-Run Producer Surplus PS R - VC Profit - R - VC - FC nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Short-Run Market Supply Curve Observation – Short-run with positive fixed cost PS nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Producer Surplus for a Market Price ($ per unit of output) S Market producer surplus is the difference between P* and S from 0 to Q*. P* Producer Surplus D Q* Output nuhfil hanani : web site : www.nuhfil.com, email : [email protected] 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Output Choice in the Long Run Price ($ per unit of output) In the long run, the plant size will be increased and output increased to q3. Long-run profit, EFGD > short run profit ABCD. LMC LAC SMC D SAC A E $40 C G P = MR B F $30 In the short run, the firm is faced with fixed inputs. P = $40 > ATC. Profit is equal to ABCD. q1 q2 q3 Output nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Output Choice in the Long Run Price ($ per unit of output) Question: Is the producer making a profit after increased output lowers the price to $30? LMC LAC SMC D SAC A E $40 C G P = MR B F $30 q1 q2 q3 Output nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Choosing Output in the Long Run Accounting Profit & Economic Profit ( ) = R - wL – Accounting profit – Economic profit( ) = R = wL - rK wl = labor cost rk = opportunity cost of capital nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Choosing Output in the Long Run Long-Run Competitive Equilibrium 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 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] – Choosing Output in the Long Run Long-Run Competitive Equilibrium 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Long-Run Competitive Equilibrium •Profit attracts firms •Supply increases until profit = 0 $ per unit of output $ per unit of output Firm Industry S1 LMC $40 LAC $30 P1 S2 P2 D q2 Output Q1 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Q2 Output Choosing Output in the Long Run Long-Run Competitive Equilibrium 1) MC = MR 2) P = LAC No incentive to leave or enter Profit =0 3) Equilibrium Market Price nuhfil hanani : web site : www.nuhfil.com, email : [email protected] 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? nuhfil hanani : web site : www.nuhfil.com, email : [email protected] 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] 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 nuhfilincrease hanani : web site : www.nuhfil.com, email : [email protected] will the price of A’s land 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 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Firms Earn Zero Profit in Long-Run Equilibrium Ticket Price LMC LAC A baseball team in a moderate-sized city sells enough tickets so that price is equal to marginal and average cost (profit = 0). $7 1.0 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Season Tickets Sales (millions) Firms Earn Zero Profit in Long-Run Equilibrium Ticket Price Economic Rent LMC LAC $10 $7 A team with the same cost in a larger city sells tickets for $10. 1.3 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Season Tickets Sales (millions) Firms Earn Zero Profit in Long-Run Equilibrium 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Firms Earn Zero Profit in Long-Run Equilibrium If the opportunity cost of the input (rent) is not taken into consideration it may appear that economic profits exist in the long-run. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Industry’s Long-Run Supply Curve 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Industry’s Long-Run Supply Curve 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Industry’s Long-Run Supply Curve To determine long-run supply, we assume: – The market for inputs does not change with expansions and contractions of the industry. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Long-Run Supply in a Constant-Cost Industry $ per unit of output Economic profits attract new firms. Supply increases to S2 and the market returns to long-run equilibrium. MC $ per unit of output Q1 increase to Q2. Long-run supply = SL = LRAC. Change in output has no impact on input cost. S1 AC P2 S2 C P2 A P1 B SL P1 D1 q1 q2 Output Q1 Q2 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] D2 Output Long-Run Supply in a Constant-Cost Industry 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Long-Run Supply in an Increasing-Cost Industry $ per unit of output SMC2 LAC2 $ per unit of output Due to the increase in input prices, long-run equilibrium occurs at a higher price. S1 S2 LAC1 P2 P2 P3 P3 P1 P1 B A D1 q1 SL SMC1 q2 Output Q1 Q2 Q3 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] D1 Output Long-Run Supply in a Increasing-Cost Industry In a increasing-cost industry, longrun supply curve is upward sloping. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Industry’s Long-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? nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Long-Run Supply in an Decreasing-Cost Industry $ per unit of output Due to the decrease in input prices, long-run equilibrium occurs at a lower price. $ per unit of output S1 S2 SMC1 SMC2 LAC1 P2 P2 LAC2 P1 P1 P3 P3 A B SL D1 q1 q2 Output Q1 Q2 Q3 nuhfil hanani : web site : www.nuhfil.com, email : [email protected] D2 Output Long-Run Supply in a Increasing-Cost Industry In a decreasing-cost industry, longrun supply curve is downward sloping. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Industry’s Long-Run Supply Curve 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Effect of an Output Tax on a Competitive Firm’s Output Price ($ per unit of output) MC2 = MC1 + tax The firm will reduce output to the point at which the marginal cost plus the tax equals the price. MC1 An output tax raises the firm’s marginal cost by the amount of the tax. t P1 AVC2 AVC1 q2 q1 Output nuhfil hanani : web site : www.nuhfil.com, email : [email protected] Effect of an Output Tax on Industry Output Price ($ per unit of output) S2 = S1 + t S1 t P2 Tax shifts S1 to S2 and output falls to Q2. Price increases to P2. P1 D Q2 Q1 Output nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Industry’s Long-Run Supply Curve Long-Run Elasticity of Supply 1) Constant-cost industry Long-run supply is horizontal Small increase in price will induce an extremely large output increase nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Industry’s Long-Run Supply Curve Long-Run Elasticity of Supply 1) Constant-cost industry Long-run supply elasticity is infinitely large Inputs would be readily available nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Industry’s Long-Run Supply Curve Long-Run Elasticity of Supply 2) Increasing-cost industry Long-run supply is upwardsloping and elasticity is positive The slope (elasticity) will depend on the rate of increase in input cost nuhfil Long-run elasticity will generally hanani : web site : www.nuhfil.com, email : [email protected] The Industry’s Long-Run Supply Curve Question: – Describe the long-run elasticity of supply in a decreasing -cost industry. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Long-Run Supply of Housing Scenario 1: Owner-occupied housing – Suburban or rural areas – National market for inputs nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Long-Run Supply of Housing Questions Is this an increasing or a constantcost industry? – What would you predict about the elasticity of supply? – nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Long-Run Supply of Housing Scenario 2: Rental property – Zoning restrictions apply – Urban location – High-rise construction cost nuhfil hanani : web site : www.nuhfil.com, email : [email protected] The Long-Run Supply of Housing Questions Is this an increasing or a constantcost industry? – What would you predict about the elasticity of supply? – nuhfil hanani : web site : www.nuhfil.com, email : [email protected] 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] 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 profitmaximizing output. Economic rent is the payment for a scarce resource of production less the minimum amount necessary to hire that factor. nuhfil hanani : web site : www.nuhfil.com, email : [email protected] 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. nuhfil hanani : web site : www.nuhfil.com, email : [email protected]