CH 10 : Output and Costs CH 12 : Perfect Competition

1. CH 10 : Output and Costs CH 12 : Perfect Competition

2. After studying this chapters, you will able to: 1- Distinguish between the short run and the long run. 2- Explain the firm’s costs and its relationship with the firm’s output in short run. 3- define perfect competition. 4- Explain how a firm makes it’s output decision in a perfectly competitive market . 5- Explain why the firm temporarily shutdown in a perfectly competitive market .

3. 1- The firm makes decisions in two time frames The short term The long term The quantity of one or more The quantities of all resources resources used in production can be varied. Ex: even the is fixed. Ex : plant size . Plant size can be varied

4. 2- The firm’s costs in short run : A- Total cost “ TC” Total fixed cost “ TFC” + Total variable cost “ TVC” Don’t change at all when level increases as output increases of Output change Ex: Rent Ex : cost of raw material If the firm’s output= 0, TFC If firm’s output = 0, TVC= 0 Must be paid

5. 30

6. B - Average Total cost “ ATC “ Average total fixed cost “ATFC “ + Average total variable cost “ATVC” TFC TVC Q Q (As output increases ,ATFC decreases (As output increases , ATVC decreases because TFC is constant and dividing to a minimum and then increases ) it by Increasing output decrease ATFC)

7. A Numerical Example : C- Marginal cost (MC)is the additional cost that results from producing an additional unit of the product. Or the increase in total cost that results from producing an additional unit of the product.

8. 3- perfect competition is a market in which : A- Many firms sell identical products to many buyers. B- There are no restrictions to entry into the industry. (ex of perfect competition is Tomatoes market) C- Established firms have no advantages over new ones. D- Sellers and buyers ar well informed about prices. *** In perfect competitioneach firm isa price takerwhich means that the firm cann’t influence the price; it must take the equilibrium market price. HERE price (p) =Marginal Revenue ( MR) &total revenue (TR )= Q x p =p

9. 4- The firm’s output decision : A firm in a perfectly competitive market chooses the output that maximizes its economic profit. ***There are two ways to find the profit-maximizing output : A- look at the firm’s total revenue and total cost curves: • Figure a show TR & TC curves • Figure b shows economic profit = TR-TC • At low output levels, the firm incurs An economic loss —it can’t cover its fixed costs ( TC > TR) . • At intermediate output levels, the firm makes an Economic profit & it maximizes it’s economic profit When producing 9 units ( TR > TC) . • At high output levels, thee firm again incurs an economic loss ( TC > TR) .

10. B - Use Marginal analysis to determine the profit-maximizing output: • Because marginal revenue is constant and marginal cost eventually increases as output increases , profit is maximized by producing the output at which MR=MC.

11. 5- Temporary shutdown decision : * Economic loss = TC - TR = TFC + TVC - TR = TFC + (ATVC X Q) - (P X Q) = TFC + (ATVC – P) Q. • If the firm shuts down, Q is 0 and economic loss equal to TFC. This economic loss is the largest that the firm must bear. * The shutdown point is the price and quantity where revenues Just cover variable costs and economic loss=TFC and this happens if the firm find that P(MR) = minimum ATVC .at this Point the firm is indifferent between producing and Shutting down temporarily.

12. Note : when Q = 0,, The firm must pay TFC So when Q= 0 ,TC = TFC. • The firm maximize profit : at highest profit (π = TR – TC) Or when MC= MR • The firm will take temporary shut down decision if it find that p (MR )= minimum AVC ..if this doesn't happened then the firm shouldn’t take shutdown decision. • There is anther way to find whether the firm should temporarily shut down or not ,,if MR =MC and at the same time = AVC so it would temporarily shut down & if MR = MC = AVC, then the firm shouldn’t shutdown.

13. Numerical Example

14. Q1 : Jebo. H.S is a perfectly competitive firm that makes & markets medications , using the data in this table, answer the following : • Calculate the TVC, TFC, ATVC, ATFC ,MC, MR , TR and total profit • Find at what price-output combination is total profit maximized? At what price-output combination is total revenue maximized. using TR & TC analysis with graphs • Find at what price-output combination is total profit maximized?. using Marginal analysis with graphs • Help the owner of the firm to decide whether to continue in the business or take a temporarily shut down decision

15. The Solution : 1-

16. 2- The maximum profit is 2000 and this achieved at Q = 4000 and p =14 The maximum revenue is 70000 and this is achieved when the firm produces 5000 and p = 14 The firm produce the Q that maximize it’s profit = 4000 units. THEN use excel to draw the graph :

17. 3- The profit is maximized when MR = MC. we will find the schedule as following : At Q 4000 MR = 14 & MC = 13 At Q 5000 MR = 14& MC = 15 So MR= MC at quantity lies between 4000& 5000 So the firm maximizes profit at Q lies between 4000 and 5000 and p = 14 Then use Excel to draw graphs :

18. 4- The firm will take temporary shut down decision if it find that p = minimum AVC ..and this isn't the case for jebo. H.S company as minimum ATVC = 10 & P(MR) = 14 SO P isn’t = minimum AVC So the firm shouldn’t take the decision of temporarily shutdown. Then using EXCEL to draw graphs :

19. Note : CH 3 : supply and demand : Why does the supply curve slope upward? the higher the price of a good, the greater is the quantity supplied &that’s because the marginal costs increases which result from opportunity cost increases as Q increases.. It is never worth producing a good if P recieved by the good dosn´t at least cover MC.. when the price of the good rises,other things remaining the same , producers are willing to incur a higher MC so they increase production.The higher the price brings forth an increase in quantity supplied.