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Chapter 6: The Role of Profit

Chapter 6: The Role of Profit. Chapter Focus. The profit-maximizing rule How businesses in each market structure maximize profits The effects of profit-maximizing behavior on consumers in each market structure

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Chapter 6: The Role of Profit

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  1. Chapter 6: The Role of Profit

  2. Chapter Focus • The profit-maximizing rule • How businesses in each market structure maximize profits • The effects of profit-maximizing behavior on consumers in each market structure • The short-run and long-run outcomes of profit-maximizing behavior natural monopolies and how governments regulate them

  3. Perfect Competition: Average Revenue: • a business's total revenue per unit of output • AR= Total Revenue (TR)/ Quantity of Output (q) Marginal Revenue: • The extra total revenue earned from an additional unit of output • Marginal Revenue (MR) = ∆TR/ ∆ q

  4. Relationship Between Revenue Conditions and Demand : • Price (P) = average revenue (AR) = marginal revenue (MR) Profit Maximization: • Profit-maximizing rule: marginal revenue (MR) = Marginal cost (MC) Breakeven Point: • The level of out put where price (or AR) equals average cost • P = AC Shutdown Point: • The level of output where price (AR) equals average variable cost • VC = TR →(AVC x q) = (p x q) → AVC = P

  5. Revenues for a perfect Competitor:

  6. Profit Maximization for a Perfect Competitor:

  7. Supply Curves for a Perfectly Competitive Business and market: Business’s supply curve: • A curve that shows the quantity of output supplied by a business at every possible price

  8. Market Supply Curve

  9. The Long Run Benefits of Perfect Competition: • Minimum-Cost Pricing: the practice of setting price where it equals minimum average cost • Marginal-Cost Pricing: the practice of setting price where it equals marginal cost

  10. Monopolistic Competition:

  11. Revenues for a Monopolistic Competitor:

  12. Oligopoly:

  13. Monopoly:

  14. Monopoly versus Perfect Competition:

  15. Regulation of Natural Monopolies:

  16. Average-Cost Pricing: the practice of setting price where it equals average cost Accounting-profit rate: a measure of a business’s profitability, calculated as its accounting profit divided by owner’s equity Fair Rate of Return: the maximum accounting-profit rate allowed for a regulated monopoly

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