A summary of finding profit Perfect Competition, Monopolistic Competition, Monopoly

profit maximizing quantity, this firm is earning profits Determining Profits Graphically Perfect Competition: A Firm with Profit P Find output where MC = MR, this is the profit maximizing Q MC MC = MR ATC Find profit per unit where the profit max Q intersects ATC P = D = MR P Profits AVC ATC ATC at Qprofit max Since P>ATC at the profit maximizing quantity, this firm is earning profits Q Qprofit max 14-2

profit maximizing quantity, Determining Profits Graphically for Perfect Competition A Firm with Zero Profit or Losses AVC MC Q P ATC MC = MR Qprofit max MR=D=AR = P Find output where MC = MR, this is the profit maximizing Q Find profit per unit where the profit max Q intersects ATC =ATC ATC at Qprofit max Since P=ATC at the profit maximizing quantity, this firm is earning zero profit or loss 14-3

profit maximizing quantity, this firm is earning losses Determining Profits Graphically For Perfect Competition: A Firm with Losses P Find output where MC = MR, this is the profit maximizing Q MC ATC ATC at Qprofit max Find profit per unit where the profit max Q intersects ATC AVC ATC P = D = MR Losses P Since P<ATC at the profit maximizing quantity, this firm is earning losses MC = MR Q Qprofit max 14-4

Determining Profits Graphically: Monopolistic Competition ATCBreak even Q MC D MR ATCL Profits ATCLosses Losses ATCProfits Break even ATCP A monopolistic firm can earn profits, losses, or break even in the short run Q 16-5

Determining Profits Graphically Monopoly: A Firm with Profit Find output where MC = MR, this is the profit maximizing Q P Find how much consumers will pay where the profit max Q intersects demand, this is the monopolist price MC D at Qprofit max ATC Find profit per unit where the profit max Q intersects ATC P Profits ATC ATC at Qprofit max MC = MR D Since P>ATC at the profit maximizing quantity, this firm is earning profits MR Q Qprofit max 15-6

profit maximizing quantity, Determining Profits Graphically Monopoly: A Firm with Zero Profit or Losses Find output where MC = MR, this is the profit maximizing Q P Qprofit max Q ATC =ATC MC D MC = MR D at Qprofit max MR ATC at Qprofit max Find how much consumers will pay where the profit max Q intersects demand, this is the monopolist price Find profit per unit where the profit max Q intersects ATC Since P=ATC at the profit maximizing quantity, this firm is earning zero profit or loss 15-7

Determining Profits Graphically Monopoly: A Firm with Losses Find output where MC = MR, this is the profit maximizing Q P MC Find how much consumers will pay where the profit max Q intersects demand, this is the monopolist price ATC at Qprofit max ATC ATC Losses D at Qprofit max P Find profit per unit where the profit max Q intersects ATC MC = MR D Since P<ATC at the profit maximizing quantity, this firm is earning losses MR Q Qprofit max 15-8

The Welfare Loss from a Monopoly The welfare loss from a monopoly is represented by the triangles B and D The rectangle C is a transfer of surplus from the consumer to the monopolist The area A represents the opportunity cost of diverted resources, which is not a loss to society Capture this through price discrimination (attracting consumers with more elastic demand. P MC PM C D PPC B D A MR Q QM QPC 15-9