1. Unit 6 - Profit Maximization of a Purely Competitive Firm n Types of Industries We distinguish between four types of industries: 1.Pure (Perfect) Competition 2.Monopolistic Competition 3.Oligopoly 4.Monopoly Microeconomics

2. Unit 6 - Profit Maximization of a Purely Competitive Firm n Pure Competition A purely competitive industry has the following characteristics: 1.Many sellers 2.Low barriers to enter 3.Competitors’ products are identical 4.Buyers have perfect information Microeconomics

3. Unit 6 - Profit Maximization of a Purely Competitive Firm n Profit Maximization Profit = Total Revenue (TR) - Total Cost (TC) Example 1 A firm sells 100 products at $2.00 each. Its total cost is $160. What is its profit? Microeconomics

4. Unit 6 - Profit Maximization of a Purely Competitive Firm n Profit Maximization Example 1 answer Profit = TR – TC TR = P x Q = $2 x 100 = $200 Profit = $200 - $160 = $40 Microeconomics

5. Unit 6 - Profit Maximization of a Purely Competitive Firm n Marginal and Average Revenue Because one firm in pure competition is a small part of the entire market, it can supply more products to the market without significantly affecting the supply and the price. For example, if the market price is $2, then a purely competitive firm can sell 100 products at $2, 110 products at $2, or 120 products at $2. Microeconomics

6. Unit 6 - Profit Maximization of a Purely Competitive Firm n Marginal and Average Revenue Marginal revenue is the additional revenue per product. For example, if at Q = 100, TR = $200, and at Q = 110, TR = $220, then MR = $20 / 10, or $2. Average revenue is the revenue per product. If at Q = 100, TR = $200, then AR = $200 / 100, or $2. Microeconomics

7. Unit 6 - Profit Maximization of a Purely Competitive Firm n Marginal and Average Revenue Demand and revenue for a purely competitive firm, which sells a product at $2 is as follows: Microeconomics

8. Unit 6 - Profit Maximization of a Purely Competitive Firm n A Purely Competitive Firm’s Total Revenue Curve Microeconomics Quantity Price, Revenue Total Revenue 100110120 200 220 240

9. Unit 6 - Profit Maximization of a Purely Competitive Firm n A Purely Competitive Firm’s Demand, Marginal, and Average Revenue Curves Microeconomics Demand, AR, MR Quantity 2.00D = MR = AR 100110120

10. Unit 6 - Profit Maximization of a Purely Competitive Firm n A Purely Competitive Firm’s Cost and Revenue Curves Microeconomics AR, MR, Price, Costs Quantity 2.00 D = MR = AR MC ATC AVC

11. Unit 6 - Profit Maximization of a Purely Competitive Firm n The Profit-maximizing Quantity Microeconomics AR, MR, Price, Costs Quantity 2.00 D = MR = AR MC ATC AVC MR=MC Qpm

12. Unit 6 - Profit Maximization of a Purely Competitive Firm n The Profit Area Microeconomics AR, MR, Price, Costs Quantity 2.00 D = MR = AR MC ATC AVC MR=MC 100 1.80

13. Unit 6 - Profit Maximization of a Purely Competitive Firm n The Case of a Loss Microeconomics AR, MR, Price, Costs Quantity D = MR = AR MC ATC AVC QlmQlm 1.60

14. Unit 6 - Profit Maximization of a Purely Competitive Firm n The Case of a Loss and a Shut-down Microeconomics AR, MR, Price, Costs Quantity 1.20 D = MR = AR MC ATC AVC

15. Unit 6 - Profit Maximization of a Purely Competitive Firm n The Long-run Equilibrium Price and Quantity Microeconomics AR, MR, Price, Costs Quantity 1.75 D = MR = AR MC ATC AVC Qlr

16. Unit 6 - Profit Maximization of a Purely Competitive Firm n The Farming Industry Characteristics of farming industries in industrialized countries include: 1.There are many farmers. 2.There are relatively low barriers to enter the farming industry. 3.Farmers competing in the same market sell identical or nearly identical products. 4.Buyers of agricultural products have significant information about the product. Microeconomics

17. Unit 6 - Profit Maximization of a Purely Competitive Firm n The Farming Industry and Elasticity Supply of agricultural products has increased considerably during the past century. Demand for agricultural products has increased as well, but not as much supply, because:  Income inelasticity of demand for food is low.  Price elasticity of demand for food is low. Microeconomics

18. Unit 6 - Profit Maximization of a Purely Competitive Firm n The Farming Industry n Revenue (TR) of many farmers has decreased, because real prices (P) have decreased. TR = P x Q P has decreased considerably. Q (quantity sold) has increased, but less than proportionately. Microeconomics

19. Unit 6 - Profit Maximization of a Purely Competitive Firm n The Farming Industry In industrialized countries, the following programs have been implemented: 1. Price Supports 2. Acreage Restrictions 3. Target Prices 4. Direct Subsidies and Loan Programs 5. Foreign Import Restrictions Microeconomics

20. Price Per Bushel Quantity Demanded of Wheat in Hundreds $3.00 12 $5.00 10 S D 15 surplus Unit 6 - Profit Maximization of a Purely Competitive Firm Price Supports

21. Price Per Bushel Quantity Demanded of Wheat in Hundreds S1S1 $3.00 12 $6.00 10 S2S2 D Unit 6 - Profit Maximization of a Purely Competitive Firm Acreage Restrictions

22. Price Per Bushel Quantity Demanded of Wheat in Hundreds $3.00 12 $4.50 S D 15 Deficiency Payment of $4.50 - $1.50 = $3.00 $1.50 Target Prices Unit 6 - Profit Maximization of a Purely Competitive Firm

23. n Other Farm Subsidy Programs Direct subsidies and soft loans to farmers increase farmers’ incomes and raise taxes. Import restrictions support domestic farmers by restricting competition and supply. Consumers pay higher prices. Yearly cost of U.S. farm programs is approximately $20 billion. Microeconomics