Economic strategies of the firm at P- Competition

How much output should firm sell, at the given price to maximize profits. The answer is: increase output until P=MR=MC

Now we will use this rule as a basic rule to consider the firm economic strategies.

In the picture just shown, the firm is making an "economic profit." All costs, explicit and implicit, are included in the firm's Average Cost curve.

Profitableness and losses conditions for perfect competitor according to MRMC-model:

a firm has profit under:

break-even point

break-even condition is:

losses minimization condition through production continuance:

losses minimization condition through temporary dissolution of the firm: – dissolution bundle.

Figure 6. Firm’s reaction on price change

In other words if the cost of and additional unit (MC) is less than the revenue obtained from that same additional unit (MR), producing the additional units will add to profits (or reduce losses). If the cost of additional units of output (MC) cost more than they add to revenue (MR), the firm should not produce the additional units. The rules for profit maximization are simple:

• MR >MC – produce it!

• MR < MC – don’t produce it!

• When MR = MC – you are earning maximum profits!

MR=MC is the main principle of supply for the individual firm. Supply is the relation between the price and the quantity that people want to sell. For an individual firm, that is: the relation between the price and the quantity the firm wants to sell. So we ask: at a given price, how much will a (profit- maximizing) firm want to sell? The answer: enough so that the price is equal to marginal cost. In other words, the marginal cost curve is the supply curve for the individual firm.

Дата добавления: 2014-01-11