14. A firms profit is the subs
traction of total revenue and
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total cost .
Revenue
Revenue is the income that a
business receives, total
revenue would be formulated
by price times quantity .
Profit
16. Profit maximization for a competitive firm
In classical economics it is assumed that firms will seek to maximize their
profits. This occurs when the difference between TR – TC is the greatest.
Profit maximization will also occur at an output where MR = MC
When MR> MC the firms is increasing its profits and Total Profit is increasing.
When MR< MC total profit starts to fall
Therefore profit is maximized where MR = MC
17. 2. What is meant by a
competitive firm?
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18. A competitive firm is a firm in a competitive market in
which .
There are many buyers and sellers.
Many sellers offer the identical goods or
service .
Firm can easily enter into or exit from the
market .
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19.
20. 3. Under what conditions will a
firm shut down temporarily ?
EXPLAIN.
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21. Conditions which makes a firm
shut down temporarily
A firm will shut down temporarily if the revenue it would
get from producing is lower than the variable costs of
production. This occurs if price is less than average total
cost.
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22. So now we will see some conditions, under which firms shut
down temporarily.
Conditions 1:
If the variable cost
is greater than the
total revenue of a
firm.
Condition 2 :
If the average variable
cost is greater than the
average revenue of a
firm .
Condition 3:
And if the price is less
than average variable ,
the firm will shut down
temporarily
TR< VC TR/Q < VC/Q P < AVC
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23.
24. 4.Draw the cost for a typical firm. For
a given price , explain how the firm
choose the level of output that
maximizes profit. At that level of
output , show on your graph firm’s
total revenue and total cost .
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25. We can see the certain level of
output will maximize the profit.
• If the price is equal to the
marginal cost .
• Price exceeds average
variable cost (in the short run)
.
• The price exceeds average
total cost (in the long run).
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Figure 1 shows the cost
curves for a typical firm.
26. 5. DOES A FIRM PRICE EQUAL MARGINAL COST IN THE
SHORT RUN , IN THE LONG RUN , OR BOTH ?
A firms price equals marginal cost in both the short run and the long
run. In both the short run and long run, price equals marginal revenue.
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27.
28. 6.Under what conditions will a firm
exit a market ? Explain .
Basically a firm exits a market if the revenue it get
from producing is less then the production cost.
Under same condition , a firm exits a market . Now
lets see it.
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29. • If the total cost is greater than total revenue.
Condition: 1
• If the average revenue is less than
average cost.
Condition: 2
• And the price is less than the average total
cost , the firm will exit.
Condition: 3
TR<TC
TR/Q < TC/Q
T < ATC
30.
31. 7.Does a firm’s price must equal the
minimum of average total cost in the short
run , in the long run, or both? Explain.
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32. The firm’s price must equal the minimum
of average total cost only in the long
run.
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In the
short run,
there can
be 3 kinds
of effects:
1. Price may be greater than average total cost. In
this case the firm is making profit.
2. Price may be less than average total cost. In this
case the firm is making loss.
3. Price may be equal to the average total cost. In this
case the firm is neither making loss nor profit.
33. In the long run, there can be
two types of effects:
1 2
If the firms are making profits, other firms
will enter the industry and the quantity
supplied will increase. This will lower the
price of the good. Which is unwanted.
If firms are making losses, firms will exit
from the market and the quantity
supplied will fall, which will cause the
price to rise. This is also unwanted.
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34. Entry or exit continues
until firms are in a break
even point in the long
run. At that point, we
can say that price
equals average total
cost in the long run.
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35. 8. Are Market supply curves typically more
elastic in the short run or in the long run?
Explain.
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36. Market supply curves are typically more
elastic in the long run than in the short run.
If the average cost is not equal to the price, the entry to the market
and exit from the market becomes more frequent in a competitive
market. So usually quantity supplied is more responsive to changes in
price in the long run.
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