Bài giảng Managerial Economics - Chapter 011: Managerial Decisions in Competitive Markets

Chapter 11: Managerial Decisions in Competitive MarketsMcGraw-Hill/IrwinCopyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.Perfect CompetitionFirms are price-takersEach produces only a very small portion of total market or industry outputAll firms produce a homogeneous productEntry into & exit from the market is unrestrictedDemand for a Competitive Price-TakerDemand curve is horizontal at price determined by intersection of market demand & supplyPerfectly elasticMarginal revenue equals priceDemand curve is also marginal revenue curve (D = MR)Can sell all they want at the market priceEach additional unit of sales adds to total revenue an amount equal to priceDemand for a Competitive Price-Taking Firm (Figure 11.2)DSQuantityPrice (dollars)QuantityPrice (dollars)P0Q0Panel A – MarketPanel B – Demand curve facing a price-taker00P0D = MRProfit-Maximization in the Short RunIn the short run, managers must make two decisions:Produce or shut down?If shut down, produce no output and hires no variable inputsIf shut down, firm loses amount equal to TFCIf produce, what is the optimal output level?If firm does produce, then how much?Produce amount that maximizes economic profitProfit = π = TR - TCIn the short run, the firm incurs costs that are:Unavoidable and must be paid even if output is zeroVariable costs that are avoidable if the firm chooses to shut downIn making the decision to produce or shut down, the firm considers only the (avoidable) variable costs & ignores fixed costsProfit-Maximization in the Short RunProfit Margin (or Average Profit)Level of output that maximizes total profit occurs at a higher level than the output that maximizes profit margin (& average profit)Managers should ignore profit margin (average profit) when making optimal decisionsShort-Run Output DecisionFirm will produce output where P = SMC as long as:Total revenue ≥ total avoidable cost or total variable cost (TR  TVC)Equivalently, the firm should produce if P  AVCShort-Run Output DecisionThe firm will shut down if:Total revenue cannot cover total avoidable cost (TR < TVC) or, equivalently, P  AVCProduce zero outputLose only total fixed costsShutdown price is minimum AVCFixed, Sunk,& Average CostsFixed, sunk, & average costs are irrelevant in the production decisionFixed costs have no effect on marginal cost or minimum average variable cost—thus optimal level of output is unaffectedSunk costs are forever unrecoverable and cannot affect current or future decisionsOnly marginal costs, not average costs, matter for the optimal level of outputProfit Maximization: P = $36 (Figure 11.3)Profit Maximization: P = $36 (Figure 11.3)Panel A: Total revenue & total costPanel B: Profit curve when P = $36Profit Maximization: P = $36 (Figure 11.4)Break-even pointBreak-even pointShort-Run Loss Minimization: P = $10.50 (Figure 11.5)Total revenue = $10.50 x 300 = $3,150Profit = $3,150 - $5,100 = -$1,950Summary of Short-Run Output DecisionAVC tells whether to produceShut down if price falls below minimum AVCSMC tells how much to produceIf P  minimum AVC, produce output at which P = SMCATC tells how much profit/loss if produce π = (P – ATC)QShort-Run Supply CurvesFor an individual price-taking firmPortion of firm’s marginal cost curve above minimum AVCFor prices below minimum AVC, quantity supplied is zeroFor a competitive industryHorizontal sum of supply curves of all individual firms; always upward slopingSupply prices give marginal costs of production for every firmShort-Run Producer SurplusShort-run producer surplus is the amount by which TR exceeds TVCThe area above the short-run supply curve that is below market price over the range of output suppliedExceeds economic profit by the amount of TFCComputing Short-Run Producer Surplus (Figure 11.6)Short-Run Firm & Industry Supply (Figure 11.6)Long-Run Competitive EquilibriumAll firms are in profit-maximizing equilibrium (P = LMC)Occurs because of entry/exit of firms in/out of industryMarket adjusts so P = LMC = LACLong-Run CostFigure 10.8 illustrates economies and diseconomies of scale.Long-Run Profit-Maximizing Equilibrium (Figure 11.7)Profit = ($17 - $12) x 240 = $1,200Long-Run Competitive Equilibrium (Figure 11.8)Long-Run Industry SupplyLong-run industry supply curve can be flat (perfectly elastic) or upward slopingDepends on whether constant cost industry or increasing cost industryEconomic profit is zero for all points on the long-run industry supply curve for both types of industriesConstant cost industryAs industry output expands, input prices remain constant, & minimum LAC is unchangedP = minimum LAC, so curve is horizontal (perfectly elastic)Increasing cost industryAs industry output expands, input prices rise, & minimum LAC risesLong-run supply price rises & curve is upward slopingLong-Run Industry SupplyLong-Run Industry Supply for a Constant Cost Industry (Figure 11.9)Long-Run Industry Supply for an Increasing Cost Industry (Figure 11.10)Firm’s outputEconomic RentPayment to the owner of a scarce, superior resource in excess of the resource’s opportunity costIn long-run competitive equilibrium firms that employ such resources earn zero economic profitPotential economic profit is paid to the resource as economic rentIn increasing cost industries, all long-run producer surplus is paid to resource suppliers as economic rentEconomic Rent in Long-Run Competitive Equilibrium (Figure 11.11)Profit-Maximizing Input UsageProfit-maximizing level of input usage produces exactly that level of output that maximizes profitMarginal revenue product (MRP)MRP of an additional unit of a variable input is the additional revenue from hiring one more unit of the inputIf choose to produce:If the MRP of an additional unit of input is greater than the price of input, that unit should be hiredEmploy amount of input where MRP = input priceProfit-Maximizing Input UsageAverage revenue product (ARP)Average revenue per workerShut down in short run if ARP < MRPWhen ARP < MRP, TR < TVCProfit-Maximizing Input UsageProfit-Maximizing Input UsageHire workers (L*) until MRP = wAt L* TVC = L* wAt L* TR = ARP * L* Profit-Maximizing Labor Usage (Figure 11.12)Profit-Maximizing Labor Usage (Figure 11.12)Implementing the Profit-Maximizing Output DecisionStep 1: Forecast product priceUse statistical techniques from Chapter 7Step 2: Estimate AVC & SMCAVC = a + bQ + cQ2TVC = Q(a + bQ + cQ2)SMC = a + 2bQ + 3cQ2Step 3: Check shutdown ruleIf P  AVCmin then produceIf P < AVCmin then shut downTo find AVCmin substitute Qmin into AVC equationImplementing the Profit-Maximizing Output DecisionProof of AVC MinStep 4: If P  AVCmin, find output where P = SMCSet forecasted price equal to estimated marginal cost & solve for Q*Implementing the Profit-Maximizing Output DecisionP = SMCP = a + 2bQ* + 3cQ*211-40Implementing the Profit-Maximizing Output DecisionStep 4: If P  AVCmin, find output where P = SMCSet forecasted price equal to estimated marginal cost & solve for Q*Step 5: Compute profit or lossProfit = TR – TC = P x Q* - AVC x Q* - TFC = (P – AVC)Q* - TFCIf P < AVCmin, firm shuts down & profit is -TFCImplementing the Profit-Maximizing Output DecisionProfit & Loss at Beau Apparel (Figure 11.13)Profit & Loss at Beau Apparel (Figure 11.13)