Tài liệu Microeconomics for MBAs 37 docx

Chapter 11 Firm Production under Idealized

Competitive Conditions

cost curve) than it receives in additional revenue (as indicated by the demand curve, which

beyond q2 is below the MC curve).

At q2 (and anywhere else), the firm’s profit equals total revenue minus total cost (TR

– TC). To find total revenue, we multiply the price, P1 (which also equals average revenue)

by the quantity produced, q2 (TR = P1q2). Graphically, total revenue is equal to the area of

the rectangle bounded by the price and quantity, or 0P1aq2.

Similarly, total cost can be found by multiplying the average total cost of production

(ATC) by the quantity produced. The ATC curve shows us that the average total cost of

producing q2 computer chips is ATC1. Therefore total cost is ATC1q2, or the rectangular area

bounded by 0ATC1bq2. The profits of the company are therefore P1q2 – ATC1q2, which is the

same, mathematically, as q2(P1 – ATC1). This quantity corresponds to the area representing

total revenue, OP1aq2, minus the area representing total cost, 0ATC1bq2. Profit is the shaded

rectangle bounded by ATC1P1ab.

FIGURE 11.5 The Profit-Maximizing Perfect Competitor

The perfect competitor’s demand curve is established by the market-clearing price [part (a)]. The

profit-maximizing perfect competitor will extend production up to the point where marginal cost

equals marginal revenue (price), or point a in part (b). At that output level—q2—the firm will earn a

short-run economic profit equal to the shaded area ATC1P1ab. If the perfect competitor were to

minimize average total cost, it would produce only q1, losing profits equal to the darker shaded area

dca in the process.

The perfect competitor does not seek to produce the quantity that results in the lowest

average total cost. That quantity, q1, is defined by the intersection of the marginal cost curve

and the average total cost curve. If it produced only q1, the firm would lose out on some of

its profits, shown by the darker shaded area dca. (Suppose the firm is producing at q1. If it

expands production to q2, it will generate P1 times q2 – q1 in extra revenue (price times the

additional units sold), an amount represented graphically by the area q1daq2.)