Chapter 9 - Profit maximization in perfectly competitive markets. In this chapter students will be able to: Outline the conditions that characterize perfect competition, explain why it is appropriate to assume profit maximization on the part of firms, show why the fact that a competitive firm is a price taker implies that the demand curve for the firm is perfectly horizontal,. | MICROECONOMICS: Theory & Applications By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 12th Edition, Copyright 2015 Chapter 9: Profit Maximization in Perfectly Competitive Markets Prepared by Dr. Della Lee Sue, Marist College Learning Objectives Outline the conditions that characterize perfect competition. Explain why it is appropriate to assume profit maximization on the part of firms. Show why the fact that a competitive firm is a price taker implies that the demand curve for the firm is perfectly horizontal. Explain a competitive firm’s optimal output choice in the short run and how the firm’s shortrun supply curve may be derived through this output selection. Describe the firm’s short-run supply curve. (continued) Learning Objectives (continued) Explain how the short-run industry supply curve is derived. Define the conditions characterizing long-run competitive equilibrium. Understand how the long-run industry supply curve describes the relationship between price . | MICROECONOMICS: Theory & Applications By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 12th Edition, Copyright 2015 Chapter 9: Profit Maximization in Perfectly Competitive Markets Prepared by Dr. Della Lee Sue, Marist College Learning Objectives Outline the conditions that characterize perfect competition. Explain why it is appropriate to assume profit maximization on the part of firms. Show why the fact that a competitive firm is a price taker implies that the demand curve for the firm is perfectly horizontal. Explain a competitive firm’s optimal output choice in the short run and how the firm’s shortrun supply curve may be derived through this output selection. Describe the firm’s short-run supply curve. (continued) Learning Objectives (continued) Explain how the short-run industry supply curve is derived. Define the conditions characterizing long-run competitive equilibrium. Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction. Analyze the extent to which the competitive market model applies. Delineate the mathematics behind perfect competition. THE ASSUMPTIONS OF PERFECT COMPETITION Outline the conditions that characterize perfect competition. The Assumptions of Perfect Competition Large numbers of buyers and sellers Free entry and exit Product Homogeneity Perfect information PROFIT MAXIMIZATION Explain why it is appropriate to assume profit maximization on the part of firms. Profit Maximization Assumption: firms select an output level so as to maximize profit, defined as the difference between revenue and cost “Survivor Principle” – the observation that in competitive markets, firms that do not approximate profit-maximizing behavior fail, and that survivors are those firms that, intentionally or not, make the appropriate profit-maximizing decisions. .
