Managing a Perfectly Competitive firm (or Price-Taking Business) Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Managing a Perfectly Competitive Firm (or Price-Taking Business)
Setting Price Market Firm Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Setting Price Firm Qf $ Df Market QM $ D S P e
Setting Output MR=MC MR=P therefore Set p=mc to maximize profits Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Setting Output: • MR = MC • MR = P, therefore • Set P = MC to maximize profits
Graphically Profit=(Pe-ATC)×Q MC ATC AVc pe=Df= MR ATC Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Graphically $ Qf ATC AVC MC P e = Df = MR Qf* ATC P e Profit = (P e - ATC) Qf*
A Numerical Example GI Iven P=$10 C(Q)=5+Q Optimal Price? P=$10 Optimal Output? MR=P=$10 and MC=2Q 10=2Q Q=5 units Maximum profits? PQ-C(Q=(10(5)-(5+25)=$20 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 A Numerical Example • Given P=$10 C(Q) = 5 + Q2 • Optimal Price? P=$10 • Optimal Output? MR = P = $10 and MC = 2Q 10 = 2Q Q = 5 units • Maximum Profits? PQ - C(Q) = (10)(5) - (5 + 25) = $20