MIS, FBS, University of Dhaka

MIS, FBS, University of Dhaka

Presented by

Stardust 1

Muhammad Muhyminul Islam

Id : 09-051

MIS, FBS, University of Dhaka

Stardust 2

Sumaiya Siddiqua

Id :09-011

Stardust 3

Tanjina sultana Tania

Id : 09-113

Stardust 4

Azmery Sultana

Id : 09-041

MIS, FBS, University of Dhaka

Stardust 5

Rahman romel

Id : 09-053

Stardust 6

Iffat Zahan Imi

Id: 09-013

MIS, FBS, University of Dhaka

MIS, FBS, University of Dhaka

A firms profit is the subs

traction of total revenue and

total cost .

Revenue is the income that a

business receives, total

revenue would be formulated

by price times quantity .

Revenue

Profit

MIS, FBS, University of Dhaka

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

2. What is meant by a competitive firm?

MIS, FBS, University of Dhaka

MIS, FBS, University of Dhaka

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 .

3. Under what conditions will a

firm shut down temporarily ?

EXPLAIN.

MIS, FBS, University of Dhaka

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.

MIS, FBS, University of Dhaka

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

MIS, FBS, University of Dhaka

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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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).

MIS, FBS, University of Dhaka

Figure 1 shows the cost

curves for a typical firm.

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.

MIS, FBS, University of Dhaka

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.

MIS, FBS, University of Dhaka

• 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

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.

MIS, FBS, University of Dhaka

The firm’s price must equal the minimum

of average total cost only in the long

run.

MIS, FBS, University of Dhaka

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.

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.

MIS, FBS, University of Dhaka

1 2

In the long run, there can be

two types of effects:

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.

MIS, FBS, University of Dhaka

8. Are Market supply curves typically more

elastic in the short run or in the long run?

Explain.

MIS, FBS, University of Dhaka

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.

MIS, FBS, University of Dhaka