Profit Maximization under Perfect Competition
Yes!
If MC > MR, they have already found too many mangoes for the day.
Phillip sells mangoes in a large city, operating in a highly competitive market.
Every day his small group of employees go and gather mangoes from trees outside the city, and one employee stands at the booth ready to sell what is found.
To summarize:
[[summary]]
Phillip faces a perfectly elastic demand curve at a price dictated by the market, of course.
Since this is the demand curve Phillip faces, think about his marginal revenue for a moment. Every time that Phillip sells a mango, what do you think his marginal revenue (MR) will be?
Absolutely!
The price is the same whether he sells one mango or 100. So every time he sells a mango, he gets the same market price. So for perfectly competitive firms, P = MR.
No, that would be the case for a downward-sloping demand curve, but not for a perfectly elastic demand curve.
No, the costs facing the firm are a separate issue; they don't affect marginal revenue at all. Just think about what he can expect when selling one more mango.
Once you then add in his marginal cost curve, which probably looks like a lot of other marginal cost curves, you'll have this:
How might you justify an upward-sloping marginal cost curve for Phillip's mango business?
No, marginal cost isn't the same as average total costs; this statement refers to ATC declining, not MC increasing.
No, recall that Phillip is operating as a perfect competitor. He can't choose price, and price is separate from costs anyway.
Exactly!
The harder they have to look, the higher cost _does_ go for each mango. Time is money.
Profit maximization occurs where marginal revenue equals marginal cost, so every firm will want to find that point of MR = MC. For Phillip, what would you recommend he should do if he finds that MC > MR?
No, Phillip has no market power and can't choose price.
No, think about the fact that marginal cost is an increasing function of quantity. If his team finds more mangoes, these mangoes will also cost more than what he will receive when he sells them.
Of course, that can change if something changes in the market. For example, perhaps demand for mangoes will increase. That will raise the market price and shift that horizontal demand curve facing Phillip upwards. Then his optimal quantity will be larger.
Also, notice that profit maximization is the same as loss minimization. If Phillip's average total cost (ATC) curve is above the market price, he'll earn a loss; there's no way around that. But at least choosing the optimal quantity will minimize this loss, which is the same thing as maximizing a negative profit.
Same idea at the end of the day: MR = MC.
The market price
Something below the market price
It depends on the cost curves facing the firm at his output level.
At a higher level of output, total costs are divided by a larger number of mangoes.
As more and more mangoes are sold, Phillip will decide to charge higher and higher prices.
As Phillip's employees go out to get more and more mangoes, they have to look harder and travel farther.
Increase price
Find more mangoes
Find fewer mangoes
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