James’s Page | Actuary / FirmMarket

Firm behavior and market structure

Profit

Profit = Total Revenue - Total Cost

Accounting versus economic profits; Normal profit

Zero economic profits in this situation - total revenues minus total costs, with opportunity costs included (thus, making 0 economic profits means you can't make any more doing anything different). Companies earning 0 economic profits are said to be earning normal profits, because they're earning a return equlivalent to their opportunity cost. Contrast economic profit with accounting profit, where that is calculating by total revenues minus total cost, not including the opportunity costs. Profit means economic profit throughout.

Profit maximization: MR=MC rule

See this by taking derivatives.

Perfect competition

Need 1) Many sellers; 2) standardized product; 3) firms to be price takers; 4) free entry and exit. [Price takers: sellers accept the market price as given and can sell all they want at that price.] Example: agricultural goods.

Short-run supply and shut-down decision
Firm and market behaviors in short-run and long-run equilibria
Efficiency and perfect competition
Monopoly
Sources of market power
Profit maximization
Inefficiency of monopoly
Price discrimination
Oligopoly
Interdependence, collusion, and cartels
Game theory and strategic behavior
Monopolistic competition
Product differentiation and role of advertising
Profit maximization
Short-run and long-run equilibrium
Excess capacity and inefficiency