Profit Maximizing and Loss Minimizing for a Perfect Competition
For a Perfect Competition in the short-run, there are a few possibilities concerning profit and loss. Because it has both variable and fixed costs, profit, loss, and break even points are all potentially feasible. The supply for a short-run competitive firm can be found in the part of the MC curve ABOVE the AVC curve. This is depicted below.
Perfect Competition is a price taker, so it can only maximize economic profit (minimize loss) by adjusting output. Fixed costs are unable to be changed, due to the fact that they are constant and must be taken into account at all times. Variable costs, however, are always subject to change and can be adjusted by the firm at any time. There are two ways to decide what to change and still maximize profits. Each firm must compare the Marginal Revenue (MR) and the Marginal Cost (MC). This is known as the MR=MC Rule. The rule states that a firm will seek to adjust output until marginal revenue is equal to marginal cost. It can also be written as P=MC, but only in a pure competition and is only applicable if production is preferable to shutting down. The alternative to this rule is the TR=TC. Total revenue (TR) is the total number of dollars recieved by a firm from the sale of a product. Total cost (TC) is defined as the sum of total fixed cost (TFC) and total variable cost (TVC).
Profit Maximizing and Loss Minimizing for a Monopolistic Competition
In the long-run, it is always impossible to make any profits, however, for a Monopolistic Competition in the short-run, making and maximizing profits is a realistic goal. Monopolistic competition is a unit of market that focuses on product differentiation.
When looking at the graph above, it is important to notice that the demand (D) is slanted down and toward the right. This is because in a monopolistic competition, if price (P) increases, then demand will decrease. Once that is understood, the next part involves a process. For the short-run, one can use the step-by-step instructions for finding the profit/loss rectangle (PCAB) for a monopolistic competition. The steps are as follows:
1. Find the place where MR=MC (profits are maximized).
2. Find price - go up to demand curve and hang a left.
3. Go up or down to ATC and hang a left.
- If P > ATC = Profit
- If P < ATC = Loss
4. Find value of profit/loss:
(P1-ATC) x Q1 = profit/loss
Finally, to calculate the value of profit/loss, one must subtract the value of ATC from P1.
P1-ATC = n
Then, take the difference (n) and multiply it by the value of output directly below the point where MR and MC meet.
n x Q1 = profit/loss
1. Find the place where MR=MC (profits are maximized).
2. Find price - go up to demand curve and hang a left.
3. Go up or down to ATC and hang a left.
- If P > ATC = Profit
- If P < ATC = Loss
4. Find value of profit/loss:
(P1-ATC) x Q1 = profit/loss
Finally, to calculate the value of profit/loss, one must subtract the value of ATC from P1.
P1-ATC = n
Then, take the difference (n) and multiply it by the value of output directly below the point where MR and MC meet.
n x Q1 = profit/loss
Profit Maximizing and Loss Minimizing for an Oligopoly
Oligopolists utilize a certain tactic known as Game Theory, or Nash Equilibrium. It is a tool that allows economists to study decision making.
This image is a depiction of Game Theory. It shows how Bonnie's and Clyde's decisions will ultimately result using the only options presented to them. If these two indiviuals were replaced by firms, this would be known as a Duopoly, which, by definition, is simply an oligopoly with only two firms, each known as a duopolist. By looking at the chart, one can determine that the two are convicted of crime and that they have the choice of confessing or remaing silent. In order to make their decision, they have to assume what the other will choose to do. If both Bonnie and Clyde decide to confess, they will each recieve a 8 years in prison, but if they both remain silent, they will only get 1 year. If Bonnie remains silent and Clyde Confesses, Bonnie will get 20 years and Clyde will go free. The reverse is true if Clyde remains silent and Bonnie confesses. The tricky part about this is that in the real world, neither party knows the options. Neither Bonnie nor Clyde would have the luxury of seeing this chart to make their decision and as a result, they would rat each other out. Both parties would recieve eight years, because they are playing to their dominant strategies, the strategies that will earn each person a larger payoff than any other option/strategy. They would have no idea that if they stayed silent, they would only experience a single year in jail as opposed to running the risk of getting 8, or even 20.
This is the way that oligopolies work. Any branch of market structure will seek to maximize profits and some will succeed. However, they all have different methods and this is just one of them.
This is the way that oligopolies work. Any branch of market structure will seek to maximize profits and some will succeed. However, they all have different methods and this is just one of them.
Profit Maximizing and Loss Minimizing for a Monopoly
Monopolies, like Perfect Competition, use the MR=MC rule to maximize profit in the short-run. This is shown in the graph below.
The MR=MC rule is pretty self-explainatory. It states that the maximum profit/minimum loss will occur where MR=MC. The steps to finding economic profit/loss are the same as the ones located above this section in the Profit Maximization and Loss Minimization for a Monopolistic Competition section.
The last graph showed what economic profit looks like, where average total cost (ATC) is below the demand (D) curve. The difference in economic profit and economic loss is that loss is presented when ATC exceeds D. This difference is shown in the graph below.
The last graph showed what economic profit looks like, where average total cost (ATC) is below the demand (D) curve. The difference in economic profit and economic loss is that loss is presented when ATC exceeds D. This difference is shown in the graph below.
One can clearly see that ATC is above the demand curve in this graph. This, as stated before, results in economic loss in a Monopoly.
Monopolistic firms, like all other firms, look to maximize profits and minimize losses. They do this by producing a quantity of output that maximizes profits. This amount is found at the point where total revenue (TR) and total cost (TC) are farthest apart on the graph.
Although each market structure has its own way of achieving profit maximization and loss minimization, they are all very similar in their methods. No matter their situation, they all seek to have some profitable outcome.
Monopolistic firms, like all other firms, look to maximize profits and minimize losses. They do this by producing a quantity of output that maximizes profits. This amount is found at the point where total revenue (TR) and total cost (TC) are farthest apart on the graph.
Although each market structure has its own way of achieving profit maximization and loss minimization, they are all very similar in their methods. No matter their situation, they all seek to have some profitable outcome.
