University of Engineering and

Technology Lahore

Chemical Engineering Economics

Che-309
Instructor: Aamir Abbas

Introduction to economics: Firms behavior and

organization of industries
 Learning Objectives
 To get the idea of competition in market.
 To learn about revenue of competitive
market.
 To study the profit maximization for the
competitive firm.
 To get idea of monopoly in market.
 To study imperfect competition and types of
imperfectly competitive markets

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 The Meaning of Competition
 A perfectly competitive market has the
following characteristics:
 There are many buyers and sellers in the
market.
 The goods offered by the various sellers are
largely the same.
 Firms can freely enter or exit the market.

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 The Meaning of Competition
 As a result of its characteristics, the perfectly
competitive market has the following
outcomes:
 The actions ofany single buyer or seller in the
market have a negligible impact on the market
price.
 Each buyer and seller takes the market price as
given.
 Thus, each buyer and seller is a price taker.

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 Revenue of a Competitive Firm
 Total revenue for a firm is the selling price
times the quantity sold.
TR = (P X Q)
TR= Total revenue
P=Price/unit
Q= No of units or quantity
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 Average and marginal revenue
 Average revenue is total revenue (P x Q)
divided by the quantity (Q)
 Therefore, for all firms, average revenue equals
the price of the good.
 Marginal revenue is the change in total revenue
from an additional unit sold.
 For competitive firms, marginal revenue equals
the price of the good.

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 Total, Average, and Marginal Revenue for
a Competitive Firm

Quantity Price Total Revenue Average Revenue Marginal Revenue

(Q) (P) (TR=PxQ) (AR=TR/Q) (MR=DTR / DQ )
1 $6.00 $6.00 $6.00
2 $6.00 $12.00 $6.00 $6.00
3 $6.00 $18.00 $6.00 $6.00
4 $6.00 $24.00 $6.00 $6.00
5 $6.00 $30.00 $6.00 $6.00
6 $6.00 $36.00 $6.00 $6.00
7 $6.00 $42.00 $6.00 $6.00
8 $6.00 $48.00 $6.00 $6.00

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Profit Maximization for the Competitive
Firm

 The goal of a competitive firm is to

maximize profit.

 This means that the firm will want to

produce the quantity that maximizes
the difference between total revenue
and total cost.
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 Profit Maximization:
A Numerical Example
Price Quantity Total Revenue Total Cost Profit Marginal Revenue Marginal Cost
(P) (Q) (TR=PxQ) (TC) (TR-TC) (MR=DTR / DQ ) MC= D T C / D Q
0 $0.00 $3.00 -$3.00
$6.00 1 $6.00 $5.00 $1.00 $6.00 $2.00
$6.00 2 $12.00 $8.00 $4.00 $6.00 $3.00
$6.00 3 $18.00 $12.00 $6.00 $6.00 $4.00
$6.00 4 $24.00 $17.00 $7.00 $6.00 $5.00
$6.00 5 $30.00 $23.00 $7.00 $6.00 $6.00
$6.00 6 $36.00 $30.00 $6.00 $6.00 $7.00
$6.00 7 $42.00 $38.00 $4.00 $6.00 $8.00
$6.00 8 $48.00 $47.00 $1.00 $6.00 $9.00

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Profit Maximization for the Competitive
Firm...
Costs The firm maximizes profit
and by producing the quantity
Revenue at which marginal cost
equals marginal revenue.
MC

MC2

ATC
P=MR1 P = AR = MR
AVC

MC1

0 Q1 QMAX Q2 Quantity 10
 Profit Maximization for the
Competitive Firm

 When MR > MC increase Q

 When MR < MC decrease Q
 When MR = MC Profit is
maximized.
 The firm produces up to the point where
MR=MC

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 Profit Maximization for the
Competitive Firm

 Profit maximization occurs at the

quantity where marginal revenue equals
marginal cost.

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 The Interaction of Firms and Markets
in Competition
Price Firm Market
And Price S1
Costs MC

A
a S2
$10
P=MR0
B
b ATC
ATC c
=$7 P=MR1
AVC
d

D0

q4 q3 q2 q1 Q1 Q2
10 units
qF QM
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 Monopoly
 While a competitive firm is a price taker, a
monopoly firm is a price maker.
 A firm is considered a monopoly if . . .
 It is the sole seller of its product.
 Its product does not have close
substitutes.

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 Why Monopolies Arise
 Barriers to entry have three sources:
 Ownership of a key resource.
 This tends to be rare. De Beers is an example
 The government gives a single firm the exclusive
right to produce some good.
 Patents, Copyrights and Government Licensing.
 Costs of production make a single producer more
efficient than a large number of producers.
 Natural Monopolies

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 Monopoly versus Competition
 Monopoly  Competitive Firm
Is the sole producer Is one of many
Has a downward- producers
sloping demand curve Has a horizontal
Is a price maker demand curve
Reduces price to Is a price taker
increase sales Sells as much or as
little at same price

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 Demand Curves for Competitive and Monopoly Firms

(a) A Competitive Firm’s (b) A Monopolist’s

Demand Curve Demand Curve
Price Price

Demand

Demand

0 Quantity of 0 Quantity of Output

Output
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Profit Maximization for the Competitive
Firm

 The goal of a competitive firm is to

maximize profit.

 This means that the firm will want to

produce the quantity that maximizes
the difference between total revenue
and total cost.
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 Imperfect Competition

Imperfect competition
includes industries in which
firms have competitors but do
not face so much competition
that they are price takers.
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 Types of Imperfectly Competitive
Markets

Oligopoly
• Only a few sellers, each offering a similar
or identical product to the others.
Monopolistic Competition
• Many firms selling products that are
similar but not identical.
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 Summary
 Firm’s profit in terms of economist and
accountant.
 Revenue and total cost.
 Diminishing marginal product.
 Fixed and variable cost.
 Total, average and marginal costs.
 Long run ATC curves

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