Micro and Macro Economics

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Short run equilibrium diagram is same as long run equilibrium diagram ( apart from shape of cost curves). At pm is greater than AC, the company have excess profits. Short run losses are also possible.

In a perfectly competitive market, it has no barriers to exit and entry into the market as here are many producers and consumers. Perfectly competitive producers are price takers that can choose how much to produce, but not the price at which they can sell their output. A monopoly exists when there is only one producer and many consumers. Monopolies are characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods.

3.

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profit maximization occurs at the biggest gap between Total revenue and total costs. (Profit = Total Revenue – Total Costs) A firm can maximize profits if it produces at an output where Marginal revenue (MR) = Marginal cost (MC)

In this diagram, the monopoly maximizes profit where MR=MC – at QM. This enables the firm to make supernormal profits (green area). Note, the firm could produce more and still make normal profit. But, to maximize profit, it involves setting higher price and lower quantity than a competitive market. Firms will produce up until the point that marginal cost equals marginal revenue. This strategy is based on the fact that the total profit reaches its maximum point where marginal revenue equals marginal profit . This is the case because the firm will continue to produce until marginal profit is equal to zero, and marginal profit equals the marginal revenue (MR) minus the marginal cost (MC).

Another way of thinking about the logic is of producing up until the point of MR=MC is that if MR>MC, the firm should make more units: it is earning a profit on each. If MR

4.

Sales revenue maximization

The objective of maximizing sales revenue rather than profits was developed by economist William Baumol whose work focused on the behavior of manager-controlled businesses.

Primary, annual salaries and perks are linked to sales revenue rather than profits. Also, companies geared towards maximizing revenue are likely to make frequent use of price discrimination to extract extra revenue and marginal profit from consumers. Moreover, a business might also aim to maximize sales revenue rather than profits because it wishes to deter the entry of new firms. In addition, if a firm decides to aim to maximize sales revenue rather than profits, one of the consequences might be a reduction in the price of the firm's shares since the rate of profit is likely to be lower.

This theory leads to the conclusion that a sales-revenue maximization firm will produce at a higher level, keep low prices and invest in such a manner, as on advertisement, that the demand for its product will increase.

References:

William J. Baumol(1997), Macroeconomics: Principles and Policy, 13 Edition, Cengage Learning Publishing, Boston, MA