精品文档

where they have the maximized profit.

From the short run view of a firm in a pure competitive market structure, the explanation of the diagram is as follow:

The price in a pure competitive market structure is decided by demand and supply, which can be seen in panel on the right. When demand rises from D1 to D2, the equilibrium point goes from A to B and P2 is the established price. Because of the price which a firm use stays at P2, marginal revenue is equal to P2 at last average revenue is equal to P2 as well. When MC=MR, profit maximization is achieved, so the point which firms will stop producing should be C which ordinate is P2 and abscissa is Q2. According to the diagram above, when quantity is Q2, ATC is equal to P1. So P2 subtract P1 is average profit and then multiply by Q2 can obtain total profit.

6.0 Roles of Profit in Market Economy

? Demand for factor resources

Scarce factor resources to flow where the expected rate of return or profit is highest. In the mobile phone market, when Richard Branson started to get profit in 2002, VM has 1,445,492 customers, which means stronger demands, more labour and capital are committed. With more scarce factor resources, VM may

精品文档

精品文档

able to earn more profit. However, in a recession, the output, incomes and investment for VM must all fall, which may cause the profit loss. Thus the company should take action (for example cutting costs) to preserve its market position. ? Market Entry

If an individual company gets more profit than others, it must be a signal to other producers within a market that profitable entry may possible. After three-year efforts, Richard Branson made VM profiting. When it comes, many other firms would be attracted to enter the industry. Thus, the competition would be increased and new products, technologies would be also updated in a higher speed.

7.0 The other two alternatives to profit maximization

? Satisficing behaviour

Satisficing behaviour can be the substitute to profit maximization behaviour. This behavioural method lays stress on how decisions are taken within the firm. When a decision is making, satisficing explains that individuals and groups should choose the first option that is good enough to address most needs rather all. Based on Herbert Simon’s work concerning behaviour --“people possess limited cognitive ability and can exercise only ‘bounded rationality’ when making decision in complex, uncertain situations”, satisficing behaviour encourages individuals and groups to attain a more realistic goal.

If VM set a goal that expending their customers to 2 million in a year, finally it reaches 2.5 million. Thus wise we can take the goal for a receivable. ? Sales revenue maximization

The goal of sales revenue maximization is to maximize the sales other than profits. The managers decision price and strategy of products. In this pattern of management, business can grow or sustain market share, ensure survival, discourage competitors, achieve bonuses and build the prestige of the senior

精品文档

精品文档

management.

For the VM, when it initially entered the mobile phone market, it is a great approach that selling their products as many as possible with the lowest profit to enlarge their market share.

8.0 Influences on a Firm in the Short Run

C TC TVC TFC

0 Q

From the diagram above, which can be seen are total cost (TC) is the sum of fixed (TFC) and variable costs (TFC).In the beginning, when nothing is being produced ,the fixed costs will be equal to the total cost. The TC and TVC increase concurrently with the quantity, but they are paralleled and the distance between them is TFC which is always invariable. And total cost is an upward trend.

MC C AC AVC AFC Q

精品文档

精品文档

The diagram is about the short run cost curves. One time the fixed cost is excessively used, which will lead to the progressive decrease of marginal product, meanwhile the marginal product reduce will lead to the decrease of marginal revenue. Leading the reducing of the ATC when MC

Making the short-run ATC curve look like U-shaped, on the other side,

the law of diminishing returns will lead to the rise of marginal cost of production as output increases.

When AVC increasing higher than the fall in AFC one time the output increases , which the marginal cost is rising will lead to the average total cost rising

9.0 References

( http://en.wikipedia.org/wiki/Perfect_competition#Basic_structural_characteristics ) .

精品文档