The supply curve is derived from a competitive firm.
Apple computer would love to raise the price of down, this chapter begins an examination of how businesses loading music from its iTunes store.
It's not likely to make price and production decisions.
Too many other firms also offer nature of profits and how they are computed.
We watch the downloads.
Customers can sign up with another company if Apple raises its prices.
The center of the discussion may be prices, and the Your campus bookstore may be in a better position to raise it.
There is only one bookstore on most college campuses.
The answers to these questions will shed more light on how the product is made.
The expectation of profit is the basic incentive for producing goods and services.
The sole owner of total revenue and total cost may receive profit residual.
The quest for profit is what motivates people to own and operate a business.
Producers are motivated by more than profit.
People who need to feel important, control others, or demonstrate achievement are likely candidates for running a business.
Many small businesses are maintained by people who gave up 40-hour weeks, $50,000 incomes, and a sense of alienation in exchange for 80 hour weeks, $45,000 incomes, and a sense of identity and control.
The profit motive may be even deeper in large corporations.
Stockholders of large corporations don't usually visit corporate headquarters.
The people who manage the corporation's day-to-day business may have little or no stock in the company.
Nonowner-managers may be more interested in their own jobs, salaries, and self-preservation than in the profits that accrue to the stockholding owners.
The corporation may look for new managers if profits decline.
The bottom line for most businesses is the level of profits.
The general public is suspicious of the profit motive.
The profit motive moves the invisible hand that Smith said orchestrates market outcomes.
The profit maximization was discussed.
Goods and services are produced to earn a profit.
Businesses that fail to earn a profit will not survive.
An old opinion about profits.
The primary incentive for supplying goods and services is the profit motive.
Consumers are distrustful of that motive.
Most consumers feel that profits are too high.
That may be the case in many cases.
Most consumers don't know how much profit U.S. businesses make.
35 cents of every sales dollar is believed to go to profits by the typical consumer.
The average profit per sales dollar is closer to 5 cents.
The perception of profits isn't limited to the general public.
Most businesses measure their profits in the wrong way.
Everyone agrees that profit is the difference between total revenues and total costs.
The decision of what to include in total costs is something that people part ways over.
Chapter 21 shows how economists calculate costs.
They write checks for those.
They understate their costs.
Businesses will overstate true profits if they understate true costs.
The accounting "profit" will be compensation to land, labor, or capital for the use of a resource.
When economic costs exceed explicit costs, observed profits will exceed true profits.
Mr. Fujishige is a strawberry farmer.
I've been farming since I left his 58-acre farm.
In 1941, Mr. Fujishige could make even more high school.
If he stopped growing strawberries, he would make a profit.
He says he'll keep growing strawberries.
Excerpted with permission.
Mr. Fujishige thought he was making a profit.
The strawberry farm was sold to Disneyland for its California Adventure theme park.
The revenues and costs associated with a local drugstore can be summarized in Table 22.1 $27,000 is the monthly sales revenues.
Explicit costs paid by the owner-manager include the cost of merchandise bought from producers for resale to consumers, wages to the employees of the drugstore, rent and utilities paid to the landlord, and local sales and business taxes.
The owner-manager of the drugstore may be happy with the accounting profit of $6,000 per month.
He is working hard for this income.
The owner-manager is working 7 days a week to keep the store running.
300 hours of labor per month is added up.
He would be paid with a paycheck if he worked hard for someone else.
He doesn't choose to pay himself this way, but his labor still represents a real resource cost.
The owner could make $10 per hour in the best job.
The implicit cost of his labor is $3,000 per month if we take the wage rate and divide it by the number of hours he works in the drugstore.
The owner used his savings to purchase inventory.
He bought the goods for $120,000.
He could have earned a 10 percent return on his savings if he had invested them in other businesses.
A real cost is the forgone return.
A producer contributes $21,000 in capital to the Accounting profit.
We must subtract implicit factor payments from reported profits.
The residual is $2,000 per month.
The opportunity cost of the owner's capital is taken into account when calculating the drugstore's economic profit.
We assumed that he would have gotten a 10 percent return somewhere else.
The owner could have made a profit by investing in a drugstore.
Investing in a fast-food franchise, a music store, a steel plant, or some other production activity will return 10 percent on his funds.
Economic profits are usually zero.
The opportunity costs of all economic activities are emphasized by this strange perspective on profits.
If a productive activity earns more than its opportunity cost, it can be profitable.
Everyone in business wants to make money.
Few people can stay ahead of the pack.
To earn economic profits, a business must see opportunities that others have missed, discover new products, find new and better methods of production, or take above-average risks.
Economic profits are seen as a reward to entrepreneurship, willingness to take risks, and to organize factors of production.
Look at the local drugstore again.
The people in the neighborhood want a drugstore that makes a lot of money.
The economic profit of the drugstore owner is $2,000.
Few people would want to make the extra effort if there were no additional compensation.
There are substantial risks associated with starting and operating a business.
More businesses fail every year.
The risks of owning or operating a business are represented by profit.
Some businesses have an equal opportunity to make money.
T-shirt shops don't have to worry about all the other stores that sell similar products.
The owner of a T-shirt shop doesn't have the power to raise prices or make economic profits.
The small Texas beach resort of South Padre Island is home to Mr. Oogav, a 29-year-old immigrant from Israel.
He got a job working in shops.
He now has his own shop and com shops.
His paradise is lost because his petition has tripled.
Padre Island is an example of a common condition in the Mark Pawlosky industry.
Maria C. Hall, executive director of JONES & COMPANY, Inc., says that everything that closed opened up JONES & COMPANY, Inc., was reproduced as a T-shirt shop.
The ability to earn a profit depends on how many other firms offer similar products.
A firm that is perfectly competitive faces difficulties in maintaining prices or profits.
Only one firm makes the entire supply of the good.
Many firms supply the industry.
There are few monopolies in the real world.
The United States has 20 million businesses that fall between these extremes.
After we establish the nature of perfect competition, we examine all these market structures.
Across industries the number and relative size of firms are different.
Market structures range from perfect competition to monopoly.
Duopoly, oligopoly, and monopolistic competition are included in that range.
Firms are competing for consumer business.
The products of different firms are the same.
It's easy to get into the business.
Storeowners have a hard time maintaining profits because the T-shirt business has all these characteristics.
T-shirt shops can't increase profits by raising their prices because they have to contend with a lot of competition.
More than 1 billion T-shirts are sold in the United States each year.
The market sets the price.
A competitive firm can sell all of its output.
Consumers will shop elsewhere if it increases its price above that level.
There is no ability to change the market price of a good good.
It appears that all firms have market power.
If a shop raises its price to fifteen dollars and 40 other shops sell the same shirts for ten dollars, it won't sell many shirts, and maybe none at all.
If you try to sell this book at the end of the semester, you may face the same problem.
You can resell this textbook for $60.
The bookstore won't buy it at that price.
The bookstore doesn't have to pay $60 if you want to sell your books.
If you want to sell this book, you have to accept the going price because you don't have any market power.
The small wheat farmer has the same kind of powerlessness.
The lone wheat farmer can increase or decrease his rate of output by making alternative production decisions.
The market price of wheat won't be affected by his decision.
The market price of wheat can't be changed by the largest U.S. wheat farmers.
The wheat farm with the largest amount of wheat produced each year.
The law of demand doesn't apply to t-shirt shops.
Individual firms count.
The market equilibrium would be disturbed if all 40 of the T-shirt shops on South Padre Island were to increase shirt production at the same time.
A competitive market composed of powerless producers still sees action.
The collective action of all the producers has the power here.
The consumer demand for a product is downward-sloping.
Only a market established price can be used to sell T-shirts.
He can sell all his shirts at the equilibrium price.
The shop owner has a demand curve for his own output.
There is a distinction between the actions of a single producer and those of the market.
The demand curve is horizontal.
Since a competitive firm can sell all of its output at the market price, it has only one decision output: how much to produce.
A T-shirt shop has to pay rent no matter how many shirts it sells.
Rider Jeans Corporation in Chapter 21 had to pay rent on its factory and lease payments that can't be changed.
The total revenue curve is linear.
You may think that the road to profits is hard.
Production capacity is what it is.
The rates of increase aren't steady, however.
Initially total costs increase, then they slow down.
The primary goal of the producer is to maximize profits.
The distance between the revenue and cost curves can be measured with a ruler.
Practical guides to profit maximization are needed by most producers.
The best rule for maximizing profits in the short run is to never produce a unit of output that costs more than it brings in.
A producer is likely to make the right decision if they follow this simple rule.
We can see how this rule works by looking at the revenue side of production and the cost side.
The change in total revenue is the result of a one-unit increase in total revenue in the quantity sold.
It's easy to calculate marginal revenue when the price of a product is constant.
We might be operating a catfish farm.
The catfish is sold at a wholesale price of $13 per bushel.
A one-unit increase in sales increases revenue by $13.
If the price of a product is constant, price and marginal revenue are the same thing.
13 13 13 was reduced from $26 to $39.
We're breeding and selling catfish.
We need to know the price of fish and how much it costs to produce in order to gauge profits.
The marginal costs associated with catfish production are summarized in Figure 22.6
The production process for catfish farming is very simple.
The rate of production is the number of fish taken from the pond.
Up to the breeding capacity of the pond, a farmer can change the rate of production.
The fixed costs include the rental value of the pond and the cost of electricity for keeping the pond oxygenated so the fish can breathe.
The fixed costs must be paid no matter how many fish the farmer harvests.
The farmer has to pay additional costs to harvest catfish from the pond.
Labor is needed to sort the fish.
Variable costs are not incurred if there is no fish harvest.
As the rate of production increases, we expect marginal costs to go up.
A one-unit increase in production increases marginal cost.
The law of diminishing returns applies to catfish farming as well.
Each worker has less space and access to nets and sorting trays as more labor is hired.
It takes a little more time to harvest additional fish.
Figure 22.6 shows the marginal costs.
As the rate of output increases, notice how the MC rises.
The marginal cost of the fifth crop is $17.
We have a chance to make a production decision.
If its MC exceeds its price, we don't want to produce an additional unit of output.
If MC exceeds price, we're spending more to produce that extra unit than we're getting back.
When price exceeds MC, the opposite is true.
This case requires total profits to increase.
When price exceeds MC, a firm wants to increase the rate of production.
The profit-maximizing rate of output is easy to find since we want to expand output when price exceeds MC and contract output if price is less than MC.
For firms that are perfectly competitive, profits are maximized at the rate of output.
The profit-maximization rule is applied in catfish farming.
The price of catfish at the wholesale level is $13 a bushel.
We can sell all the places where marginal revenue and marginal cost are equal.
The catfish can't be sold at a higher price because a lot of farmers sell them for $13.
Consumers will buy fish from other vendors if we charge a higher price.
The price of $13 is the horizontal demand curve.
Figure 22.6 examined the costs of catfish production.
marginal cost is the key concept shown here.
The MC curve slopes upward.
The figure shows the total revenues, costs, and profits of alternative production rates.
The firm loses $10 per day if it doesn't produce fish.
The firm has fixed costs of $10 per day.
The firm incurs a loss.
The table shows how much the loss is reduced when a few fish are taken per day.