The Profit-Maximizing Firm as Exporter

5 Pages Posted: 5 Apr 2010

See all articles by Peter Marcel Debaere

Peter Marcel Debaere

University of Virginia - Darden School of Business; Centre for Economic Policy Research (CEPR)

Abstract

This technical note provides a microeconomic framework of monopolistic competition to think about firms, and in particular, exporting firms. At the same time, the note discusses some of the stylized facts from the recent empirical literature that uses firm-level data.

Excerpt

UVA-G-0622

August 14, 2009

The Profit-Maximizing Firm as Exporter

This note offers an economic framework to think about firms. Although each firm faces its own specific challenges and opportunities, we want to look at what firms may have in common. As we think about a firm's actions, we assume that its decisions are ultimately driven by its objective to make profits. We describe how a firm's actions (the price it charges, the output it produces) are a function of the economic environment it faces (the market structure, the strength of demand, the wage level, etc.) and its own particular cost structure. By way of example, we start off with the case of a monopolist who, by definition, is the only supplier in a market. The monopolist is in an extraordinary position of control. As the sole provider of a good or service, he or she is able to determine the price because he or she can restrict the quantity supplied. But the monopolist's behavior can also teach us about firms in less extreme situations. As a matter of fact, firms that sell differentiated products and that have a somewhat loyal customer base can also, to some extent, determine the price they will charge. We then apply the framework that we propose to think about exporting firms, and we bring in stylized facts of exporting firms from the most recent research.

The Fundamental Decision Rule: Marginal Revenue (MR) = Marginal Cost (MC)

Needless to say, profits are the difference between total revenue (TR) and total costs (TC). Any profit-maximizing firm, monopolist or not, that seeks the optimal quantity (Q) of goods to produce compares marginal revenue and marginal cost. The firm considers whether the marginal revenue or the additional revenue from producing an extra unit of a good (MR = ΔTR/ΔQ) is larger than the marginal cost or the extra cost of producing an additional unit (MC= ΔTC/ΔQ). Whenever MR > MC, the firm will increase its production; if MR < MC, the firm will reduce production. The firm has found its optimal production amount when marginal revenue equals marginal cost, MR = MC.

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Keywords: monopolistic competition, exporters

Suggested Citation

Debaere, Peter Marcel, The Profit-Maximizing Firm as Exporter. Darden Case No. UVA-G-0622, Available at SSRN: https://ssrn.com/abstract=1583772

Peter Marcel Debaere (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/html/direc_detail.aspx?styleid=2&id=5794

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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