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We can be sure this setup gives us the equilibrium levels as neither firm has an incentive to change their level of output as doing so will harm the firm at the benefit of their rival. Now substituting in q ∗ {\displaystyle q^{*}} for q 1 , q 2 {\displaystyle q_{1},q_{2}} and solving we obtain the symmetric (same for each firm) output ...
The firm which produces at this output level is said to maximize profits. If the output produced is less than the equilibrium quantity (), as shown in the red part, then is greater than (>), and the profit is not maximized. The firm has in its interest to raise its output level to maximize profits, because the revenue gained will be more than ...
For example, the IS model of only the goods market [1]: pp. 250–260 derives the market-clearing (and thus endogenous) level of output depending on the exogenously imposed level of interest rates, since interest rates affect the physical investment component of the demand for goods.
The follower actually observes this and in equilibrium picks the expected quantity as a response. To calculate the SPNE, the best response functions of the follower must first be calculated (calculation moves 'backwards' because of backward induction). The profit of firm (the follower) is revenue minus cost.
Therefore, the sole equilibrium in the Bertrand model emerges when both firms establish a price equal to unit cost, known as the competitive price. [9] It is to highlight that the Bertrand equilibrium is a weak Nash-equilibrium. The firms lose nothing by deviating from the competitive price: it is an equilibrium simply because each firm can ...
When drawing diagrams for businesses, allocative efficiency is satisfied if output is produced at the point where marginal cost is equal to average revenue. This is the case for the long-run equilibrium of perfect competition. Productive efficiency occurs when units of goods are being supplied at the lowest possible average total cost.
The relevant variables are p, w, x, and f(x). p is the price of the output, w is the price of the input, f(x) is the amount of output, and x is the amount of input. Thus, the profit-function can be written as the following:
The structure of the input–output model has been incorporated into national accounting in many developed countries, and as such can be used to calculate important measures such as national GDP. Input–output economics has been used to study regional economies within a nation, and as a tool for national and regional economic planning.