ECON 1051 1nd Edition Lecture 33 Outline of Last Lecture I. GDP: Measuring Total Production and Income II. GDP: Measuring Total Production III. Components of GDP IV. What You Need To KnowV. Shortcomings of GDPOutline of Current Lecture I. Using ATC to Determine Profitability of a Firm II. When to Shut Down vs. When to Keep Producing III. Long-Run Story in Perfectly Competitive Markets Current LectureI. Using ATC to Determine Profitability of a Firm a. Profit = Total Revenue – Total Cost i. = P x Q – ATC x Q ii. Profit = Q (P-ATC) 1. Quantity = output2. (P-ATC) = per unit volume b. Profit and ATCi. Profit > 0, if price > ATCii. Profit < 0, if price < ATCiii. Profit = 0, if price = ATCII. When to Shut Down vs. When to Keep Producing a. Example:i. By producing firm earns TR = $200 incurs FC = $100 and VC = $150. Should this firm stay open and keep producing?1. Keep producing: a. Profit = 200 – 250 i. =-50 2. Shut Down:a. Profit = 0 – 100 i. -100 ii. TR = 120, FC = 100, VC = 1501. Keep producing:These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.a. 120 – 250 i. -130 2. Shut down:a. 0 – 100 i. -100 b. TR vs. VCi. If TR > VC, then keep producing or stay openii. If TR < VC, then shut down or stop producing iii. If TR = VC, indifferent III. Long-Run Story in Perfectly Competitive Markets a. In long-run, all perfectly competitive firms earn zero profitsi. Why?1. Free entry a. As profit opportunities attract new entrants, this will increase market supply of a firm. Therefore, price will drop.This will shrink profits for everyone. This will continue untilall profits are competed
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