ECON 201 1st Edition Lecture 9 Tuesday 2 10 I Firm Costs Cont A Marginal Cost The additional cost incurred from producing one more unit of output The derivative of the total product The optimal production strategy of any firm is to produce the level of output where MR MC LAST ON THE FINAL o i e marginal revenue marginal cost If marginal revenue is bigger than marginal cost then you get more than it costs you II Firm Behavior in a Competitive Market Recall there are many sellers and many buyers such that each agent acts as a price taker A The market and firm revenue Marginal revenue to a competitive firm is just the market price The optimal level of production is such that the MR equates the MC if they produce B Short Run Production Choices The short run is the time frame such that firms can t enter or exit an industry o They can t avoid their fixed costs o For iPhones 2 3 years o If the marginal is above the average the average is rising and vice versa AVC average variable costs Total Variable Costs Output Variable costs adding another chair to the classroom or printing more exams 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 If the firm graph above produces then it should produce Q o Q level of output that brings in more revenue than cost o Should not produce because they will make negative profit o Still valuable to stay open in business o In the short run a competitive firm will produce if price is bigger than AVC P AVC and the optimal level of production is where MR MC TR TC o P x Q ATC x Q or P x Q TC Q x Q ATC x Q o P ATC Q P AVC AFC Q o P AVC Q FC o Fixed costs are unavoidable in the short run even if you produce 0 you have to pay your fixed costs C Long Run Production Decisions In the long run a competitive firm will produce only if price is greater than or equal to average total cost P ATC and the optimal level of production is where MR MC D Long Run Equilibrium in an Industry Suppose At any given price there are fewer firms that are willing and able to produce Downward shift in the supply curve causes the price to go up At Q there is no exit happening and no reason for the market price to change LRE When you declare bankruptcy you are exiting the industry A long run competitive equilibrium is o A market price shuch that qp quantity price qs quantity supplied o Firm production strategy s t MR MC o P min ATC s t there is no firm entry or exit
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