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UO ECON 201 - Firm Behavior in a Competitive Market
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ECON 201 1st Edition Lecture 9Tuesday 2/10I. 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 MarketRecall, 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 industryo 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 examsThese 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 costo 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- Π = TR – TCo = P x Q – ATC x Q or = P x Q – TC/Q x Q – ATC x Qo = (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 yourfixed 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 = MCD.) 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 = MCo P = min ATC s.t. there is no firm entry or


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