ECON 1101 1nd Edition Lecture 25 Outline of Last Lecture I Diminishing Marginal Returns II Economies of Scale Outline of Current Lecture II Short Run Supply Curve of Firm III Long Run Supply Curve of Firm IV Long Run Supply Curve of Industry V Short Run Supply Curve of Competitive Industry Current Lecture A firm maximizes it profit by MR MC Firms only have to determine the quantity they are going to produce Short Run There is a fixed cost that cannot be avoided An example would be to have a one year lease You cannot get out of the lease and you have to pay the rent The supply curve is placed at a price of how many are supplied Basically ask What quantity allows me to maximize profit Rules 1 Find quantity such that P MC P MR 2 Check that P AVC at that quanity 3 if not shutdown if P is not greater than or equal to AVC MR Market Price Fixed cost at 4 but profit maximizing amount at 3 so you would produce to at least make 1 back of your fixed cost Long Run 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 You can exit the industry basically you do not renew your lease There is no fixed cost nothing is binding you You can change location employees etc Long run supply curve is similar to short run Don t look at the AVC but instead look at the ATC ATC AVC P ATC otherwise shutdown produce 0 In the short run there is exceptions to taking losses sometimes its okay In the long run any time there is a loss it is bad and should be avoided Long Run with Free Entry Same technology available for all there are no barriers to enter the industry Input prices do not go up as the industry expands Long Run Equilibrium P minATC Each firm produces a quantity q where ATC is minimized Number of firms N is demand curve at Q q In long run equilibrium competitive firms make ZERO economic profit When you clump all the firms together you get industry In the long run Price minATC If losing money in long run shutdown The number of firms is fixed
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