ECON 1101 1nd Edition Lecture 25Outline of Last Lecture I. Diminishing Marginal ReturnsII. Economies of Scale Outline of Current Lecture II. Short Run Supply Curve of FirmIII. Long Run Supply Curve of FirmIV. Long Run Supply Curve of IndustryV. Short Run Supply Curve of Competitive IndustryCurrent LectureA firm maximizes it profit by MR=MCFirms only have to determine the quantity they are going to produce. Short RunThere 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 quanity3) if not, shutdown if P is not greater than or equal to AVCMR = Market PriceFixed cost at $4 but profit maximizing amount at -$3 so you would produce to at least make $1 back of your fixed cost. Long RunThese 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=AVCP>ATC otherwise shutdown + produce 0.In the short run there is exceptions to taking losses, sometimes its okay. In the long run any timethere is a loss it is bad and should be avoided. Long Run with Free EntrySame technology available for all there are no barriers to enter the industryInput prices do not go up as the industry expandsLong Run Equilibrium = P= minATCEach firm produces a quantity (q) where ATC is minimizedNumber of firms (N) is demand curve at Q/qIn long run equilibrium, competitive firms make ZERO economic profit. When you clump all the firms together, you get industry.In the long run Price=minATCIf losing money in long run= shutdownThe number of firms is
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