ECON 201 1nd Edition Lecture 17 Outline of Previous Lecture I II III IV V Perfect Competition Characterize Competition The implication of Perfect Competition Profit Maximizing Level of Output Marginal Revenue Outline of Current Lecture I Profit Maximization Using TC and TR II Determining Profit and Loss From a Graph Jones and P G III The Shutdown Point IV V VI Market Supply and Demand Adjustment from the Long Run to the Short Run Long run Market Supply Current Lecture I II III Profit Maximization Using TC and TR a P MR MC condition tells us how much output b Profit is maximized where the vertical distance between total revenue and total cost is greatest c At that output MR the slope of the total revenue curve and MC the slope of the total cost curve are equal Determining Profit and Loss From a Graph Jones and P G a Find output where MC MR b Drop a line down from where MC equals MR and then to the ATC curve i Profit per unit average profit c Extend the line horizontally from Q and ATC intersection to vertical axis total profit d Is it a loss or a profit e Loss when the ATC curve is above the MR curve profit when ATC is below MR The Shutdown Point a In the short run the shutdown point is the point at which the firm will be better of if it shuts down than it will if it stays in business 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 IV V VI b Rule Good pick largest Bad pick smallest c Continue to produce is P AVC d Shut down if P AVC Market Supply and Demand a Short Run Market demand is downward sloping b Market Supply is the horizontal sum of all the firms marginal costs c Long run competitive equilibrium d No profit or loss e P MR MC ATC Adjustment from the Long Run to the Short Run a Adjustment process i An increase in demand leads to higher prices and higher profts 1 Existing firms increase output 2 New firms enter the market increasing output more 3 Price falls until all profit is competed away 4 An increase in Demand Long run Market Supply a In the long run firms earn zero profits b If the long run industry supply curve is perfectly elastic the market is a constant cost industry i Increasing cost industry factor prices rise as new firms enter the market and existing firms expand capacity LR supply curve is upward sloping ii Decreasing cost industry factor prices fall as industry output exapands LR supply curve is downward sloping