ECON 202 1nd Edition Lecture 24 Outline of Last Lecture I. Perfectly Competitive Industriesa. Characteristics of a Perfectly Competitive Industryb. Profit Maximizationi. In Generalii. In Perfectly Competitive Industries1. Short RunOutline of Current Lecture II. Perfectly Competitive Industriesa. Profit Maximizationi. In Perfectly Competitive Industries1. Short RunCurrent LecturePerfectly Competitive IndustriesProfit Maximization – In Perfectly Competitive IndustriesThree cases of profit (π) maximization in Perfectly Competitive IndustriesCASE 1: profit (π) > 0Total Revenue = ABDETotal Cost = FCDEProfit (π) = ABCFCASE 2: profit (π) = 0 Total Revenue = ABDETotal Cost = ABDEThese 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. $p*mcqd=mrATCq*FABCDEPROFIT$p*mcqd=mrATCq*ABDEProfit (π) = 0CASE 3: profit (π) < 0Total Revenue = FCDETotal Cost = ABDEProfit (π) = -ABCFShort-Run Shut Down DecisionEx: Suppose a perfectly competitive firm is making a loss in the short run. It’s Total Revenue = $1000, Total Fixed Cost = $800, and Total Variable Cost = $500.The firm should stay in business because they can cover its Total Variable Costs and some of their Total Fixed Costs with its Total Revenue.So in General: businesses should continue operating in the short run if Total Revenue is GREATER than Total Variable CostThis is because TR/Q > TVC/Q which means P > AVCSo: Continue operating if P > AVC and shut down if P < AVCWhy do Supply Curves Slope Upwards?The portion of a Marginal Cost (mc) Curve that lies above the average variable cost is a firms supply curve. This is because of the Law ofDiminishing Marginal Productivity.$p*mcqd=mrATCq*FABCDELOSS$Min.
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