Some Reminders: • In the short run, at least one factor of production is fixed• Diminishing returns are inevitable (THE RULE)• The cost of producing one more unit goes up- marginal cost bottoms out than rises• The average always “chases” the margin• Margin and Cost cross at the bottom of the bowl!!!!!• Under perfect competition, firm-level demand curves are horizontal because the price is given to you and you can’t change that• If all costs are included, can you identify the economic profits on this graph?• All the implicit costs are captured in a way that’s more transparent?• Think about the total cost• Because ATC = TC / Q ———> ATC * Q = TC• Use where MC = MR, where MC crosses Demand• Marginal Revenue is demand• Drop straight to Q*, then hit the avg total cost curve, if i produce this many units, Q*, then go straight to price, the white box—total cost, the big box—totalrevenue, and the blue box—economic profit (SUPER)• CONSTRUCT A GRAPH TO SHOW ECONOMIC PROFIT IN THE SHORT RUN• Profit maximization in the SR—this graph and explanation—profit above normal rate of return• What is the long run prognosis for these economic profits?• The price is driven down till MC, ATC, and P all intersect…The new line is now demand curve• If you’re in a grocery store, lines, all lines full except one, that empty line won’t last, someone waiting will move, it cannot last—if people have good info, it’seasy to switch• D=MR=PPerfect Competition• IN the long run…• the absence of barriers to entry ( or exit) guarantees that super profits will disappear• In the long run: P = minimum ATCDoes it ever make sense for a firm to continue producing in the short run if revenues are below cost?Shutdown Point***• In the short run, with perfect competition…(flat demand curve)• a firm should continue producing…(keep going)• as long as the price > average variable cost.(you can pay for labor)• Because… .we assume fixed costs are sunk costs and have no opportunity cost, cannot be changed• Graph: AVC will be lower than ATC, both will dec then inc and MC will dec than rise and they intersect at the bottom of the bowl• Shutdown point—> where AVC crosses MC at market price, anywhere under SHUTDOWN!!!!!!!• Long run— you are not locked into anything• SAMPLE: Under what conditions should a firm produce in the short run?Profit maximization by the numbersTEST: Elasticity, MU, and a cost table (fixed, variable, average)No profit maximizing with
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