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 total 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 s Under perfect competition firm level demand curves are horizontal because the price is given to you and you can t change that 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 cid 127 Margin and Cost cross at the bottom of the bowl 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 cid 127 Marginal Revenue is demand revenue 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 cid 127 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 easy to switch D MR P Perfect 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 ATC Does 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 cid 127 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 numbers TEST Elasticity MU and a cost table fixed variable average No profit maximizing with numbers cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127
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