PAM200Lecture13 - PAM 200 Lecture 13 Agenda Competition in...

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Unformatted text preview: PAM 200 Lecture 13 Agenda Competition in the Short-Run The Firm’s Shut-down Decision Tracing Out the Short-Run Supply Curve Competition in the Long-Run Alternative Slopes for Supply Curve Competition in the Short- Run Determine the profit-maximizing q in the short-run Recall that under competition, R = pq, so MR = ΔR/Δq = p So for each added unit the firm sells, it just gets p in added revenue For any firm, the profit maximizing condition is to pick q such that MR = MC Competition in the Short- Run (con’t) But for a competitive firm, the condition is pick q such that: P = MC Result : A competitive firm produces at that output where price equals marginal cost The firm’s total revenue line is a straight line with slope p (MR = p) Lay the total cost curve over it The difference between TC and R is the firm’s profit Competition in the Short- Run (con’t) Now consider the same relation on a per-unit basis On the per-unit graph, the firm will maximize profits where P = MC If MC > P, then firm loses money on those units of output Could do better by reducing output , and conversely Competition in the Short- Run (con’t) Can show the amount of profit as an area Profit is the difference between the revenue per unit, and the cost per unit, times the number of units, q Per unit cost is average cost The firm’s shutdown decision (short-run) In the short-run, the firm has both fixed and variable costs Fixed costs are often considered to be “sunk” (non-recoverable) If so, the firm should ignore fixed or sunk costs in its shutdown decision If it is unable to recover at least its variable costs through revenues , then it should shutdown The firm’s shutdown decision (short-run) So in short run, if revenues are less than avoidable costs , firm should shut down This points to a general notion that in any...
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This note was uploaded on 03/03/2009 for the course PAM 2000 taught by Professor Evans,t. during the Spring '07 term at Cornell University (Engineering School).

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PAM200Lecture13 - PAM 200 Lecture 13 Agenda Competition in...

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