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

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    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
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    Competition in the Short- Run Determine the profit-maximizing q in the  short-run Recall that under competition, R = pq, so MR  Δ R/ Δ q = 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
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    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
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    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
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    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
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    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
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      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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