10-18 lecture notes

10-18 lecture notes - the fixed costs are divided by more...

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TR=TC= EC+IC, economic profit is 0 in this situation Economic profit is another way of saying excess profits, if econ profits the firm is earning more than its total cost, both external and internal When MR=MC you have maximized the profits possible When price is the same for a firm no matter how much they produce, this market is called a competitive market Competitive market: o Firms are price-takers- they take the price as determined by the market, cannot raise and don’t need to lower the price…no market power o Identical products o Entry-exit is easy- no restrictions on entering or leaving the market The law of diminishing marginal returns states that if a firm keeps adding one input (i.e. labor) eventually the new factor will not produce as much as the original factors ATC is always higher than AVC because AVC does not take into account the fixed costs, but the distance between ATC and AVC continually shrinks because
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Unformatted text preview: the fixed costs are divided by more quantity the farther along the graph you go • A competitive firm’s short term supply curve is its marginal cost curve that lies above the AVC curve • In the long run, the firm must produce above the ATC to stay in the market • In the long run the competitive firms cannot make excess profit because more firms will enter the market • Therefore, the only sustainable point in the market is producing at the point where the MC=ATC • ATC is also at its lowest point, meaning the firms are supposed to be performing at minimum costs, which is also known as technically efficient • At each point P=MC and the significance of this is that P is equal to MB (marginal benefit) for consumers, so P reflects MB (marginal benefit) • MB=MC and therefore allocative efficiency is obtained...
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This note was uploaded on 05/16/2008 for the course ECON 0005 taught by Professor Abdullah during the Fall '07 term at Tufts.

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