Chapter 9_Micro_S09

Chapter 9_Micro_S09 - Chapter 9 Long-Run Costs and Output...

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9 Chapter Long-Run Costs and Output Decisions
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2 LONG-RUN COSTS AND OUTPUT DECISIONS Short-Run Conditions and Long Run Directions Maximizing Profits and Minimizing Losses The Short-Run Industry Supply Curve Long-Run Directions: A Review Long-Run Costs: Economies and Diseconomies of Scale Increasing Returns to Scale Constant Returns to Scale Decreasing Returns to Scale Long-Run Adjustments to Short-Run Shocks Short-Run Profits: Expansion to Equilibrium Short-Run Losses: Contraction to Equilibrium
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3 LONG-RUN COSTS AND OUTPUT DECISIONS We begin our discussion of the long run by looking at firms in three short-run circumstances: (1) firms earning economic profits, (1) firms suffering economic losses but continuing to operate to reduce or minimize those losses, and (1) firms that decide to shut down and bear losses just equal to fixed costs.
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4 SHORT-RUN CONDITIONS AND LONG-RUN DIRECTIONS FIGURE 9.1 Graphic Representation: Firm Earning Positive Profits in the Short Run At the market price of P=$5, the firm chooses to supply q*=300. The ATC of 300 units is $4.20. Profit=P*q-TC=P*q-ATC*q=(P-ATC)*q =$240
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5 SHORT-RUN CONDITIONS AND LONG-RUN DIRECTIONS Whenever a firm is making positive economic profits, it is doing better than the next best alternative. In this case, other firms will be attracted to this industry. In the long run, we expect that new firms enter this industry.
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6 SHORT-RUN CONDITIONS AND LONG-RUN DIRECTIONS Firms may also experience economic losses in the short run. This is because it does not have the option of exiting in the short run. If revenues exceed variable costs, by continuing to produce, a part of the revenues can be used to offset fixed costs and reduce losses, and it will be better for the firm to keep operating. However, if at the profit maximizing level of output a firm can not cover its variable costs, the firm should “shut- down”. Shut-down if TR<TVC or P<AVC
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7 SHORT-RUN CONDITIONS AND LONG-RUN DIRECTIONS shut-down point The lowest point on the average variable cost curve. When price falls below the minimum point on AVC, total revenue is insufficient to cover variable costs and the firm will shut down and bear losses equal to fixed costs.
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8 SHORT-RUN CONDITIONS AND LONG-RUN DIRECTIONS FIGURE 9.3 Short-Run Supply Curve of a Perfectly Competitive Firm
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9 SHORT-RUN CONDITIONS AND LONG-RUN DIRECTIONS FIGURE 9.2 Firm Suffering Losses but continuing to operate in the Short Run At a market price of $3.5, the profit maximizing level of output would be q=225. Since the price is above the AVC=$3.10, it is not optimal shut-down. However, Because P<ATC=$4.10, the firm incurs a loss. Profits/Losses=(P-ATC)*q
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SHORT-RUN CONDITIONS AND LONG-RUN DIRECTIONS FIGURE 9.4 The Industry Supply Curve in the Short Run Is the Horizontal Sum of the Marginal Cost Curves (above AVC) of All the Firms in an Industry short-run industry supply curve The sum of the marginal cost curves (above AVC ) of all the firms in an industry. THE SHORT-RUN INDUSTRY SUPPLY CURVE
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This note was uploaded on 07/22/2009 for the course ECON 203 taught by Professor Nelson during the Fall '08 term at Texas A&M.

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Chapter 9_Micro_S09 - Chapter 9 Long-Run Costs and Output...

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