PAM_2000_Spring_2009_Lecture_14

PAM_2000_Spring_2009_Lecture_14 - PAM 2000 L ecture 14...

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    PAM 2000 Lecture 14 Agenda: Firm’s shut-down decision Short-run supply curve Competition in long run Change in input prices and supply Different shapes for LR supply curves
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    Recall: The firm’s shutdown  decision (short-run) In short run, if revenues are less than avoidable costs , firm should shut down This points to a general notion that in any decision, firm should ignore sunk costs on the margin (here “margin” is between staying open and shutting down) In the long run, all costs are variable (or avoidable), so if it is earning any loss, it should shut down
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    The Short-Run Shutdown Decision
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    Firm’s short-run shutdown  decision The firm in the short-run will shut down only if its revenue is less than its short-run variable cost pq < VC Or p < VC/q Or p < AVC(q)
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    Firm’s short-run shutdown  decision (con’t) The firm avoids these variable costs (labor, materials, utilities, etc.) by shutting down Note : The difference between AC and AVC is fixed costs What does the lower pink rectangle represent?
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    Firm’s short-run shutdown  decision (con’t) Firm still incurs the loss of area A, which is that part of fixed costs it cannot pay off in the short run When P < AVC, the loss avoided by operating, goes to zero, so shut down
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    Tracing Out the Short-Run Supply  Curve Recall : The firm’s supply curve is the q it chooses to supply (i.e. its profit maximizing q ) at each P So consider costs exogenous (given), and let the price alone vary The upward sloping portion of the MC curve (that portion above its AVC curve ) is the firm’s short-run supply curve
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    How the Profit-Maximizing Quantity Varies with Price
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    Market Supply Curve
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This note was uploaded on 11/14/2009 for the course PAM 2000 taught by Professor Evans,t. during the Spring '07 term at Cornell University (Engineering School).

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PAM_2000_Spring_2009_Lecture_14 - PAM 2000 L ecture 14...

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