141_Chapter_9_Lecture_Outline - 9 Long-Run Costs and Output...

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9 Long-Run Costs and Output Decisions OUTLINE OF TEXT MATERIAL I. Introduction In the long run with no fixed scale of operations, the shapes of cost curves become more  complex and less easy to generalize about. We continue to focus on perfectly competitive  firms. II. Short-Run Conditions and Long-Run Directions As used here, profit means economic profits, accounting profits above a normal rate of  return. When a firm is breaking even it is earning exactly a normal rate of return (zero  economic profit). A. Maximizing Profits: A firm that is earning economic profits in the short run and  expects to continue doing so has an incentive to expand its scale of operation in  the long run. Those profits also give new firms an incentive to enter and compete  in the market. 1. Example: The Blue Velvet Car Wash 2. Graphic Presentation B. Minimizing Losses: Whether a firm suffering losses decides to produce or not to  produce   in   the   short   run   depends   on   the   benefits   and   costs   of   continuing  production. 1. Producing at a Loss to Offset Fixed Costs: The Blue Velvet Revisited 2. Graphic Presentation 3. Shutting Down to Minimize Loss a. A firm may produce at a loss to offset fixed costs as long as the  price   of   its   output   exceeds   its   average   variable   cost.   When  revenues   are   insufficient   to   cover   even   variable   costs,   firms  91
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141_Chapter_9_Lecture_Outline - 9 Long-Run Costs and Output...

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