lec17 - 2010-04-07 Short-Run Shut-Down Decision (I) VC $...

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Unformatted text preview: 2010-04-07 Short-Run Shut-Down Decision (I) VC $ Profit Maximization TR Quantity If VC > TR for all Q>0, then AVC (=VC/Q) > AR (=TR/Q) for all Q>0 Short-Run Shut-Down Decision (II) Profit Maximization TC=VC+F $ VC TR F Q* Quantity Two Rules for All Firms: • Produce where MR=MC (if profitable) • Shut down if Economic Costs > Revenue at all quantities (AVC > AR in short run or AC > AR in long run) Short Run: Stay in business. Fixed costs are not an economic cost. The Price-Taking Firm (ch. 10) • A price-taking firm is small relative to the market in which it produces; • As a result, it can sell as much output as it wants to produce without affecting the market price for its output. Total Revenue for a Price-Taking Firm $ TR Firm Demand Fi D d Market Demand P P Demand “d” (firm) Demand “D” (industry) q (thousands of units) Q (billions of units) q (thousands of units) 1 2010-04-07 Determining Production for the Price-Taking Firm Price Short-Run Production (Supply) Decision Price MC MCSR P1 ☺1 d = MR = P = AR AVCSR Produce where MC=MR if profits ≥ 0 80 100 120 q1 wheat Another Example: Short Run Production Price wheat Short-Run Supply Curve for the Firm Price MCSR MCSR AVCSR AVCSR Pmin ☺2 P2 0 Shut Down X q2 wheat wheat Typical Long-Run Average Cost Curve for the Firm Price Short-Run Supply Curve In both cases, ignore fixed costs. ATC4SR ATC1SR ATC2SR Deriving Long Run Total Cost Curve and Long-Run Average K Cost Curve Total Cost Expansion path ATC3SR C2 plot C1 C0 ACLR Q=20 5 101 20 5 Q=15 Q=5 wheat C0 C1 C2 C3 Q Q=10 L 2 2010-04-07 Typical Long-Run Supply Curve for the Firm Price MCLR Short-Run vs. Long-Run Supply Curve for Firm Price MC1SR MCLR ATC1SR ACLR ACLR Pmin Long-run supply curve is more elastic. Why? Pmin Long-Run Supply Curve q1 wheat q1 q2 wheat 3 ...
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This note was uploaded on 09/18/2010 for the course ECON 201 taught by Professor Beomsookim during the Fall '10 term at Korea University.

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lec17 - 2010-04-07 Short-Run Shut-Down Decision (I) VC $...

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