301lec12b

301lec12b - Lecture 12 Econ 301 Professor S. Severinov...

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Lecture 12 Econ 301 Professor S. Severinov Economics of the Firm Costs of Production, Supply
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Supply of a competitive firm P·q – C(q) Take the derivative with respect to q and set to zero: We have: p =MC(q) Thus, for each P the firm should choose q which equates P and MC(q). In other words, supply curve IS the Marginal Cost curve. Optimal output maximizes profits Let P me the price of output. Profits are:
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To produce or not to Produce? Marginal cost curve and the rule P=MC(q) shows what you would choose to produce if you in fact decide to produce a positive quantity. But the firm should produce zero if it is making negative profits. Different definition of profits in the short-run and the long-run because
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To produce or not to Produce in the short-Run? Fixed costs are sunk in the short-run and not sunk in the long-run . So, in the short-run fixed costs do not matter at all (`bygones are bygones’). Short-run profits are SR Profits=pq-VC These should be positive for a firm to produce anything.
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Short-Run Supply Curve Short-run profits ignoring the fixed costs are: [ ] AVC(q) P q q VC(q) P q VC(q) q P Π SR - = - = - = Q 0 MC AVC P Q P 0 So shut down in the short-run if short-run profits are negative, i.e. P < AVC(q) P 0 – Short-Run shut down point ATC
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301lec12b - Lecture 12 Econ 301 Professor S. Severinov...

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