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Microeconomics Chapter 14 Class Notes

# Microeconomics Chapter 14 Class Notes - Firms in...

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Firms in Competitive Markets Chapter 14 Profit Maximization: Mr=Mc=P Price Tackers. Perfectly competitive Market mR=P At Qa MC<MR So increase Q to raise Profit At Qb, MC>MR. The additional Unit will cost more than revenue to the firm. Does not satisfy MR=MC=P At Q1, MC=MR, Changing Q would lower profit. To get the highest profit the firm is going to produce at Q1. Let’s say the market prices have changed from P1 to P2. Hence the MC curve is the firms supply curve.

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Shutdown Vs Exit Short run: Shutdown a short run decision not to produce anything because of market conditions. Short Run Vs Long Run Shut down Exit. Exit: A long run Decision to leave the market. A key difference: If shutdown in SR, must still pay its fixed costs. If Exit: IN LR, Zero Cost. i.e. sell your building or land etc. In Exit no cost. If you prefer shutdown and you pay for the fixed cost, most important thing is how much is that cost, if it is too much go for the exit. So we have to decided in the short Run Shutdown or not. Depends on the fixed cost. Cost of Shutting Down: Revenue Loss. Revenue Loss=TR. Benefit of shutting down: Cost Saving=VC (firm must still pay FC). Variable Cost If you shut down the quantity is=0, so the variable cost is also Zero. So Shut down if TR (total Revenue) <VC. When Variable cost is bigger than total revenune. Devide both sides by Q: TR/Q (Price) < VC/Q (Average Variable Cost). So firm’s rule Shutdown if P<AVC. T/R/Q=PQ/Q=P A Competitive Firm’s short run supply curve.
ATC=AVC+AFC ATC>AFC - When P=Marginal Cost curve, what is the area where price is bigger than average variable cost? -

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Microeconomics Chapter 14 Class Notes - Firms in...

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