EC 201 10-15-08 - s =0 o TR<TVC Divide by Q(TR/Q<...

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EC 201 10-15-08 Government spending + taxes o Why govt.? Law + courts + police Public goods National defense Vaccination Fire protection Income distribution Econ. Profit= acctg. Profit + opp. cost Profit per unit= P- ATC Econ. Profit >0 → P > ATC Profit per unit = P – ATC Econ. Loss → P < ATC Should firm go out of business? o If stay in business, loss = TC-TR o Short Run: at least one fixed input o If quit, TR=0 TC=TFC } loss = TFC o Choose smaller loss o Quit if (TC-TR) > TFC o TC= TFC+TVC → quit if (TFC +TVC-TR)>TFC o Quit if TVC-TR>0 o Quit if TVC>TR or if TR<TVC o If can’t cover variable costs, go out of business now o If loss, but TR> TVC, stay in for now
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o Firm’s supply curve If econ. Profit: MC If econ. Losses, but TR>TVC, MC If TR< TVC, Q
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Unformatted text preview: s =0 o TR<TVC Divide by Q (TR/Q) < ( TVC/Q) P<AVC Quit if P<AVC • Short-run supply curve of perf. Comp. firm: • Supply curve=MC if P> AVC • Q s =0 if P<AVC • Mkt. S curve is horizontal sum of firm S curves • Dynamics of entry + exit • Perfect comp. : free entry + exit • If existing firms are earning positive econ. Profits, entry • → mkt. S to right S ↑ • → P ↓ until zero econ. Profit (good enough) • Profit per unit = P-ATC • If zero profit: P=ATC • Profit max: P=MC • Zero profit: P=ATC • Min. ATC: MC= ATC • Perf. Comp. / zero profit: ATC min. • What if neg. econ. Profits? Eventually some firms quit. • Mkt S left (S↓) • P↑ until zero econ. profit...
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This note was uploaded on 04/19/2011 for the course EC 201 taught by Professor Ballard during the Fall '08 term at University of Michigan.

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EC 201 10-15-08 - s =0 o TR<TVC Divide by Q(TR/Q<...

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