compet firm - TheCompetitiveFirm:ShortRun What is a...

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    The Competitive Firm : Short Run What is a competitive firm? How does a competitive firm maximize its profit in the short run? using total cost using marginal cost When should a firm shutdown in the short run.
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    What is a Competitive Firm? A firm in a competitive market. A competitive market has: Many producers, so that no one firm can affect the price. A product that is the same for each firm– consumers do not see differences between the products of different firms There are no significant barriers keeping new firms from entering the market.
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    A company’s Short Run  Decisions. How much to produce. (= how much variable inputs) Stay in operation or shut down.
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    The question we want to answer is:   What is the most profitable amount to produce? To find maximum profits, we have to look at how cost and revenues change at different levels of output.
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    Evaluating Profits  Producers will choose to produce the quantity that generates the most profit. Profit = revenues – cost 2 approaches to finding profit-maximizing output Total revenues vs. total costs Marginal revenue vs marginal cost
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    Using Total Revenues and Cost Total Profit = Total Revenues - Total Cost We have already found Total Cost at each level of output. As output increases, total cost increases But the rate of increase is different at different levels of output.
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Total Cost at various Outputs Rate of Output Fixed Cost Variable Total Cost 0 $120 $ 10 120 85 205 15 125 245 20 150 270 30 240 360 40 350 470 50 550 670 51 633 753 Note how fast it goes up when output exceeds 40 units…. This indicates that capital is  very  crowded at this level
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Total Cost at each level of Output . . increases as output increases, based on changing returns to the variable inputs. Cost Output                      Decreasing  Increasing    returns returns 10   20   30   40   50   60   70  700  500  120
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    Total Revenues Total Revenues are the total amount the firm gets for selling its output. This depends on the price it charges how many units of output the firm sells.
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    Total Revenues If the firm is in a competitive market, There are many firms making the same good No firm has enough market share to affect the price Therefore, the firm will simply charge the market price for its good It cannot sell its output above the market price, since consumers would just buy from other producers There is no reason to sell at a lower price, since it can sell all it wants at the market price
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    Price Taker Competitive firms are “price takers” Do not price lower to sell more They find the market price is and charge it.
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compet firm - TheCompetitiveFirm:ShortRun What is a...

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