Lecture 17 - Announcements • Have a great break!! 1 of 26...

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Unformatted text preview: Announcements • Have a great break!! 1 of 26 Short Run Profits • We now know that a perfectly competitive firm should choose quantity where MR=MC • In the short run, a firm can: 1. earn positive economic profits 2. earn zero economic profits 3. suffer economic losses but continuing to operate to reduce or minimize those losses 4. shut down and bear losses just equal to fixed costs. We will look at each of these scenarios. 2 of 33 3 of 36 SHORT-RUN CONDITIONS Example: The Blue Velvet Car Wash SCENARIO 1: EARNING POSITIVE PROFITS Blue Velvet Car Wash Weekly Costs TOTAL FIXED COSTS ( TFC ) TOTAL VARIABLE COSTS ( TVC ) (800 WASHES) TOTAL COSTS ( TC = TFC + TVC ) $ 3,600 1. Normal return to investors $ 1,000 1. 2. Labor Materials $ 1,000 600 Total revenue ( TR ) at P = $5 (800 x $5) $ 4,000 2. Other fixed costs (maintenance contract, insurance, etc.) 1,000 $ 1,600 Profit ( TR- TC ) $ 400 $ 2,000 4 of 36 SHORT-RUN CONDITIONS Graphic Presentation (with different numbers) Firm Earning Positive Profits in the Short Run 5 of 36 SHORT-RUN CONDITIONS Example: The Blue Velvet Car Wash SCENARIO 2: EARNING ZERO PROFITS Blue Velvet Car Wash Weekly Costs TOTAL FIXED COSTS ( TFC ) TOTAL VARIABLE COSTS ( TVC ) (800 WASHES) TOTAL COSTS ( TC = TFC + TVC ) $ 4,000 1. Normal return to investors $ 1,000 1. 2. Labor Materials $ 1,000 600 Total revenue ( TR ) at P = $5 (800 x5) $ 4,000 2. Other fixed costs (maintenance contract, insurance, etc.) 1,400 $ 1,600 Profit ( TR- TC ) $ $ 2,400 SHORT-RUN CONDITIONS • Zero profit: when P=MC=AC • When P=AC, profit=TR-TC=(P- AC)*Q=0 6 of 33 Q $ d=MR=AR=P* AC MC $5 800 7 of 36 SHORT-RUN CONDITIONS MINIMIZING LOSSES operating profit (or loss) or net operating revenue: Total revenue minus total variable cost ( TR - TVC ). In general, ■ If revenues exceed variable costs, operating profit is positive and can be used to offset fixed costs and reduce losses, and it will pay the firm to keep operating. ■ If revenues are smaller than variable costs, the firm suffers operating losses that push total losses above fixed costs . In this case, the firm can minimize its losses by shutting down. 8 of 36 SHORT-RUN CONDITIONS SCENARIO 3: Producing at a Loss to Offset Fixed Costs A Firm Will Operate If Total Revenue Covers Total Variable Cost CASE 1: SHUT DOWN CASE 2: OPERATE AT PRICE = $3 Total Revenue ( q = 0) $ Total Revenue ($3 x 800) $ 2,400 Fixed costs Variable costs Total costs + $ $...
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This note was uploaded on 12/20/2011 for the course ECON 2005 taught by Professor Zirkle during the Fall '07 term at Virginia Tech.

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Lecture 17 - Announcements • Have a great break!! 1 of 26...

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