Profits for Competitive and Monopolistic Firms

Profits for Competitive and Monopolistic Firms - able to...

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Profits for Competitive and Monopolistic Firms Profit In the long run, firms make the decision either to stay in the market, or to leave the market. (Leaving the market is different from stopping production: a firm can temporarily halt production with the intention of starting up once it becomes profitable again. Leaving the market is much more permanent.) How do they make this decision? Firms still look at the relationship between their average cost (AC) and price. In the short run, firms will sometimes decide to continue production even if their costs exceed the market price, in the long run firms will exit the market if P < AC, since they are losing money, and they have the option to leave the market. When prices rise in a market, more firms will enter, since they will be
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Unformatted text preview: able to produce goods at a lower average cost than the market price. When the price falls, however, those firms who cannot produce at AC < p have to exit. Firms will produce at their minimum AC in order to make as much money as possible, and to avoid having to leave the market. This means that any firm that cannot produce at an average cost below the market price will be forced out of the market, and in the long run, firms will earn no profits from producing and selling their goods. Competition forces firms with higher costs to either cut costs or leave the market until the market price is equal to the average cost incurred by firms still in the market. In the long run, P = AC...
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.

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