Eco 10-22-07 - Econ Notes 10/22/07 1. Working at a loss a....

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Econ Notes 10/22/07 1. Working at a loss a. If price drops below total cost, would you keep working? i. If your price is enough to cover variable costs, it’s in the firm’s best interest to keep working (in the short run) in order to minimize it’s losses ii. In the LR, all FC become VC, therefore the firm will shut down (price won’t be able to cover variable costs) b. What if price drops below AVC? i. The firm will shut down c. Definitions i. Break-even Point: 1. minimum point on the AC curve- when costs = income ii. Shut Down Point: 1. minimum of the AVC curve d. We can think of the competitive firm’s supply curve as being the MC curve above the shut down point 2. Economic Profit in Equilibrium a. Can Profit > - in Equilibrium? i. No ii. Why? 1. Entry/Exit a. See Entry/Exit i. Assume there are no sunk costs ii. Assume there are “n” firms iii. Entry is costless 1. Derived from (2aii1ai) b. Profit of firms will attract competition i. Firms will enter the market ii. Firms will continue to enter the market until P=
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This note was uploaded on 04/07/2008 for the course ECO 2302 taught by Professor Smith during the Spring '08 term at University of Texas at Dallas, Richardson.

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Eco 10-22-07 - Econ Notes 10/22/07 1. Working at a loss a....

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