The firm should produce in the short run as long as

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Unformatted text preview: evenue is less than total variable costs. What Should a Firm Do in the Short Run? The firm should produce in the short run as long as price (P) is above average variable cost (AVC). It should shut down in the short run if price is below average variable cost. Perfectly Competitive Firm’s Short-Run Supply Curve • Only a price above average variable cost will induce the firm to supply output. • The Short-Run supply curve is that portion of the firm’s marginal cost curve that lies above the average variable cost curve. From Firm to Market Supply Curve • We can derive the Short-Run Market (Industry) Supply Curve by horizontally “adding” the short-run supply curves for all firms in the market or industry. • The supply curve is upward-sloping because of the law of diminishing marginal returns Q&A • If a firm produces the quantity of output at which MR=MC, does it follow that it earns profits? • In the short run, if a firm finds that its price is less than its average total cost, should it shut down its operation? • The lay...
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This note was uploaded on 09/16/2012 for the course ECONOMICS 90 taught by Professor Srinivas during the Spring '12 term at SMU.

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