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Unformatted text preview: evenue
is less than total variable costs. What Should a Firm Do in the Short
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
• 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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