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CLEP Microeconomic Notes 1

Long run there is no such thing as fixed costs all

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Long run – there is no such thing as fixed costs – ALL costs are variable, supply has adjusted to changes in demand 104) Optimum Profits – a firm should produce at a point where a) Marginal Revenue (MR) = Marginal Costs (MC) b) Firms should produce up to the point where: Marginal Revenue (MR) = Marginal Cost (MC) b.i)Q1 – to increase profits, increase production b.ii) Q2 – profits are maximized (MC = MR) b.iii) Q3 – to increase profits, decrease production 105) Normal Profits – is the minimum profit necessary for a firm to survive in a perfectly competitive market a) Markets with normal profits will neither expand or shrink, they are in a state of long-term equilibrium b) In a free market normal economic profits are Zero 106) When Marginal Revenue (MR) is below ATC, the firm is losing money a) The firm is selling products for less than it costs to produce b) Firms should produce up to the point where: Marginal Revenue (MR) = Marginal Cost (MC) 107) Breakeven points for a firm is where? a) The point that lays at the intersection of the Average Total Cost (ATC) and the marginal cost (MC) a.i) ATC – all costs divided by quantity a.ii) MC – the cost to make one additional unit 108) Marginal Revenue – is the amount of revenue that is generated by selling one more unit a) MR = Total Revenue / Total Quantity (Q) 109) Rules of Normal Profits: (a.i.1) A firm will only achieve normal profits in the long run (a.i.2) A firm that has sub-normal profits will probably close shop in the long run this will drive up profits (a.i.3) A firm that has super-normal profits will attract new competition (a.i.3.a) Firms enter in the long run and drive profits down
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b) Lower than normal profits are known as sub-normal and firms exit the market 110) Shut Down Points : a.i) Long Run – the minimum price point is Average Total Cost curve (ATC) (a.i.1) If the price drops below the minimum on the ATC curve, the firms cannot make money and will shut down a.ii) Short Run – the minimum price point is on the Average Variable Cost curve (AVC) 111) Average Fixed Costs (AFC) = Total Fixed Costs (TFC) divided by Quantity (Q) 112) Total Revenue – Total Cost = Profit a) A firm must maintain a large difference between the cost of production and revenue b) The optimum level of production is: b.i)MR (marginal Revenue) = MC (marginal Cost) 113) Marginal Cost (MC) curve will ALWAYS cross the Average Total Cost (ATC) curve at the minimum average variable cost (AVC) curve 114) Marginal Cost (MC) is the increase in total cost that occurs when one unit of output is added a) In contrast – Marginal Revenue (MR) is the additional revenue from one unit increase in output Perfect Competition 115) In a perfect competition, Price (P) = Marginal Cost (MC) a) P=MC simply means that the price that a firm is selling their product is equal to marginal cost to produce b) Price of a product is equal to minimum average cost 116) Normal profits mean Zero .00 economic profits a) Normal profits occur when Price (P) = Average Total Cost (ATC) at the bottom of the ATC curve 117)
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