9.Case Study: Near-Empty Restaurants and Off-Season Miniature GolfFigure 3
a.In making a decision of whether or not to open for lunch, a restaurant owner must weigh revenue with variable costs. (Much of the cost of running a restaurant is somewhat fixed.)b.The same criteria would apply to a decision of whether a miniature golf course in a summer resort community should stay open during other seasons. The course should only be open if revenue exceeds variable costs.D.The Firm's Long-Run Decision to Exit or Enter a Market1.If a firm exits the market, it will earn no revenue, but it will have no costs as well.2.Therefore, a firm will exit if the revenue that it would earn from producing is less than its total costs:Exit if TR< TC.3.Because TR= Px Qand TC= ATCx Q, we can rewrite this condition as:Exit if P< ATC.4.A firm will enter an industry when there is profit potential, so this must mean that a firm will enter if revenues will exceed costs:Enter if P> ATC.5.Because, in the long run, a firm will remain in a market only if P≥ ATC, the firm's long-run supply curve will be its marginal cost curve above ATC.If:The Firm Will:Figure 4
P> ATCEnter because economic profits are earnedP= ATCNot enter or exit because economic profits are zeroP< ATCExit because economic losses are incurredE.Measuring Profit in Our Graph for the Competitive Firm1.Recall that Profit = TR−TC.2.Because TR= Px Qand TC= ATCx Q, we can rewrite this equation:Profit = (P– ATC) x Q.3.Using this equation, we can measure the amount of profit (or loss) at the firm's profit-maximizing level of output (or loss-minimizing level of output).Students always want to use the point of minimum average total cost when finding profit on the graph. Remind them to always find the average total cost of the profit-maximizing level of output.Figure 5
III.The Supply Curve in a Competitive MarketA.The Short Run: Market Supply with a Fixed Number of Firms1.Example: a market with 1,000 identical firms.2.Each firm's short-run supply curve is its marginal cost curve above average variable cost.3.To get the market supply curve, we add the quantity supplied by each firm in the market at every given price.B.The Long Run: Market Supply with Entry and Exit 1.If firms in an industry are earning profit, this will attract new firms. a.The supply of the product will increase (the supply curve will shift to the right).b.The price of the product will fall and profit will decline. 2.If firms in an industry are incurring losses, firms will exit. 3.At the end of this process of entry or exit, firms that remain in the market must be earning zero economic profit.
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