b. Once a cost is sunk, it is no longer an opportunity cost. c. Because nothing can be done about sunk costs, you should ignore them when making decisions. D. The Firm's Long-Run Decision to Exit or Enter a Market 1. 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. Since TR = P x Q and TC = ATC x Q , we can rewrite this condition as: Exit if P < ATC . 4. The price that coincides with the minimum point on the average total cost curve is referred to as the exit price. 5. 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 . Figure 14.3
6 6. In the long run, a firm will remain in a market only if P ≥ ATC. As a result, the firm's long-run supply curve will be its marginal cost curve above ATC . If: The Firm Will: P > ATC Enter because economic profits are earned P = ATC Not enter or exit because economic profits are zero P < ATC Exit because economic losses are incurred E. Measuring Profit in Our Graph for the Competitive Firm 1. Recall that Profit = TR - TC . 2. Because TR = P x Q and TC = ATC x 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). Figure 14.4 Figure 14.5
III. The Supply Curve in a Competitive Market A. The Short Run: Market Supply with a Fixed Number of Firms 1. 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. a. The supply of the product will decrease (the supply curve will shift to the left). b. The price of the product will rise and losses will decline. 3. At the end of this process of entry or exit, firms that remain in the market must be making zero economic profit. 4. Because Profit = TR – TC , profit will only be zero when: TR = TC .
You've reached the end of your free preview.
Want to read all 9 pages?