At intermediate output levels, the firm makes an economic profit. At high output levels, the firm again incurs an economic loss—now the firm faces steeply rising costs because of diminishing returns. The firm maximizes its economic profit when it produces 9 sweaters a day. If MR > MC, economic profit increases if output increases. If MR < MC, economic profit decreases if output increases. If MR = MC, economic profit decreases if output changes in either direction, so economic profit is maximized. find more resources at oneclass.comfind more resources at oneclass.com
4 Temporary Shutdown Decision If the firm makes an economic loss, it must decide whether to exit the market or to stay in the market. If the firm decides to stay in the market, it must decide whether to produce something or to shut down temporarily. The decision will be the one that minimizes the fiƌŵ’s lossLoss Comparisons The fiƌŵ’s loss eƋuals total fiǆed Đost ;TFC) plus total variable cost (TVC) minus total revenue (TR). Economic loss = TFC + TVC TR = TFC + (AVC P) x Q If the firm shuts down, Q is 0 and the firm still has to pay its TFC. So the firm incurs an economic loss equal to TFC. This economic loss is the largest that the firm must bear. The Shutdown Point A fiƌŵ’s shutdown pointis the price and quantity at which it is indifferent between producing the profit-maximizing quantity and shutting down. The shutdown point is at minimum AVC. This point is the same point at which the MC curve crosses the AVC curve. At the shutdown point, the firm is indifferent between producing and shutting down temporarily. At the shutdown point, the firm incurs a loss equal to total fixed cost (TFC). Figure 12.4 shows the shutdown point. Minimum AVC is $17 a sweater. At $17 a sweater, the profit-maximizing output is 7 sweaters a day. The firm incurs a loss equal to the red rectangle. If the price of a sweater is between $ϭ7 aŶd $ϮϬ.ϭϰ, …The firm produces the quantity at which marginal cost equals price. The firm covers all its variable cost and some of its fixed cost. It incurs a loss that is lessthan TFC. find more resources at oneclass.comfind more resources at oneclass.com
5 The Firms Supply Curve A peƌfeĐtlǇ Đoŵpetitiǀe fiƌŵ’s supplǇ Đuƌǀe shoǁs hoǁ the fiƌŵ’s pƌofit-maximizing output varies as the market price varies, other things remaining the same. Because the firm produces the output at which marginal cost equals marginal ƌeǀeŶue, aŶd ďeĐause ŵaƌgiŶal ƌeǀeŶue eƋuals pƌiĐe, the fiƌŵ’s supplǇ Đuƌǀe is linked to its marginal cost curve. But at a price below the shutdown point, the firm produces nothing.
You've reached the end of your free preview.
Want to read all 54 pages?
- Spring '11
- Price Elasticity