ECON 1000 Lecture Notes - Lecture 15: Market Power, Average Variable Cost, Sunk Costs
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Ch 14: rms in compeve market
Characteriscs of perfect compeon:
Many buyers and many sellers and all are small
Goods are oered for sale, essenally the same
Firm can freely enter or exit the market
Each buyer and seller is a “price taker” cannot inuence the price
MR=AR=P is only true for rms in perfectly compeve market
If MR(P)> MC, then increases Q to raise prot
If MR(P)< MC, then reduce Q to
The Marginal-cost curve and the rms supply decision
•Key Assumpon: goal of rms is to maximize prots, the dierence between Total
Revenues and Total Costs
•What costs are relevant?
•Accounng costs versus economic costs
•Economic costs are “opportunity costs” and thus include implicit costs ( e.g. using
your own savings or labour me rather than borrow or hire)
•Accounng costs are limited to explicit costs for which there are cost outlays
•Where there are implicit costs, economic costs are greater than accounng costs
1. If marginal revenue is greater than marginal cost, the rm should increase its
2. If marginal cost is greater than marginal revenue, the rm should decrease its
3. At the prot maximizing level of output, marginal revenue and marginal cost are
The Firms short-run decision to shut down
A rm cannot recover its xed costs; the rm will choose to shut down temporarily if the
price of the good is less than average variable cost.
An increase in demand raises raises prices and leads to prots, and a decrease in
demand lowers prices and leads to losses
A cost is a sunk cost when it has already been commied and cannot be recovered.
Because nothing can be done about sunk costs, you can ignore them when making
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