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Lecture 15

ECON 1000 Lecture Notes - Lecture 15: Market Power, Average Variable Cost, Sunk Costs

Course Code
ECON 1000
Paul Haddow

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Ch 14: rms in compeve market
Characteriscs of perfect compeon:
Many buyers and many sellers and all are small
Goods are oered for sale, essenally the same
Firm can freely enter or exit the market
Each buyer and seller is a “price taker” cannot inuence the price
MR=AR=P is only true for rms in perfectly compeve market
If MR(P)> MC, then increases Q to raise prot
If MR(P)< MC, then reduce Q to
The Marginal-cost curve and the rms supply decision
Key Assumpon: goal of rms is to maximize prots, the dierence between Total
Revenues and Total Costs
What costs are relevant?
Accounng 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)
Accounng costs are limited to explicit costs for which there are cost outlays
Where there are implicit costs, economic costs are greater than accounng 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 prot maximizing level of output, marginal revenue and marginal cost are
exactly equal
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 prots, and a decrease in
demand lowers prices and leads to losses
A cost is a sunk cost when it has already been commied and cannot be recovered.
Because nothing can be done about sunk costs, you can ignore them when making
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