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Lecture 8

ECON 1B03 Lecture 8: Micro Unit 8

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Hannah Holmes

Unit 8 Perfectly Competitive Markets AR = TR/Q = PQ/Q = P Marginal Revenue: change in total revenue from an additional unit sold MR = change in TR / change in Q MR is the slope of the TR function MR = P, *** only true for perfectly competitive firms that are price takers A profit-maximizing firm will produce a quantity of output at the point where MR=MC ^ True for all firms not just competitive firms ** In perfect competition only, a firm will produce where P = MR = MC or P = MC When MR > MC, firm should increase Q When MR < MC, firm should decrease Q When MR = MC, profit it maximized at Q Individual firms supply curve is its MC curve (not market supply) SR Shutdown Companies may choose to temporarily shutdown due to market conditions ⁃ negative advertising could lead to a decrease in demand and drop in market price of firms good ⁃ firm expects effect of advertising will wear off, demand will rise again and therefore price will rise again ⁃ then firm plans to reopen ⁃ Example Maple Leaf’s cold cut products a little while back ⁃ Shutting down may cause loss of customers in a competitive market ⁃ A firm will continue to have to pay its fixed costs even if it shuts down ⁃ If a firm can afford to pay for its variable costs it should still stay open ⁃ Firm shuts down if TR
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