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Lecture 16

ECON 1000 Lecture Notes - Lecture 16: Perfect Competition, Marginal Revenue, Demand Curve

Course Code
ECON 1000
George Georgopoulos

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Lecture Sixteen: Perfect Competition
November 24, 2011
Temporarily Shut Down Decision
If the firm makes an economic loss it must decide 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 firms loss.
If your total revenue is less than your variable costs, then it would be wise to shut
Loss Comparison
The firm’s loss equals Total Fixed Cost plus Total Variable Cost, minus Total
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.
-The firm incurs a loss equal to its fixed costs
Firm’s Output Decision
A firm’s shutdown point is the price and quantity at which it is indifferent
between producing and shutting down.
This point is where AVC is at its minimum.
-It is also the point at which the MC curve crosses the AVC curve
The firm, incurs a loss equal to the TFC from either action.
Market Supply in the Short Run
The short run market supply curve shows the quantity supplied by all the
firms in the market at each price when each firm’s plant and the number of firms
remain the same

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The Firm’s Supply Curve
A perfectly competitive firm’s supply curve shows the firm’s profit-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
revenue, and because marginal revenue equals price, the firm’s supply curve is
linked to its marginal cost curve.
But at a price below the shutdown point, the firm produces nothing
Profits and Losses in the Short Run
To determine whether a firm is making an economic profit or incurring an
economic loss, we compare the firms average total cost at the profit maximizing
output with the market price.
If the price equals the average total cost, then the firm makes 0 profit. This is the
break even point.
If the price exceeds average total cost, and the firm makes an economic profit,
the economic profit is positive
- This is when firms will enter the industry because there is profit to be made.
If the price is less than average total cost and the firm incurs an economic loss,
the economic profit is negative
-This is when firms will start to exit the industry
Short-Run Equilibrium - short run market supply and market demand
determine the market price and the output
Change in Demand
An increase in demand brings a rightward shit of the market demand curve, The
rice rises and quantity rises.
A decrease in demand brings a leftward shit of the market demand curve. The
price falls and the quantity decreases
Profits and Losses in the Short Run
Maximum profit is not always a positive economic profit.
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