ECON 1 Lecture Notes - Lecture 30: Average Variable Cost, Marginal Revenue, Demand Curve

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If price is below average variable cost, firm shuts down rather than produces. When price equals average variable cost, firm is indifferent but between producing or shutting down but still loses fixed costs. Above shutdown point, firm produces to minimize loss. When price equals average total cost, firm earns normal profit. Above break-even point, firm earns economic profit. Quantity supplied when above shutdown point is determined by intersection of marginal cost and marginal revenue curve. The portion of the firm"s marginal cost curve that is above lowest point on average variable cost curve(above shutdown point) becomes short-run firm supply curve. Short-run industry supply curve: horizontal sum of all firm"s short-run supply curves. Perfectly competitive firm supplies short-run quantity that maximizes profit or minimizes loss. Describe how taking the long-run view affects economic factors. In long run, firms have time to enter and leave and adjust its size. Firms in perfect competition earn normal profit.

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