ECON 101 Lecture 22: Lecture 22

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13 Jun 2018
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Basic intuition (used throughout the course)
Produce the marginal unit if P>MC
Choose output so that MC=P
But we should also ask
Does the firm cover its variable costs?
Should compare P and AVC
And we might ask
Does the firm cover its fixed costs?
Should compare P and ATC
Wants to produce until MC=P
We see losses since the ATC is above P
Shut down operations is better than producing at Q
We see losses since ATC is above P
Going to stick around in the industry if fixed costs aren’t avoidable since revenue will cover
the variable costs (will produce until P is equal to MC)
If fixed costs can be avoided the firm will shut down since it will be impossible to break even
Industry equilibrium
In a dynamic market, firms are able to enter and exit the industry
Entry involves sinking of fixed costs
Exit implies avoiding fixed costs
Entry/exit occurs in response to profit levels
Profits induce entry
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ECON 101 Full Course Notes
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Document Summary

We see losses since the atc is above p. Shut down operations is better than producing at q. We see losses since atc is above p. Going to stick around in the industry if fixed costs aren"t avoidable since revenue will cover the variable costs (will produce until p is equal to mc) If fixed costs can be avoided the firm will shut down since it will be impossible to break even. In a dynamic market, firms are able to enter and exit the industry. Long-run: all firms can choose whether to bear fixed costs. If price above min avc, then firm will produce until p=mc. Little q=variable being produced by an individual firm. It is true for any industry so nothing will be produced or there will be more produced (decisions of short-run) Increase number of firms causes s to go to right. Decreasing number of firms shifts s to the left.

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