1 - Competitive Firms

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Department
Economics
Course
ECO101H1
Professor
Gustavo Indart
Semester
Summer

Description
COMPETITIVE FIRMS Short-Run Decisions Any profit-maximizing firm will produce at a level output at which: P ≥ AVC and MC = MR Note: When MR > MC, revenue from last unit produced > cost of last unit produced Produce this unit and increase production When MR < MC, revenue from last unit produced < cost of last unit produced Do not produce this unit and decrease production The Competitive Firm Equilibrium occurs at P = MC Short-Run Profit Maximization for a Competitive Firm: Given price (P), the firm chooses the quantity supplied to maximize profit when P = MC (since P = MR and MR = MC) Economic Profit = P*q - Total Cost = P*q - (Average Cost)q = (P - AC)q 1) P > AC (Economic Profit) 2) P = AC (Break-even output, 0 Economic Profit) 3) AVC < P < AC (Economic Loss, but will continue producing since P > AVC) 4) P < AVC (Economic Loss, firm shuts down) Shutdown Price: minAVC = p Long-Run Competitive Equilibrium Economies of Scale (Increasing Returns to Scale): occur when a % increase in all factor inputs causes a greater % increase in output Diseconomies of Scale (Decreasing Returns to Scale): occur when a % increase in all factors causes a smaller % increase in output Constant Returns to Scale: occurs when a % increase in all factors causes the same % increase in output AC decreases with Economies of Scale AC increases with Diseconomies of Scale AC does not change with Constant Returns to Scale Profi
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