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Chapter 9

ECON 2000 Chapter Notes - Chapter 9: Average Variable Cost, Longrun, European Cooperation In Science And Technology


Department
Economics
Course Code
ECON 2000
Professor
All
Chapter
9

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ECON 2000
THE MARKET SYSTEM: Choices Made by Households & Firms
Chapter 9: LONG-RUN COSTS & OUTPUT DECISIONS
1. BREAKING EVEN: the situation in which a firm is earning exactly a normal
rate of return
2. Because a firm must bear FIXED COSTS whether or not is shuts down, its
decision depends solely on whether total revenue from operating is sufficient to
cover total variable cost
3. SHUTDOWN POINT: the lowest point on the average variable cost curve.
When prices fall below the minimum point on AVC, total revenue is insufficient
to cover variable costs and the firm will shut down and bear losses equal to fixed
costs
a. At prices below AVC, it pays a firm to shutdown rather than continue
operating. Thus, the short-run supply curve of a competitive firm is the
part of its marginal cost curve that lies ABOVE its average variable cost
curve
b. Anytime that price is below the minimum point on the average variable
cost curve, total revenue will be less than total variable cost, and the firm
will shut down. The minimum point on the average variable cost curve
(which is also the point where marginal cost and average variable cost
interest) is called the SHUTDOWN POINT. At all prices above the
shutdown point, the MC curve shows the profit-maximizing level of output.
At all prices below it, optimal short-run output is zero
4. SHORT-RUN INDUSTRY SUPPLY CURVE: the sum of the marginal cost
curves (above AVC) of all the firms in an industry
a. The SHORT-RUN SUPPLY CURVE of a firm in a perfectly competitive
industry is the portion of its MC curve that lies above its AVC curve
5. A firm that is earning positive profits in the short run and expects to continue
doing so has an incentive to expand in the long run. Profits also provide an
incentive for new firms to enter the industry
6. In the short run, firms suffering losses are stuck in the industry. They can shut
down operations (q=0), but they must still bear fixed costs. In the long run, firms
suffering losses can exit the industry
7. A firms decision about whether to shut down in the short run depends solely on
whether its total revenue from operations is sufficient to cover its total variable
cost. If total revenue exceeds total variable cost, the excess can be used to pay
some fixed costs and thus reduce losses
LONG & SHORT RUN DECISIONS BY PERFECTLY COMPETITIVE
FIRMS
Short-Run Condition Long-Run Condition Long-Run Decision
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