1. Production, cost, profit and perfect competition
Microeconomics Unit 2
Production, cost, profit and perfect competition

2. Average Product = Topic 1: PRODUCTION
Total Product (TP)- total output or quantity produced
Marginal Product (MP)- the additional output generated by additional inputs (workers).
= change in total product
Average Product (AP)- the output per unit of input
Average Product =
Total Product
# of workers 2

3. Total Product(TP) PIZZAS
calculate MP and AP
# of Workers
(Input)
Total Product(TP) PIZZAS
Marginal Product(MP)
Average Product(AP) 1 10 2 25 3 45 4 60 5 70 6 75 7 8 3

4. Total Product(TP) PIZZAS
calculate MP and AP
# of Workers
(Input)
Total Product(TP) PIZZAS
Marginal Product(MP)
Average Product(AP) - 1 10 2 25 15 3 45 20 4 60 5 70 6 75 7 8 -5 4

5. Total Product(TP) PIZZAS
calculate MP and AP
# of Workers
(Input)
Total Product(TP) PIZZAS
Marginal Product(MP)
Average Product(AP) - 1 10 2 25 15
12.5 3 45 20 4 60 5 70 14 6 75 7
10.71 8 -5
8.75 5

6. Stages of Production
Increasing returns: workers produce more additional products
Happens because of SPECIALIZATION

7. Stages of Production
Diminishing returns: workers produce less ADDITIONAL products
Happens because more workers are using the same fixed resources
(not enough fixed resources to go around)

8. Diminishing Marginal Returns Too many cooks in the kitchen!

9. Stages of Production
Negative returns: workers produce less total product
Happens because workers get in each others way

10. Identify the three stages of returns Total Product(TP) PIZZAS
# of Workers
(Input)
Total Product(TP) PIZZAS
Marginal Product(MP)
Average Product(AP) - 1 10 2 25 15
12.5 3 45 20 4 60 5 70 14 6 75 7
10.71 8 -5
8.75 10

11. Graphing Production 11

12. Stage I: increasing marginal returns Marginal and Average Product
Due to Specialization
Total
Product
Total Product
Quantity of Labor
Marginal and Average Product
Average Product
Quantity of Labor 12
Marginal Product

13. Stage II: decreasing marginal returns
Due to more workers using same fixed resources
Total
Product
Total Product
Quantity of Labor
Marginal and Average Product
Average Product
Quantity of Labor 13
Marginal Product

14. Stage III: Negative Marginal Returns Marginal and Average Product
Total
Product
Total Product
Quantity of Labor
Marginal and Average Product
Average Product
Quantity of Labor 14
Marginal Product

15. Topic 2: short run costs vs. long run costs

16. Short Run: fixed plant
Time period in which some resources remain fixed; it is too brief for a firm to change its plant capacity

17. Long Run: Variable plant
Time frame in which all resources can be varied; period of time is long enough to change plant size

18. Topic 3:
Short Run Costs of Production

19. workers TP
Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
Average fixed cost
Average variable cost
Average total cost 70
---
3.29 5
----
8.29 92
1.64
138
1.39
184
1.24
230
1.21
276
1.53
322
2.00
368
3.54

20. Complete MP in chart in notes

21. Increasing and decreasing returns????
workers TP
Marginal product 14 28 33 37 38 30 23 13
Increasing and decreasing returns????

22. EXPLICIT VS. IMPLICIT COSTS
Explicit costs = out of pocket expenses
Accountants only look at this
Implicit costs = opportunity costs (foregone wages, depreciation ect)
Economists consider explicit AND implicit!

23. Overall costs: What is the overall cost of producing??
Must look at TOTALS
Fixed Costs: (FC) Costs that DON’T change
Variable Costs: (VC) Costs that DO change
Total Costs: FC + VC

24. workers TP
Marginal product
Fixed cost 14 70 38 33 37 30 23 13

25. What happens to FC as more products are produced???
workers TP
Marginal product
Fixed cost 14 70 28 33 37 38 30 23 13
What happens to FC as more products are produced???

26. What happens to VC as more products are produced?
workers TP
Marginal product
Fixed cost
Variable cost
Total cost 14 70 38 92 33
138 37
184
230 30
276 23
322 13
368
What happens to VC as more products are produced?

27. What happens to TC as more products are produced???
workers TP
Marginal product
Fixed cost
Variable cost
Total cost 14 70 46
116 28 92
162 33
138
208 37
184
254 38
230
300 30
276
346 23
322
392 13
368
438
What happens to TC as more products are produced???

28. Cost Graphs
Total Costs

29. 1. Fixed cost will always be the same
2. VC will always slope up
3. Total cost will always slope up
* TC always > VC
*Distance between TC and VC = FC

30. Additional costs of making ONE more product .
Marginal Cost:
Additional costs of making ONE more product . 30

31. What happens to MC as more products are produced???
workers TP
Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost 14 70 46
116
3.29 28 92
162
1.64 33
138
208
1.39 37
184
254
1.24 38
230
300
1.21 30
276
346
1.53 23
322
392
2.00 13
368
438
3.54
What happens to MC as more products are produced???

32. How much does each product cost to make? Use AVERAGES
Average Fixed Cost (AFC): fixed cost PER PRODUCT
AFC = FC/TP

33. workers TP
Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
Average fixed cost 14 70 46
116
3.29 5 28 92
162
1.64 33
138
208
1.39 37
184
254
1.24 38
230
300
1.21 30
276
346
1.53 23
322
392
2.00 13
368
438
3.54

34. What happens to AFC as more products are produced???
workers TP
Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
Average fixed cost 14 70 46
116
3.29 5 28 92
162
1.64
1.67 33
138
208
1.39
.93 37
184
254
1.24
.63 38
230
300
1.21
.47 30
276
346
1.53
.39 23
322
392
2.00
.34 13
368
438
3.54
.32
What happens to AFC as more products are produced???

35. Average Variable cost (AVC): variable cost PER PRODUCT
AVC = VC/TP

36. workers TP
Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
Average fixed cost
Average variable cost 14 70 46
116
3.29 5 28 92
162
1.64
1.67 33
138
208
1.39
.93 37
184
254
1.24
.63 38
230
300
1.21
.47 30
276
346
1.53
.39 23
322
392
2.00
.34 13
368
438
3.54
.32

37. What happens to AVC as more products are produced???
workers TP
Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
Average fixed cost
Average variable cost 14 70 46
116
3.29 5 28 92
162
1.64
1.67
2.19 33
138
208
1.39
.93
1.84 37
184
254
1.24
.63 38
230
300
1.21
.47
1.53 30
276
346
.39 23
322
392
2.00
.34
1.59 13
368
438
3.54
.32
1.70
What happens to AVC as more products are produced???

38. Average total cost (ATC): TOTAL cost PER PRODUCT
ATC = TC/TP or
ACT = AFC + AVC

39. workers TP
Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
Average fixed cost
Average variable cost
Average total cost 14 70 46
116
3.29 5
8.29 28 92
162
1.64
1.67
2.19 33
138
208
1.39
.93
1.84 37
184
254
1.24
.63 38
230
300
1.21
.47
1.53 30
276
346
.39 23
322
392
2.00
.34
1.59 13
368
438
3.54
.32
1.70

40. What happen to ATC as more products are produced???
workers TP
Marginal product
Fixed cost
Variable cost
Total cost
Marginal cost
Average fixed cost
Average variable cost
Average total cost 14 70 46
116
3.29 5
8.29 28 92
162
1.64
1.67
2.19
3.86 33
138
208
1.39
.93
1.84
2.77 37
184
254
1.24
.63
2.27 38
230
300
1.21
.47
1.53 2 30
276
346
.39
1.92 23
322
392
2.00
.34
1.59
1.93 13
368
438
3.54
.32
1.70
2.03
What happen to ATC as more products are produced???

41. Average costs graph

42. AFC will always get smaller as more products are produced
Why??? Fixed cost are spread out among more products
AVC and ATC – always U shaped due to increasing and then diminishing returns
Distance between ATC and AVC gets smaller as more products are produced

43. Marginal cost with Average costs ***

44. MC intersects ATC at min
MC intersects ATC at min. point Gap between ATC and AVC gets smaller as Q increases

45. TC VC What is the FC? At 9 units what is the: VC TC AVC ATC AFC 800
700
600
500
400
300
200
100
What is the FC?
At 9 units what is the:
VC TC AVC
ATC AFC
Costs (dollars)
TC=$500
FC=$400
VC=$100
Quantity 45

46. Practice reading MC ATC AVC 12 11 10 9 8 7 6 5 4 3 Costs (dollars) 2 1
At an output of 11, what is the :
AVC MC AFC
ATC TC VC
Quantity 46

47. At output Q, what area represents:
Practice reading
At output Q, what area represents: TC VC FC
CDQ0
BEQ0
AFQ0 or CDEB 47

48. Relationship between ATC and MC
Costs (dollars)
Average product and
marginal product AP
Relationship between ATC and MC MP
The MC curve intersects the ATC curve at its lowest point.
Quantity of labor
Quantity of output MC
When the marginal cost is below the average, it pulls the average down.
When the marginal cost is above the average, it pulls the average up.
ATC
Example:
The average income in the room is $50,000.
An additional (marginal) person enters the room: Bill Gates.
If the marginal is greater than the average it pulls it up. 48

49. Things to remember about drawing cost curves:
1. Draw MC first (looks like a check mark)
2. Draw ATC – start at point above MC
3. Draw AVC – start at point above MC but below ATC
4. MC curve always intersects ATC and AVC at their minimum points
5. Distance between ATC and AVC gets smaller as output (quantity) increases
6.ATC and AVC are U shaped (due to increasing and then decreasing marginal returns)

50. TOPIC 4: Long run costs of production
Long run costs reflect changes in plant size

51. Definition and Purpose of the Long Run
In the long run all resources are variable. Plant capacity/size can change.
Why is this important?
The Long-Run is used for planning. Firms use to identify which plant size results in the lowest per unit cost.
3 things can happen in the long run
1. Economies of scale
2. Constant returns to scale
3. Diseconomies of scale 51

52. Long Run AVERAGE Total Cost
Costs
MC1
ATC1
$9,900,000
$50,000
$6,000
$3,000
, , ,000,0000
Quantity Cars 52

53. Long Run AVERAGE Total Cost
Company builds new plant ATC goes down due to mass production
Costs
MC1
ATC1
MC2
$9,900,000
ATC2
$50,000
$6,000
$3,000
, , ,000,0000
Quantity Cars 53

54. Long Run AVERAGE Total Cost
Company builds new plant ATC goes down due to mass production
Costs
MC1
ATC1
MC2
$9,900,000
MC3
ATC2
$50,000
ATC3
$6,000
$3,000
, , ,000,0000
Quantity Cars 54

55. Long Run AVERAGE Total Cost
Company builds more plants, ATC stays the same
Costs
MC1
ATC1
MC2
$9,900,000
MC3
MC4
ATC2
$50,000
ATC3
ATC4
$6,000
$3,000
, , ,000,0000
Quantity Cars 55

56. Long Run AVERAGE Total Cost
Company builds more plants and ATC begins to increase
Costs
MC1
ATC1
MC2
$9,900,000
MC5
MC3
ATC5
MC4
ATC2
$50,000
ATC3
ATC4
$6,000
$3,000
, , ,000,0000
Quantity Cars 56

57. Long Run AVERAGE Total Cost
Costs
MC1
ATC1
MC2
$9,900,000
MC5
MC3
ATC5
MC4
ATC2
$50,000
ATC3
ATC4
$6,000
$3,000
, , ,000,0000
Quantity Cars 57

58. Long Run AVERAGE Total Cost Where is the Long Run Average Cost Curve?
Costs
MC1
ATC1
MC2
$9,900,000
MC5
MC3
ATC5
MC4
ATC2
$50,000
ATC3
ATC4
$6,000
$3,000
, , ,000,0000
Quantity Cars 58

59. The LRATC curve connects the lowest points on all of the SRATC curve (envelope)

60. Economies of Scale- LRATC curve is decreasing
Happens due to mass production techniques

61. Constant Returns to Scale- The ATC to produce is staying the same
LRATC is flat

62. Diseconomies of Scale- LRATC is increasing
Caused by a firm becoming too big “for own good”

63. Constant Returns to Scale Long Run Average Cost Curve
LRATC Simplified
The law of diminishing marginal returns doesn’t apply in the long run because there are no FIXED RESOURCES.
Costs
Economies of Scale
Constant Returns to Scale
Diseconomies of Scale
Long Run Average Cost Curve 63
Firm should select the size of firm that has lowest SRATC
Quantity

64. Topic 5: Revenue
Total Revenue = amount of $ a firm takes in from selling a product
TR = P X Q

65. Marginal revenue
The increase in revenue that results from selling ONE more unit

66. Topic 6: PROFIT Profit = financial gain TOTAL REVENUE – TOTAL COST
TR>TC = PROFIT
TR<TC = LOSS
TR = TC = BREAK EVEN (normal profit)

67. Calculate profit Total product Total cost Total revenue Profit 50 700
500 80
800
100
850
1,000
130
900
1,300

68. Calculate profit Total product Total cost Total revenue Profit 50 700
500
-200 80
800
100
850
1,000
150
130
900
1,300
400

69. 2 ways to improve profit
1. Increase revenue
2. decrease costs

70. Making a profit activity

71. Review:
What is Revenue????

72. What are the different types of costs???
FIXED and VARIABLE cost EXPLICIT cost and an IMPLICIT cost

73. Profit total cost Video clip PROFIT = total revenue – Costs???

74. Marshmallow Towers Objective:
Your goal in this activity is the same goal of every business, to make PROFIT. Your assignment is to earn the most profit as you make a tower made only of toothpicks and mini-marshmallows. You will have 15 minutes

75. What does it cost to build the tower???

76. Fixed Costs Total Fixed Cost = $ 800 rent $500 property tax $150
Insurance $100
opportunity cost$ $ 50
Total Fixed Cost = $ 800

77. Variable cost – will depend upon the # of marshmallows and toothpicks you use
$50.00 each
$ each

78. How much will we earn for building our tower???
Revenue will be based on the HEIGHT and STRENGTH of your tower

79. HEIGHT Inches 1-4 = $1,000 in inch
Every inch over 4 = $2,000 each inch

80. Strength Can stand alone for at least 10 seconds = $2,000
Can hold a sheet of paper on top for at least 10 seconds = $2,000

81. Record Sheet
You will record all costs on your record sheet You may purchase as many toothpicks and marshmallows as you wish RECORD THE NUMBER EACH TIME YOU PURCHASE! Marshmallows toothpicks ______ ________ _______ ________ Total # marshmallows ___ Total # toothpicks ______

82. Before tower is judged
Marshmallows Toothpicks ______ ________ _______ ________ Total # marshmallows __ Total # toothpicks ____ X $50 = ______ X $100 = ______ Total Variable cost = ________

83. Stop Watch: 15:00

84. Discuss these questions as a group – answer on your record sheet
We could have improved our profit by…..
How did your group try to minimize your costs?
How did your group try to maximize your revenue?
Why is it important to consider both cost and
revenue when making business decisions?

85. Imperfect Competition
TOPIC 7: MARKET STRUCTURES
Pure
Monopoly
Perfect
Competition
Monopolistic
Competition
Oligopoly
Imperfect Competition
Most competition least competition 85

86. Perfect Competition Number of firms: Many (thousands) of small firms
Choice for Consumers: many
Type of Good: identical products; perfect substitutes to each another
Market Entry: very easy, no barriers to entry
Amount of competition: Great deal; more than any other structure

87. Perfect competition
Example: Agricultural products

88. Monopolistic Competition

89. Characteristics of monopolistic competition
Number of firms: hundreds of small companies Choice for consumers: many Type of Good: product DIFFERENTIATION Market Entry: easy, little barriers to entry Amount of competition: significant amount; non-price competition

90. Examples: monopolistic competition
Retail stores
Restaurants
Pizza

91. Oligopoly
Number of firms: Few large companies Choice for Consumers: Few Type of Good: similar or different from one another Market entry: difficult to enter; barriers exist Amount of Competition: LITTLE One firm’s actions have impact on other firms Brand name recognition important

92. Examples: Oligopoly
Soft drinks
Cereal
Athletic apparel

93. Example of how one firm in oligopoly impacts another

94. Monopoly Number of firms: Single Seller Choice for consumers: ONE
Type of Good: unique; no substitutes
Amount of Competition: none (usually illegal because of this)
Market Entry: Impossible 94

95. Example: Monopoly
Utility companies

96. ID the market structure
Business 1: I’ve got plenty of competition. If I tried to raise my price, I’d lose business to the large firms that dominate our industry. I wait for them to raise prices and I follow along behind.

97. Business 2: New shops like mine are opening all the time – there are hundreds of us. I have to spend money on advertising to convince people that my shop is unique and different.

98. Business 3: I can’t afford to advertise; it would eat up what little profit I make. Besides, what good would it do? My product is the same as everyone else’s.

99. Business 4: My product is like no one else’s
Business 4: My product is like no one else’s. I work hard to make sure my firm stays out in front to avoid cutthroat competition.

100. Intellectual Property
Intellectual Property includes:
secret formulas, ideas, inventions (products and processes), industrial designs, literary and artistic works (novels, films, music, architectural designs and web pages)
Intellectual property is protected by:
Patents
Copyrights
Trademarks

101. Patents
legal right to exclude anyone else from manufacturing or marketing an invention
Last for 20 years.

102. Strange patents ???
Anti-eating face mask
Gerbil shirt

103. Copyrights
protect written or artistic expressions - novels, poems, songs or movies.
Lasts for the life of the author plus 50 years.

104. Famous copyright cases
S. Victor Whitmill v. Warner Bros. Entertainment Inc.
Tatoo (like Mike Tyson’s) in The Hangover Part 2. Warner Bros. and Whitmill worked out an agreement of undisclosed terms.

105. Mattel Inc. v. MGA Entertainment Inc
Mattel Inc. v. MGA Entertainment Inc. MGA Entertainment filed a lawsuit against Mattel, claiming that the line of My Scene Barbies copied the big-headed and slim-bodied physique of Bratz dolls

106. The Happy Birthday Song
The copyright belongs to Warner Music Group, and the company regularly charges up to $30,000 to anyone who wants to use the song for profit

107. Trademarks
Name, phrase, sound or symbol used in association with services or products.

108. Famous Trademarks
“That’s hot!”
“You’re Fired!”

109. “Fear the brow”
“Let’s get ready to rumble”

110. “There’s an app for that”
“BAM!”

111. The seller has NO control over price.
Profit Topic 8: PERFECT Competition REVIEW
Many small firms (thousands)
Identical products (perfect substitutes)
Easy for firms to enter the industry
Firms are “Price Takers”
The seller has NO control over price.
Can only control Quantity they are producing
111

112. Demand for Perfectly Competitive Firms
Why are they Price Takers?
If a firm charges above the market price, NO ONE will buy. Consumers will go to other firms
There is no reason to lower price because consumers will buy the same amount at the market price.
Since the price is the same at all quantities demanded, the demand curve for each firm is… Perfectly Elastic (A Horizontal straight line)
112

113. The Competitive Firm is a Price Taker Price is set by the Industry
$15
$15 D Q
5000 Q
Firm
(price taker)
Industry
113

114. If price changes in the market, it will also change in the FIRM

115. The Competitive Firm is a Price Taker Price is set by the Industry
What is the additional revenue for selling an additional unit?
1st unit earns $15
2nd unit earns 30 (15 more)
Marginal revenue is constant at $15
Notice: MR=D=AR=P P
Demand
$15
MR=D=AR=P Q
Firm
(price taker)
115
115

116. For Perfect Competition: MR=D=AR=P
The Competitive Firm is a Price Taker
Price is set by the Industry
What is the additional revenue for selling an additional unit?
1st unit earns $15
2nd unit earns $15
Marginal revenue is constant at $15
Notice:
Total revenue increases at a constant rate
MR equal Average Revenue P
Demand
$15
MR=D=AR=P Q
Firm
(price taker)
116
116

117. Topic 9: Maximizing PROFIT in perfect competition
117

118. Short-Run Profit Maximization
What is the goal of every business?
To Maximize Profit!!!!!!
To maximum profit firms must make the right output
How does a firm decide the right output????
MR< MC don’t produce
MR> MC produce
118

119. How many products should this perfect competitive firm produce???
Price of item is $20.00
TP TC MC MR

120. How many products should this perfect competitive firm produce???
What is the firm’s profit at this point???
TR-TC
Price of item is $20.00
TP TC MC MR
$20.00

121. *Profit would still be made at TP of 5, but profit not maximized
Price of item is $20.00
TP TC MC MR
Profit at TP of 4 = $20
Profit at TP of 5 = $10

122. Profit Maximizing Rule
MR=MC
122

123. # of workers TP MP FC VC TC
AFC
AVC
ATC MC TR MR
profit 1 14 40
100
2.86
7.14 2 30
200
1.33
6.67
6.25 3
300
7.5 10 4 45
400
.89
8.89 5 43
500
.93
11.63
-50

124. Increasing, diminishing and negative returns???
# of workers TP MP FC VC TC
AFC
AVC
ATC MC TR MR
profit 1 14 40
100
2.86
7.14 2 30 16
200
1.33
6.67
6.25 3 10
300
7.5 4 45 5
400
.89
8.89 43 -2
500
.93
11.63
-50
Increasing, diminishing and negative returns???

125. # of workers TP MP FC VC TC
AFC
AVC
ATC MC TR MR
profit 1 14 40
100
140
2.86
7.14 2 30 16
200
240
1.33
6.67
6.25 3 10
300
340
7.5 4 45 5
400
440
.89
8.89 43 -2
500
540
.93
11.63
-50

126. # of workers TP MP FC VC TC
AFC
AVC
ATC MC TR MR
profit 1 14 40
100
140
2.86
7.14 10 2 30 16
200
240
1.33
6.67 8
6.25 3
300
340
7.5
8.5 4 45 5
400
440
.89
8.89
9.78 43 -2
500
540
.93
11.63
12.56
-50

127. # of workers TP MP FC VC TC
AFC
AVC
ATC MC TR MR
profit 1 14 40
100
140
2.86
7.14 10 2 30 16
200
240
1.33
6.67 8
6.25
300 3
340
7.5
8.5
400 4 45 5
440
.89
8.89
9.78
450 43 -2
500
540
.93
11.63
12.56
-50
430

128. In PC, Marginal revenue = price of product (remember MR=D=AR=P)
# of workers TP MP FC VC TC
AFC
AVC
ATC MC TR MR
profit 1 14 40
100
140
2.86
7.14 10 2 30 16
200
240
1.33
6.67 8
6.25
300 3
340
7.5
8.5
400 4 45 5
440
.89
8.89
9.78
450 43 -2
500
540
.93
11.63
12.56
-50
430
In PC, Marginal revenue = price of product (remember MR=D=AR=P)

129. In PC, Marginal revenue = price of product (remember MR=D=AR=P)
# of workers TP MP FC VC TC
AFC
AVC
ATC MC TR MR
profit 1 14 40
100
140
2.86
7.14 10 2 30 16
200
240
1.33
6.67 8
6.25
300 3
340
7.5
8.5
400 4 45 5
440
.89
8.89
9.78
450 43 -2
500
540
.93
11.63
12.56
-50
430
In PC, Marginal revenue = price of product (remember MR=D=AR=P)

130. # of workers TP MP FC VC TC
AFC
AVC
ATC MC TR MR
profit 1 14 40
100
140
2.86
7.14 10 2 30 16
200
240
1.33
6.67 8
6.25
300 60 3
340
7.5
8.5
400 4 45 5
440
.89
8.89
9.78 20
450 43 -2
500
540
.93
11.63
12.56
-50
430
-110

131. # of workers TP MP FC VC TC
AFC
AVC
ATC MC TR MR
profit 1 14 40
100
140
2.86
7.14 10 2 30 16
200
240
1.33
6.67 8
6.25
300 60 3
340
7.5
8.5
400 4 45 5
440
.89
8.89
9.78 20
450 43 -2
500
540
.93
11.63
12.56
-50
430
-110
How many products should this firm produce to maximize its profits ????

132. # of workers TP MP FC VC TC
AFC
AVC
ATC MC TR MR
profit 1 14 40
100
140
2.86
7.14 10 2 30 16
200
240
1.33
6.67 8
6.25
300 60 3
340
7.5
8.5
400 4 45 5
440
.89
8.89
9.78 20
450 43 -2
500
540
.93
11.63
12.56
-50
430
-110

133. MC in Perfect competition
Upward sloping part of MC curve = Supply of firm
MC=S

134. MR = MC in perfect competition
Firm will produce the Q where MR=MC to maximize profit

135. Topic 10: Perfectly competitive firm in the short run
1. It can make a profit
2. Break even NORMAL PROFIT
3. Have a loss
Firm will produce where MR=MC

136. 1. Profit P > ATC
profit

137. Break even point price = ATC

138. 3. LOSS P < ATC
ATC
LOSS

139. Shut Down Rule
A firm should continue to produce as long as the price is above the AVC
When the price falls below AVC then the firm should minimize its losses by shutting down
Why? If the price is below AVC the firm is losing more money by producing than they would have to pay to shut down.

140. If price changes in the market, it will also change in the FIRM and the firm should adjust their output Example: increase in S lowers P

141. Practice
141

142. Practice What Quantity will this firm produce?
What is this firm’s total revenue?
What is this firm’s total cost?
Is this firm experiencing a profit or loss? How much?
ATC
AVC
$20

143. ` 1 What Quantity will this firm produce? 2 What is the TR at
this quantity?
3 What is the TC at this quantity?
4 Profit or Loss? How much?

144. Topic 11:Perfectly competitive firm in the Long run

145. Perfectly competitive firm in the long run
P=MR=MC=SRATC= LRATC
All Perfectly competitive firms in the LORNG RUN earn a NORMAL economic profit (profit is 0)

146. Perfectly competitive firm in the Long run

147. In the long-run, what happens when economic profits are made?
When firms make profits, other firms enter the industry – this causes supply to increase which causes prices to go down
When prices go down, profits go down

148. In the long-run, what happens when losses are made?
When firms incur a loss, firms start to leave the industry – this causes supply to decrease which causes prices to go up
When prices go up, profit goes up

149. Topic 12: Efficiency Perfectly competitive markets are perfectly efficient They have BOTH productive and allocative efficiency in the long run
149

150. Productive Efficiency
The production of a good in a least costly way.
Graphically it is where…
Price = Minimum ATC
150

151. Long-Run Equilibrium MC ATC Price D=MR
Notice that the product is being made at the lowest possible cost (Minimum ATC) Q
Quantity
151

152. Allocative Efficiency
Producers are making the products most wanted by society.
Graphically it is where…
Price = MC
152

153. Optimal amount being produced
Long-Run Equilibrium MC MR P
Price
Optimal amount being produced Q
Quantity
153

154. Long-Run Equilibrium P = Minimum ATC = MC EXTREMELY EFFICIENT!!!! MC
Price
D=MR P
P = Minimum ATC = MC
EXTREMELY EFFICIENT!!!! Q
Quantity
154