Presentation on theme: "Andrea’s software business"— Presentation transcript:

How competitive firm sets its output

\$80 \$70 \$60 \$56 Price \$50 \$40 \$30 \$20 \$10 AFC 1 2 3 4 5 6 7 8 9 10 Quantity

\$80 \$70 \$60 \$56 Price \$50 \$40 AVC \$30 \$20 \$10 AFC 1 2 3 4 5 6 7 8 9 10 Quantity

\$80 \$70 \$60 \$56 Price \$50 ATC \$40 AVC \$30 \$20 \$10 AFC 1 2 3 4 5 6 7 8 9 10 Quantity

\$80 \$70 MC \$60 \$56 D Price \$50 ATC \$40 AVC \$30 \$20 \$10 AFC 1 2 3 4 5 6 7 8 9 10 Quantity

Why is Mr. Couch making me add all these stupid columns, that aren’t even on the stupid handout, and do all these stupid calculations, and make this stupid graph???

For one thing, at six units of output, my profit increases from \$35 to \$51!
\$16 !!! - That’s my biggest profit margin increase isn’t it? Why wouldn’t I stop there?

Ah grasshopper – the past doesn’t matter, today is the first day of the rest of your life.
Economists do think on the margin, but marginal thinking is forward thinking

Where ever you are is where you are –
and does the benefit of producing one more exceed the cost of producing one more? If yes, produce one more If no, stop

Price = demand (D) = marginal revenue (MR) = average revenue (AR)
\$80 \$70 MC \$60 D \$56 Price \$50 \$48.12 ATC \$40 AVC \$30 \$20 \$10 AFC 1 2 3 4 5 6 7 8 9 10 Quantity

Total economic PROFIT (\$7.88 x 8 = \$63)
\$80 \$70 MC \$60 \$56 D Price \$50 Total economic PROFIT (\$7.88 x 8 = \$63) \$48.1 ATC \$40 AVC \$30 \$20 \$10 AFC 1 2 3 4 5 6 7 8 9 10 Quantity

Always proceed until MC = MR Marginal Cost = Marginal Revenue
That is when you maximize your profit!

And get this… for a firm when Price equals Demand and equals Marginal Revenue And price equals marginal cost, then quantity demanded equals quantity supplied!!! That’s why supply meets demand in equilibrium! Oh! My Gosh! It all comes together – I could just jump for joy

Questions coming up … What if price drops below ATC minimum?
What if price drops below AVC minimum? Will a change in fixed cost affect output? Will a change in variable cost affect output? And why is that marginal cost curve decreasing and the increasing anyway?