Quantity (Output of yo-yos) Price $5 1 $20 $15 $10 $45 $40 $35 $30 $ Yo Yos in a purely competitive market MC ATC AVC

Asking about “per-unit” is the same as asking about average

Remember! Price = Marginal Revenue When the Price is $21.50 The Marginal Cost of the 12 th yo-yo is $21 –But the MC of the 13 th yo-yo is $30 So you stop output at the 12 th yo-yo (MC=MR) The ATC of the 12 th yo-yo is $19.16 –Subtract ATC from MR to determine per unit profit $ $19.16 = $2.34 per unit profit $2.34 X 12 = approximately $28.00 total profit Total Revenue (P x Q) = $21.50 X 12 = $258 At 12 yo-yos, Total Cost is $230 Profit is also equal to TR – TC ( =28)

Minimizing loss in the short-run: To consider operating with a loss, or shutting down Remember OPPORTUNITY COST and COST-BENEFIT ANALYSIS

Minimizing loss in the short-run: When the price is $10.50 MC of the 8 th yo-yo is $9.50 But the MC of the 9 th yo-yo is $16.00 So you stop output at the 8 th yo-yo (MC=MR) The ATC of the 12 th yo-yo is $19.50 –Subtract ATC from MR to determine per unit loss $ $ = $9.00 per unit loss $9.00 X 8 = approximately $72.00 total loss Total Revenue (P x Q) = $10.50 X 8 = $84 At 8 yo-yos, Total Cost is $156 Loss is also equal to TR – TC (84-156=(-72))

So why stay open, in the short- run, if I’m losing economic profit? Why make 8 yo-yo’s at a loss, rather than laying off my workers? Because my fixed cost is $ –The $ I have to pay even if I don’t make any yo-yos And $72 is less than $100 The opportunity cost (losing $72) of hoping that demand will increase, is less than giving up (losing $100) and paying the expense out of pocket

Shutting down in the short-run: When the price is $5.00 MC of the 4 th yo-yo is $5.00 –Even though the MC of the 5 th yo-yo is $4.00 –Even at the minimum of MC, MR<AVC Because I know that the distance between ATC and AVC is my FIXED COST –Whenever MR is less than the minimum of the Variable Cost curve –By definition: my loss will exceed my fixed cost

Shutting down in the short-run: When the Price is $5.00 The Marginal Cost of the 5 th yo-yo is $4 –But the AVC of the 5 th yo-yo is $6 The ATC of the 5 th yo-yo is $26 –Subtract ATC from MR to determine per unit loss $5 - $26 = $21 per unit loss $21 X 5 = $ total loss Total Revenue (P x Q) = $5 X 5 = $25 At 5 yo-yos, Total Cost is $130 Loss is also equal to TR – TC (25-130=(-105)) And $105 is greater than $100, –give up and pay the $100