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Part (a) shows that market demand and market supply determine the
market price that the firm must take.
Part (b) shows the firms total revenue curve (TR)the relationship
between total revenue and quantity sold.
What about MR curve?
10
The decision will be the one that minimizes the firms losses.
12
14
The firm shuts down if the revenue from production is less than its
variable costs of production.
If price < average variable cost, the firm is better off stopping production
17
18
If the price is
between 17 and
20.14, the firm
produces the
quantity at which
marginal cost
equals price.
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20
21
Exercise
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24
25
26
27
28
Profit = (P - ATC).Q
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Adjustment process in LR
Consider the case where firms make positive profit
Implication: new firms will enter the market.
Entry will expand the number of firms,
Increase the quantity of the good supplied
drive down prices and profits
How long will firms enter?
As long as existing firms are still making profit
When will this adjustment process stop?
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Adjustment process in LR
Conversely, what if firms in the market are making losses?
then some existing firms will exit the market
Their exit will reduce the number of firms, decrease the quantity of the
good supplied,
and drive up prices and profits
When will this adjustment process stop?
At the end of this process of entry and exit, firms that remain in the
market must be making zero economic profit
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Note:
Competitive firms produce so that P = MR = MC
Free entry and exit forces P = ATC
Implication: P = MC = ATC
MC = ATC occurs when the firm is operating at the minimum of ATC
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Implication:
Interest foregone @ 5% = 50000
Wages foregone = 30000
Opportunity cost of money and time = 80000
Economic profit = Revenue Explicit cost Implicit cost =0
Accounting profit = Revenue Explicit cost = Implicit cost = 80,000 >0
Thus revenue from farming compensates him for the opportunity costs
of time and money
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