9.3 Short-Run Decisions Flashcards
Formula for economic profit.
π=TR−TC
What does it mean when a firm is making losses?
If total revenues are not enough to cover total costs, economic profits will be negative—in this case we say that the firm is making losses.
What are the two questions we should ask and answer about a competitive firm?
First, should the firm produce any output at all, or would it be better to shut down and produce nothing?
Second, if it makes economic sense for the firm to produce some output, what level of output should it produce?
To answer both questions, we assume the firm’s objective is to maximize its profits.
If a firm doesn’t produce output, it must pay its fixed costs. If a firm does decide to produce…
If it decides to produce, it will add the variable cost of production to its costs and the receipts from the sale of its product to its revenue.
If a firm decides to produce, what level of output must the revenue from exceed?
Since it must pay its fixed costs in any event, it will be worthwhile for the firm to produce as long as it can find some level of output for which revenue exceeds the variable costs.
When should a firm not produce at all?
Rule 1: A firm should not produce at all if, for all levels of output, total revenue (TR) is less than total variable cost (TVC). Equivalently, the firm should not produce at all if, for all levels of output, the market price (p) is less than average variable cost
Other than comparing Total revenue and Total Variable Costs, how else can we exam a firm’s decision about whether to produce or not.
We have been looking at the firm’s decision about whether to produce at all by comparing total revenues with total variable costs. Equivalently, we can examine this decision by comparing the market price with the average variable cost.
What is the Shut-down price?
The price that is equal to the minimum of a firm’s average variable costs. At prices below this, a profit-maximizing firm will produce no output.
Such a price is equal to the lowest point on the firm’s AVC curve.
it terms of variable cost and market price, when will a competitive firm choose not to produce any poutput?
When the market price is less than the minimum average variable cost, the competitive firm will choose to produce no output.
After deciding that a firm does in fact want to produce, what is the next decision they need to make?
If a firm decides that, according to Rule 1, production is worth undertaking, it must then decide how much to produce.
What is the key to understanding how much a profit-maximizing firm should produce?
The key to understanding how much a profit-maximizing firm should produce is to think about it on a unit-by-unit basis. If any unit of production adds more to revenue than it does to cost, producing and selling that unit will increase profits.
What are the conditions required for a unit of production to raise profit?
According to the terminology introduced earlier, a unit of production raises profits if the marginal revenue obtained from selling it exceeds the marginal cost of producing it.
What output level should a profit-maximizing firm produce output?
Rule 2: If it is worthwhile for the firm to produce at all, the profit-maximizing firm should produce the output at which marginal revenue equals marginal cost.
When should a firm produce more/less of a product?
If an extra unit of output will increase the firm’s revenues by more than it increases costs (MR>MC),(MR>MC), the firm should expand its output. However, if the last unit produced increases revenues by less than it increases costs (MR
In a perfectly competitive market, a profit maximizing firm will produce the output that equates…
A profit-maximizing firm that is operating in a perfectly competitive market will produce the output that equates its marginal cost of production with the market price of its product (as long as price exceeds the average variable cost).
