Week 6 - Firm Behaviour Flashcards
For perfectly competitive firms, what does marginal cost and marginal revenue equal?
MC = Price = MR
What do positive profits in the short run mean?
Sends signal to other firms to enter. This means supply shifts out and prices fall until there are zero economic profits?
What do negative profits in the short run mean?
In the short run, negative profits mean that firms shutdown and exit in the long run, supply is reduced, prices rise and the equilibrium returns to the point where there are zero profits.
Equation for profit
Profit = total revenue - total cost
= are between AR and ATC curves
What is the constant cost case?
the constant cost curve means as the number of firms changes, the market is small enough for factors of production not to change in price.
When can the reducing cost curve be possible?
When there is a small town where increasing firms means that costs actually fall as more people move to the town and more infrastructure is built.
Where does marginal cost cut the other curves?
MC cuts at the minimum point of ATC and AVC as when it is below these, it is falling. When above, AC is rising as more per unit is added.
Equation for marginal cost
Short run marginal cost = marginal revenue
When with firms produce?
Firm produce when marginal revenue is more than marginal cost. Firms will shutdown if no operating profits are made (fc < loss)
What is operating profit?
OP = average revenue - average variable cost X quantity
= producer surplus
What are the long run cost curves?
In the long run, firms choose their capital stock and point (minimum) on the curve?
What are 3 assumptions when looking at firm behaviour?
1) all firms are price takers in input and output prices
2) In the short run, capital is fixed and in the long run L and K both vary
3) Since K is fixed, after some point the marginal product of labour is diminishing
How to calculate Marginal Product?
Change in output
Equation for average cost
= cost / output
Equation for MC
= change in total cost/ change in quantity
