Perfect competition and the supply curve - production and profits - the short run production decisions
14 important questions on Perfect competition and the supply curve - production and profits - the short run production decisions
Why should the firm produce even if the price falls below minimum average total cost?
Is my variable cost relevant to my decision whether to produce or not?
What is the vertical distance between the ATC, and AVC?
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What is the shape of the SRAVC curve? Why?
because if its initial fall in marginal cost causing average variable cost to fall , before rising marginal coat eventually pulls up again
For optimal production decision in the short run 2 things need to be true?
When the market price is greater than or equal to the min AVC
What happens when the market price is below the min AVC? Why? What is this market price called?
because there is no level of output at which the firms total revenue covers the variable cost (the cost it can avoid by operating)
this market price is called shutdown price
When should the first produce in the short run? Why?
- When price is greater than minimum average cost
- Because the firm maximizes profit, by choosing output quantity at which marginal cost is equal to the market price
What if the market price lies between the shutdown price (minimum average variable cost) and breakeven (price minimum average total cost)
- In this case the firm is not profitable; since the market is below the minimum average total cost and the firm is losing the difference between the price and the average total cost per unit produced.
- But it should produce some output in the short run
If a firm is in shutdown price why would shutting down generate an even greater loss than continuing to operate.
What can we consider the decision to produce when the firm is covering its variable cost but not its fixed cost? Why?
because the fixed cost cannot be recovered in the short run
Can variable cost be avoided in the short run? How?
By not producing at all.
What happens if the market is exactly equal to shutdown price, minimum average variable cost? What are we assuming?
but we always assume that the firm produces output when price is equal to the shut-down price.
What is the curve that shows how the profit maximizing quantity of output in the short run depends on price? And what are the two segment of the curve
- Thee short-run individual supply curve
- the two segments are
- the upward sloping segment showing that price is equal to above the shutdown price
- the downward sloping one where the firm is still begining and the MC is decreasing with more and more units of the inputs employed
Can firms reakky shutdown temporarily without going out of business?
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