Unit 8
| Word | Meaning |
|---|---|
| average revenue | = price |
| marginal revenue | the change in total revenue from an additional unit sold =\frac{\Delta TR}{\Delta Q} equals price in perfectly competitive firm |
- when MR > MC, the firm should produce more goods
- when MR < MC, the firm should produce less goods
- when MR = MC, the firm is maximizing profit
in perfect competition only, a firm will produce where P = MR = MC
The firm would shut down in the short run if P < min AVC (won't consider its sunk costs)
The competitive firm's short run supply curve is the portion of the MC that lies above min AVC.
| Word | Meaning |
|---|---|
| sunk costs | costs that have already been committed and cannot be recovered |
The firm's demand curve is perfectly elastic
In a perfect competition, for a firm: P = AR = MR = D (demand curve is perfectly horizontal)
\Pi=(P-ATC)Q
A firm will exit an industry if P < min ATC
A firm will enter an industry if P > min ATC
| Word | Meaning |
|---|---|
| LR equilibrium | no entry or exit in an industry P = MC P = min short run ATC P = min LRAC  |
A firm's long run supply curve is the portion of the MC that lies above min ATC.
| Word | Meaning |
|---|---|
| increasing cost industry | input price increases as market output increases An increase in P is required to increase the market quantity supplied |
| constant cost industry | input price stays the same as market output increases firms' min LRAC will not change regardless of how much they produce the long run market supply will be a horizontal line at min LRAC = LR equilibrium P |
Last update:
November 6, 2021
Created: October 30, 2021
Created: October 30, 2021