1.

profit maximisation (loss minimisation) =>> P=MR=MC =>Quantity

2. P with ATC => P> ATC => gain / profit per unit P-ATC and total profit = (P-ATC)*Q
P=min ATC => breakeven => no gain no loss => Economic profit = zero

P< min ATC => loss

In the short run: I cannot leave the market => fixed inputs that cannot be modified

=> leaving the market in the SR is not an option. What about shutting down=> stopping
production???

Loss but Continue production

P= 15 min AVC= 12 min ATC= 20

P=15<min ATC=20 => loss 5

min AVC=12< P=15< min ATC= 20

If I produce I cover all AVC and 3 USD from the AFC =>>>> loss will be minimized to 20-15=5 USD
per unit

if I stop production => I pay all the fixed cost => it is like paying ATC -AVC= 20-12=8 USD
P= 10 min AVC=12 min ATC=20

P=10< min AVC=12< min ATC=20 => loss = 10 USD per unit if we continue production. However, if
we stop production, we pay only the fixed cost whch is around 8 usd
=> we will be minimizing our loss by paying fixed cost < loss with production
If the market price is less than the minimum ATC => the firm is losing. However, in the short run, it
does not have the option to leave the market since the equipment and the machinery are fixed =>
cannot be sold in order to leave the market. The company has to remain in the market in the short
run.

The decision to produce or not when P< min ATC is based on the min AVC.
The fixed cost should be paid by the firm even if it decides to stop production =>>>> it is not a factorto
be considered when deciding to produce or not. What should be considered in the prpductoon
decision with loss is the Variable Cost.

If the price per unit exceeds the min average variable cost => the firm covers all its variable costs and
a part of its fixed cost, but if it stops production it will have to pay the entire fixed cost =>>> in this case
when min Avc < P< min ATC ====> the firm should continue producing in the short run with loss.

If the price did not improve throughout the SR => the firm will exit the market in the long run.
Otherwise, it will stay.

If the market price does not cover the minimum average variable cost (shut down price) => the
company should shut down its machines and stop production to limit its loss to the total fixed cost
only.

Of course, if the price did not improve with time => the firm will exit in the long run.
if the market price is excatly equal to the min AVC= shut down price, the company will be indifferent
between shutting down its machineries and stopping temporarily its production or keep producing,
BECAUSE the loss in both cases is equal to the fixed cost.

if P> min ATC =>>>> profit and continue production in the LR

P< min ATC ===> loss:

a) Min AVC< P< min ATC => loss but the company is covering the variable cost and part of the fixed
cost ======> Leep producing in the SR

b) P< min AVC< min ATC =>>>>> loss from stopping production and Shutting down in the SR < then
teh loss from producing ======> Shut down

In the two cases f loss, the company should exit the market if the price did not improve in a way to
allow some profit generation to the company.

=====> the firm produces (with loss or profit) at any price that exceeds the shut down price (min AVC)
=>>>>. the MC curve that starts from min AVC is called the individual supply curve of the firm in a
perfectly competitive market.
if one individual firm is producing Q= 50 units at P=18 and it has an economic profit of 200 USD

if the market includes 100 identical firms => total production = 50*100=5000 at P= 18 and each of
these 100 firms is making a 200 USD profit
New comers are facing higher cost functions
than the old companies mainly because some
inputs became scarce or available in limited
quantities

New comers are facing the same cost functions

as those already established in he market

New comers face lower costs than old

comapnies because they benefit from new
technologies that were not available for
previously established companies
Problem 3 page 381

FC= 30,000+20,000= $50,000

Problem 4

a) break-even price is min ATC= 14 which corresponds to Q= 5000

shut down price is min AVC= 3 which corresponds to Q=3000

b)P=2 < min AVC he should shut down = stopped production in the short run

c) min AVC <P=7 < min ATC => he is losing but capable of covering the VC and part of the FC so he
should continue producing in the SR

Profit/loss= (P- ATC)*Q= (7-14)*5000= - 35000

In case he stopped production, he would have had to pay all the FC = 50000
=> by producing, he is minimizing hs loss -35000<-50000

If the price remained equal to 7, he will exit the market in the long run.

d) P=20 => Profit = (P-ATC)*Q= (20-14.14)*7000= 41020 => he will produce in the SR
He will stay in the industry in the long run.
MONDAY 15 November 2021 at 7.30 pm Q&A session