Transcript MR=D=AR=P
and Unit 3 – Theory of the Firm Part 2 In the previous lecture we learned about the economic model of ….. 1. Many buyers and sellers 2. All the products are homogeneous. 3. All buyers & sellers are price takers. 4. There are NO barriers to entry. 5. There is perfect information. 6. Firms cannot earn economic profits in the long run. 2 of 9 cost P firm p MR=D=AR=P industry S P D quantity Q How do we label the demand curve for the individual firm? What does each of these abbreviations stand for? Briefly, why is each equal to the other? Q cost P firm industry S MC p MR=D=AR=P P D quantity Q Q q How does the individual firm determine where it will produce? A firm maximizes profits where MC = MR How does this relate to “making decisions on the margin?” cost P firm industry S MC MR=D=AR=P p P D q quantity Q Q Where MC = MR is the point of allocative economic efficiency for our economy. or when resources are distributed in a way to maximize utility; here the cost of the next one is equal to the price (value) of the next one (P = MC); both the firm and the consumer are getting the max that they can 5 of 9 cost P firm ATC market MC S AVC p MR=D=AR=P P some AFC covered AVC covered D Q Q quantity q Where will this firm produce? MC = MR Is this firm making an economic profit? No Should this firm shut down? No Why not? B/c at point q it is covering all of its AVC and some of its sunk costs (AFC) cost P firm ATC market MC S AVC p p MR=D=AR=P P D 2 quantity Q Q Price must fall to what level for the firm to shutdown? shutdown point where MC = MR = AVC cost firm P MC p market ATC AVC MR=D=AR=P S P D Q quantity q Is the above firm making a profit? Q It is making a normal profit b/c a normal profit is figured into the cost of doing business; but it is not making an economic profit; it is at equilibrium output & price cost firm P MC p ATC AVC MR=D=AR=P market S P D Q Q quantity q The above firm is producing at productive (or technical) efficiency….. where it is operating at its minimum ATC explain why here it is producing goods for society at the very lowest cost of 9 of 9 resources for society