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Lecture Managerial economics: Chapter 11 - Dr. Hasnain Naqvi

This chapter provides knowledge of the firm’s decisions in perfect competition. The contents of this chapter include all of the following: The firm’s decisions in perfect competition; output, price, and profit in perfect competition; perfect competition (long run); changing tastes and advancing technology;. | The Firm’s Decisions in Perfect Competition The Firm’s Short-Run Supply Curve A perfectly competitive firm’s short-run supply curve shows how the firm’s profit-maximizing output varies as the market price varies, other things remaining the same. Because the firm produces the output at which marginal cost equals marginal revenue, and because marginal revenue equals price, the firm’s supply curve is linked to its marginal cost curve. But there is a price below which the firm produces nothing and shuts down temporarily. The Firm’s Decisions in Perfect Competition Temporary Plant Shutdown If the price is less than the minimum average variable cost, the firm shuts down temporarily and incurs a loss equal to total fixed cost. This loss is the largest that the firm must bear. If the firm were to produce just 1 unit of output at a price below average variable cost, it would incur an additional (and avoidable) loss. Temporary shutdown. In our experience, this topic is the hardest for . | The Firm’s Decisions in Perfect Competition The Firm’s Short-Run Supply Curve A perfectly competitive firm’s short-run supply curve shows how the firm’s profit-maximizing output varies as the market price varies, other things remaining the same. Because the firm produces the output at which marginal cost equals marginal revenue, and because marginal revenue equals price, the firm’s supply curve is linked to its marginal cost curve. But there is a price below which the firm produces nothing and shuts down temporarily. The Firm’s Decisions in Perfect Competition Temporary Plant Shutdown If the price is less than the minimum average variable cost, the firm shuts down temporarily and incurs a loss equal to total fixed cost. This loss is the largest that the firm must bear. If the firm were to produce just 1 unit of output at a price below average variable cost, it would incur an additional (and avoidable) loss. Temporary shutdown. In our experience, this topic is the hardest for the students to understand. You can help them with the intuition by pointing out that the rationale for temporary shutdown isn’t confined to perfect competition and that they can see the phenomenon right around the corner. Many restaurants close on Sunday evening and Monday. Many hairdressers close on Sunday and Monday. Why? Your students will easily figure out that total revenue is less than total variable cost and equivalently that price is less than average variable cost. The mechanics of the shutdown analysis will be a lot easier to explain once the students have thought about these real situations with which they are familiar. The Firm’s Decisions in Perfect Competition The shutdown point is the output and price at which the firm just covers its total variable cost. This point is where average variable cost is at its minimum. It is also the point at which the marginal cost curve crosses the average variable cost curve. At the shutdown point, the firm is indifferent between .