2 Short-Run Firm and Market Decisions Free Online FlashCards

What is marginal revenue for a price-taking firm?

For a price-taking firm, marginal revenue equals the market price: $MR=P$.

How is a competitive firm's profit calculated?

Profit is total revenue minus total cost: $\pi=TR-TC=Pq-TC$.

How does a competitive firm choose output when it operates?

If it operates, the firm chooses output where $P=MC$ on the rising portion of its marginal-cost curve.

How do fixed and variable costs differ in the short run?

Total fixed cost does not vary with current output; total variable cost does. Total cost is their sum: $TC=TFC+TVC$.

What is the short-run rule for operating rather than shutting down?

Operate when revenue covers variable costs: $TR\ge TVC$, equivalently when $P\ge AVC$.

At $P=\$8$, $AVC=\$6$, $ATC=\$10$, and $q=100$, should the firm produce?

It should produce: operating contributes $(8-6)\times100=\$200$ toward fixed costs, so its loss is \$200, less than the \$400 loss from shutting down.

How does short-run shutdown differ from long-run exit?

Shutdown is a temporary, short-run production decision while unavoidable costs remain. Exit is a longer-run decision to leave the market when all inputs can be adjusted.

What is a competitive firm's short-run supply curve?

It is the portion of the marginal-cost curve at and above minimum $AVC$; below the shutdown price, the firm supplies zero.

How is market supply derived from individual firms' supplies?

Market supply is the horizontal sum of firms' quantities supplied at each price.

What condition defines competitive-market equilibrium?

Competitive-market equilibrium occurs where market quantity demanded equals market quantity supplied.

What should a firm do if price is below minimum $AVC$?

If price is below minimum $AVC$, the firm should temporarily shut down and produce zero; operating cannot cover its variable costs.

What is the firm's choice at exactly minimum $AVC$?

At exactly minimum $AVC$, the firm is indifferent between shutting down and producing at the shutdown-point output; either choice results in a loss equal to fixed costs.