Short Run vs. Long Run

Created by eileenbell 

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5 terms

Competitive Market Nature

- free entry/exit = infinite number of firms
- Homogenous goods = no product differentiation
- Seller is a $$ taker
- Firm can choose optimal output given cost structure

Firm I's profit maximizing output decision

- TR = P x Q
- AR = TR/q = P
PRICE = AR = MR
-----> demand curve is a horizontal line

Profit maximizing and supply curve

Profit = TR - TC
MR = demand curve = AR = P
MC = how much supply at any price and is RISING
if MC > MR, output fall
if MC < MR, output rise

SR Shut down decision

Shut down if TR < VC
Shut down if TR/q < VC/q = P < AVC
No variable costs if not producing

LR Shut down decision

Exit if TR < TC
Exit if TR/q < TC/q = P < AC
Enter if P > AC
Total profit = (P-ATC) x Q
LR, Price = Minimum of AC

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