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10 -- Part 5: Understanding Monopoly
A firm focuses on marginal cost in order to understand cost structure.
On the revenue side, the same is true.
Mr wants to make a good decision on the level of investment.
The plow must use marginal analysis.
The change in profit, MR - MC, is equal to $0 when we look at column 7.
The numbers in green indicate that MR - MC is positive at output levels below 7.
Adding to profits is expanding output to 7 driveways.
The marginal cost increases dramatically when Plow services more driveways.
Higher transportation costs may be incurred for additional customers if the plow has to seek a driveway that is farther away.
The constant marginal revenue is eventually overtaken by the increased marginal cost.
We said that a firm can't wait for profit statements to make production decisions.
Each time it snows, Mr.
The profit maximiza has to decide whether or not to clear more driveway.
When a firm chooses the amount of plowing a driveway, he may decide to work a little harder the next time, since it equates marginal snows and plow one more.
He could expand from 5 to 6 drive if he wanted to since he enjoys making this extra money.
He made an extra $7 in profit.
He makes $4 more in profit from 6 to 7 driveways.
He discovers that he does not earn any additional profit when the plow expands from 7 to 8 driveways.
He would scale back his efforts to make more money.
Marginal thinking helps Mr.
The production level at which Plow maximized his profits was discovered.
There is no additional profit when the marginal revenue is equal to the extra cost of production.
According to the MR = MC rule, production should stop at a point when profit ties no longer exist.
There is a point at which Plow chooses.
The cost of producing additional units adds more to revenue than a plow, so production should continue.
The cost of snowplow business is more than the additional revenue it brings.
Production is unprofitable at that point.
The exact level of production at which no further profitable opportunities exist and losses have not yet occurred is the point at which MR is MC.
This is the best place to stop production.
The factors that make a market competitive are shown in the episode.
Homer's great idea is about to disappear.
The market is in the neighborhood already because there are many buyers and many up late one snowy morning to find all the businesses.
Firms can easily enter the market.
The entry into the business of ney shows how easy it is for increased competition.
We can say that competitors will enter the market.
A firm in a highly competitive market is a price taker because it has no control over the price set by the market.
The price that snow removal companies charge is determined by the overall supply and demand conditions in that market.
We can see them visually to better understand them.
In Figure 9.1, we use the MR and MC data to show the profit calculation.
The average total cost curve is also included.
The marginal cost curve crosses the average total cost curve at the lowest point.
The marginal revenue is horizontal.
MC at first decreases and then increases due to diminishing marginal product.
The firm wants to expand production as long as MR is greater than MC, and will stop production if MR is greater than $10.
Profits are maximized when Q is 8 and MR is MC.
The MR curve is above the MC curve.
Marginal cost is higher than marginal revenue.
The profit market price is shown as ATC and the horizontal MR curve is P. The firm makes an economic profit because the price charged is higher than the average total cost curve.
MR is the point at which the firm will maximize its profits.
Lower profits are caused by any quantity greater than or less than Q.
We can determine the average cost of producing Q units once we know the profit- maximizing quantity.
We move up along the dashed line until we reach the ATC curve.
The average cost of making 8 units is shown by doing so.
Dividing 70 by 8 gives us $8.25 for the average total cost, because the total cost in Table 9.3 is $70.
Mr can be calculated.
The profit is shown in Table 9.3, column 4, in red numbers, as a result of the equation given in Figure 9.1.
The firm makes the profit visually represented in the green rectangle because the MR is the price and the average total cost is higher than the MR.
The goal of every business in a competitive market is to maximize profits.
Sometimes it is not possible to make a profit.
When revenue is not enough to cover costs, the firm must decide whether to operate or temporarily shut down.
This decision is made all the time by successful businesses.
Retail stores close at 9 p.m. because they don't have enough revenue to cover the costs of staying open.
During the summer months, Smith Mountain Lake in Virginia has an Ice Cream Float.
The music announcing its arrival at the public beach can be heard over a mile away.
There is usually a long line of eager customers waiting for the float to dock.
On hot and sunny summer days, this business is very profitable.
The float only operates on weekends during the late spring and early fall.
The Ice Cream Float, a cool idea on a hot day at the lake, is shut down due to cold weather.
The calculation of the shutdown decision is short.
The float would need to pay for fuel and employees if it were to operate during the winter.
When there are so few customers, the total costs would be higher than simply dry docking the boat.
The fixed cost of storing the boat remains when the float is dry.
If the firm would lose less by shutting down than by staying open, then it should shut down.
Fixed and variable costs are broken into two parts.
Whether the business is open or not, fixed costs must be paid.
If the business can make enough money to cover its variable costs, it will stay open.
Extra money goes toward paying the fixed costs once the variable costs are covered.
If a business can't cover its variable costs, it should shut down.
The firm will choose to operate if the marginal revenue curve is greater than the minimum point on the average variable cost curve.
You can think of the green area as the months during the summer when the business makes a profit and the yellow area as the times during the spring and fall when the float is in the red.
The firm should shut down if the MR curve falls below the AVC curve.
The table summarizes the decisions.
The Ice Cream Float will make a profit if the MR curve is above the minimum point on the ATC curve.
The float will operate at a loss if the MR curve is below the minimum point on the ATC curve but above the minimum point on the AVC curve.
The float will temporarily shut down if the MR curve is below the minimum point.
The MR curve is here.
The MR curve is here.
The firm makes money.
The firm will operate at a higher price than the firm charges.
The firm will have a cost of production.
To make the shutdown decision more concrete, imagine that the Ice Cream Float's minimum ATC is $2.50 and its minimum AVC is $2.00.
During the summer, when many customers line up on the dock waiting for it to arrive, it can charge more than a dollar and make a lot of money.
As the weather cools, fewer people want ice cream.
The Ice Cream Float has to cross the lake to make money, burn expensive gasoline and pay employees.
The Ice Cream Float needs customers in order to keep its revenues high.
In the fall, the Ice Cream Float can make enough to cover its average variable cost of $2.00, but not enough to cover its average total cost of $2.50.
It will continue to operate because it makes enough in the yellow region to pay part of its fixed cost.
Finally, the price drops below $2.00.
The average variable cost is no longer being covered by the business.
It shuts down for the winter.
When MR is low, the business incurs a larger loss.
Cost curves show a firm's willingness to give a good or service.
When the MR curve is below the minimum point, the firm shuts down and the output is zero.
No supply is produced when revenues are too low.
The supply curve does not exist during the winter when the Ice Cream Float is dry docked.
The marginal cost is what the firm bases its output decisions on.
The profit- maximizing rule is used by the firm to determine how much to pro duce.
The Ice Cream Float's supply curve is shown in Figure 9.3.
As the quantity produced increases, diminishing marginal product causes the firm's costs to rise.
The firm's short- run supply curve is shown in red.
The supply curve is sloping above the minimum point.
The short- run supply curve is vertical at a quantity of zero, indicating that a willingness to supply the good does not exist below a price of $2.00.
As the price increases, the firm will offer more for sale.
A firm's output decision is tied to profits in the long run.
All costs are variable because the firm is flexible.
The firm's long- run supply curve only exists when the firm expects to cover its total costs of production, otherwise it will exit the market.
When demand is low, the Ice Cream Float shuts down over the winter and is expected to come back.
The float would go out of business if the crowds don't come back.
The minimum point on the average variable cost curve is known as S.
When the price is above the average total cost curve, theSLR and MC curve are equivalent.
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