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.
Firms are free to enter or exit the market in the long run if the price is less than average total cost.
There is no supply below $2.50.
The float expects to make a profit if the price is greater than average total cost.
The firm makes money.
The cost of production should be stopped by the firm.
A willingness to supply the good does not exist below a price of $2.50 according to the supply curve.
In the long run, a firm that expects price to exceed ATC will continue to operate, because the conditions for making a profit seem favorable.
A firm that does not expect price to exceed ATC should cut its losses and leave the market.
The long- run decision criteria are outlined in Table 9.5.
We have been able to determine the profit each firm makes by examining the firm's decision- making process in the short run in the context of revenue versus cost.
When the long- run profit outlook is not good, the firm is better off shutting down.
The ebb and flow of business is normal in a market economy.
There were many buggy whip companies.
As technology has improved and we no longer rely on horse drawn carriages, few buggy whip makers remain.
Many companies make automobile parts.
The music industry has been transformed by technological advances.
The records were replaced with tapes and cassettes.
The CD is going to be replaced by better technology such as iPods, iPhones, and mp3 players, as well as web sites such as Pandora and the Apple music service, which allow streaming of almost any selection a listener wants to hear.
There was a time when innovation meant playing music on the original Sony Walkman.
It was cool in the early 1980s.
Businesses that distribute music have had to adapt or shut down.
Changes are happening in the video rental industry.
The nation's largest video store chain was founded in 1982.
In 2004, the company had 60,000 employees in 9000 stores.
The company's days were numbered even then.
In the early 2000s, Blockbuster faced stiff competition from online providers and in- store dispensers.
The company closed its remaining stores after filing for bankruptcy.
Changing tastes, demographic factors, and migration are just some of the factors that can force businesses to close.
The decision to go out of business has nothing to do with the short- term profit outlook.
The principle of sunk costs can be applied to the decision to build a new sports stadium.
Despite the arenas they replaced being built to last longer, many professional stadiums have been built in the past few years.
Three Rivers Stadium in Pittsburgh used to have thousands of stores.
Veterans Stadium in Philadelphia was built in the early 1970s as a multi use facility for both football and baseball, each with an expected life span of 60 or more years.
Each city built two new stadiums with unrecoverable costs that features such as luxury boxes and better seats that generate more revenue than Veterans and Three Rivers did.
The new result of previous decisions is made by the additional revenue.
It can be good economics to demolish a structure that is still in good working order.
The cost of imploding the old stadium and constructing a new one will be paid for by the extra benefit of a new stadium.
The citizens of Pittsburgh and Philadelphia have been made better off by the decision to replace the older stadiums because the new stadiums have created increased ticket sales, higher tax revenues, and a more enjoyable experience for fans.
Stadium implosions can be caused by opportunity costs.
There is a question that confuses students.
The key is to think about each answer in a concrete way.
We will refer back to the Mr. for the rule for making help do that.
It sounds great to make a large profit per unit.
The firm will fail to realize the additional profits if it stops production when the increase in profit is the greatest.
The profit function is only half of total revenue.
If total costs are higher than total revenue, the firm will experience a loss.
The firm wants to maximize profits.
Looking at column 2, we can see that at 10 driveway Mr.
There is a total revenue of $100.
The total cost of plowing 10 driveways is $145 according to column 3.
This level of output is not a good idea with a total profit of -$45
The firm doesn't make profits if total revenue and total cost are the same.
All profitable opportunities are exhausted when a firm maximizes profits.
His profit is $10 for plowing 7 or 8 driveway.
The marginal cost of clearing the ninth driveway is greater than the marginal revenue he earns, so his profits fall from $10 to $5.
An opportunity cost is the cost of continuing to use an out of date facility.
They compare the benefits and costs.
The old stadium should be torn down if a new stadium creates more value than the old one.
Replacing an old stadium with a new one can be controversial.
People misunderstand sunk costs and argue for a stadium to continue until it's worn down.
We should not focus on the sunk costs of the stadium's construction.
The marginal cost of demolition and new construction should be compared with the marginal benefit of a new stadium.
The stadiums shown are considered successes.
The franchises are happy because of higher attendance and higher revenue per ticket thanks to luxury boxes and better concessions.
The analysis of the stadiums would be done by an economist.
A firm's willingness to supply a good or service depends on whether the firm is making a short- run or long- run decision.
In the long run, a firm may choose to operate at a loss in order to recover some costs.
In the long run, there are no fixed costs, so a firm is willing to operate only if it expects the price it charges to cover total costs.
A small part of the overall supply in a competitive market is represented by the supply curve for a single firm.
The short- run and long- run market supply curves have been developed.
There is a large number of identical sellers.
If we add all the individual supply curves in a market, we arrive at the short- run market supply curve.
The Plow King is willing to clear 20 driveways.
The total market supply of 28 driveways is seen in the third graph when we sum the output of the two firms.
The individual supplies of firms in the market are summed up to determine the market supply.
We only showed this process for two firms.
Any number of firms in a market are encompassed by Plow and Plow King.
A large number of buyers seek a product that many sellers offer in a competitive market.
Competitive markets are easy to enter and exit.
Entrepreneurs and firms decide whether to enter or leave a market.
Entrepreneurs are encouraged to enter the market when existing firms are enjoying profits.
An increase in the quantity of good supplied is the result.
When existing firms are experiencing losses, there is an incentive for them to leave the market.
Entry and exit affect the amount of profit a firm can hope to make.
Existing firms expand production or other firms enter the market will increase the quantity supplied.
Existing firms reduce production or exit the market will cause the quantity supplied to decrease.
There is a need for an adjustment in market supply.
Resources enter or leave a market based on profits and losses.