Chapter 11: cost and profit maximization under competition

Long run

The time after all entry and exit has occurred

short run

The period before entry and exit can occur

an industry is comeptetive under 3 conditions

The product is being sold is similar across sellers

There are many buyers and sellers, each small relative to the total market

There are many potential sellers

sunk cost

A cost that cannot be recorded

fixed cost

Costs that don't vary with the quantity produces

Generally fixed costs can't be changed in the short run and so should be ignored for short run decisions like what quantity to produce, but fixed costs can be changed in the long run so teu should be focuses on for long run decisions like entry or exit

Sunk costs vs fixed costs

What makes ... costs different from ... costs is that ... costs are never relevant because they cannot be changed by any choice. ... costs can't be changed by short run choices but can be changed by long run choices and so should be ignored in the former case and focused on in the latter case

opportunity costs

- explicit costs

- implicit costs

- accounting profit

- economic profit

explicit costs

A cost that requires a money outlay

implicit costs

A cost that doesn't require a money outlay

accounting profit

Total revenue - explicit costs

economic profit

Total revenue - total costs (including implicit opportunity costs)

profit

total revenue - total costs

... = TR/Q-TC/Q

... = Q(P-AC)

total revenue (TR)

P*Q

total cost (TC)

The cost of producing a given quantity of output

... = FC +VC

variable costs

Costs that vary with output

marginal costs

The change in total cost from producing an extra unit

... = ΔTC/ΔQ

marginal revenue

The change in total revenue from selling an additional unit

... = ΔTR/ΔQ

maximizing profit

a profit a firm in a competitive industry increases output until P=MC

Even though the firm's fixed costs are irrelevant for determining the ... quantity, we know that they are relevant for the choice to exit or not

average costs

The cost per unit, that is, the total cost of producing n units divided by Q

... =TC/Q

zero profit

Or normal profits, occur when P=AC. At this price the firm is covering all its costs, including enough to pay labor and capital their ordinary opportunity costs

short run shutdown decisions

If P

TR

increasing cost industry

An industry cost increase with greater output, shown with an upward-slopped supply curve

constant cost industry

An industry in which industry costs do not change with greater output, shown with a flat supply curve

decreasing cost industry

An industry in which industry costs decrease with an increase with an increased output, shown with a downward sloped supply curve