ECON 410 Organization

maximizing profit involves two decisions

• output decision

• shutdown decision

perfect competition firms output decision

• MR > MC; Q ↑

• MR < MC; Q ↓

• MR = MC; Q*

what does a firm shutting down implicate?

• stop production (no revenue)

• variable costs avoided

• fixed costs unavoidable

perfect competition shutdown decision

• TR > VC; stay open

• TR < VC; shut down

is the shutdown decision a SR or LR decision?

• SR decision

• in the LR all costs are avoidable

slope of a perfectly competitive firm’s demand curve

horizontal

shut down rule for perfectly competitive firms in the SR

• p > AVC → stay open

• p < AVC → shut down

where does a perfectly competitive firm’s supply curve begin

above the AVC minimum

market supply

• the sum of the quantities each firm supplies at that price

• horizontal sum of the firm supply curves

perfectly competitive markets long run equilibrium conditions

• S = D

• MR = MC

• profit = 0

why is economic profit for perfectly competitive markets in LR 0?

there are no barriers to entry/exit

LR P.C. shutdown decision

if p < minimum of ATC