Principles of Microeconomics: Long-Run Costs and Output Decisions

Long-Run Output Decisions: Decisions where firms can choose their plant's scale, change any or all inputs, and enter or exit the industry freely, facing fewer constraints than in the short run.

Managerial Decision-Making: The process where managers simultaneously make decisions for the short run and long run to optimize operations while considering future constraints.

Economic Profits: A scenario where a firm's profits exceed its total costs.

Economic Losses: A scenario where a firm suffers losses, which may lead to continued operation to minimize losses or a decision to shut down.

Breaking Even: A state where a firm earns a normal return, meaning its total revenue equals its total cost.

Profit Maximization Principle: For a perfectly competitive firm, this principle states that profits are maximized by operating where Price (P) equals Marginal Cost (MC).

Profit: The difference between a firm's total revenue (TR) and its total cost (TC).

Average Total Cost (ATC): Calculated by dividing total cost (TC) by quantity (q), allowing the back-calculation of total cost as TC = ATC \times q (where \times denotes multiplication).

Operating Decisions During Losses: If total revenue (TR) exceeds total variable cost (TVC), the firm may continue to operate to offset fixed costs and minimize losses. If TR < TVC, the firm should shut down to limit losses to fixed costs.

Shutdown Point: The lowest point on the average variable cost (AVC) curve. If the price falls below this point, total revenue does not cover variable costs, leading the firm to shut down.

Short-Run Supply Curve (Competitive Firm): Represented by the section of the marginal cost (MC) curve that lies above the average variable cost (AVC) curve.

Short-Run Industry Supply Curve: The aggregate of all individual firms' marginal cost (MC) curves that lie above their respective average variable cost (AVC) curves within an industry.

Long-Run Average Cost Curve (LRAC): A curve that represents how per-unit costs change with the level of output in the long run.

Economies of Scale: A condition of increasing returns to scale where an increase in production output results in lower costs per unit.

Constant Returns to Scale: A condition where an increase in production output does not affect costs per unit, resulting in a flat LRAC curve.

Diseconomies of Scale: A condition reflecting increasing returns to scale, where average costs per unit rise as output increases.

Minimum Efficient Scale (MES): The smallest size of production at which the Long-Run Average Cost (LRAC) curve reaches its minimum point.

U-Shaped Cost Curve: A representation of long-run average costs where economies of scale initially decrease costs, but beyond an optimal scale, diseconomies of scale cause costs to rise, forming a U-shape.

Long-Run Competitive Equilibrium: A state in an industry where all firms earn zero economic profit, indicating a balance between supply and demand, and there is no incentive for firms to enter or exit.