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This portion aims to look into how costs change depending on quantity in the short run. The short run is the period in which at least one of our inputs are fixed. On the other hand, the long run looks into costs which aim to minimise our costs.
This can be measured by understanding the following concepts
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In the long run, all inputs are variable, which is where the firms aims to adjust to minimise costs regardless of what short run average total cost curve it is on.
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Firms need to be able to know when to enter the market, as well as when to end production (entry and exit). By understanding profits, we are able to know what a firm does and therefore how many quantities to produce.
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Short Run:
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Long Run :
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Shut down rule: a firm should not produce unless it can cover its variable costs. If it is not able to do so, firms are better off producing nothing. However, this only tends to happen in perfect competition)
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In perfect competition, many identical firms are competing at a constant market price. This market has low barriers, meaning any firm is able to enter and exit the market in the long run.
Long run will have normal profit
Short run can have either profit or loss
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