shutdown rule shutdown rule 1: the firm shuts down only if...
TRANSCRIPT
![Page 1: Shutdown Rule Shutdown rule 1: The firm shuts down only if ...web.utk.edu/~scho9/knu/Lecture_21_5_26_2011.pdf•Short-run competitive profit maximization –Where its marginal profit](https://reader035.vdocuments.net/reader035/viewer/2022070706/5e9d5592bf0f59256703983a/html5/thumbnails/1.jpg)
Shutdown Rule
• Shutdown rule 1: The firm shuts down only if it can reduce its loss by doing so.
• Shutdown rule 2: The firm shuts down only if its revenue is less than its avoidable cost.
– E.g., R=$2,000, VC=$1,000, F=$3,000, Profit=-$2,000?
– What if R=$500, VC=$1,000, F=$3,000, Profit=-$3,500?
![Page 2: Shutdown Rule Shutdown rule 1: The firm shuts down only if ...web.utk.edu/~scho9/knu/Lecture_21_5_26_2011.pdf•Short-run competitive profit maximization –Where its marginal profit](https://reader035.vdocuments.net/reader035/viewer/2022070706/5e9d5592bf0f59256703983a/html5/thumbnails/2.jpg)
Competition in the short run
• Short-run competitive profit maximization
– Where its marginal profit is zero or where its marginal cost equals its marginal revenue
– A competitive firm can sell as many units of output as it wants, the revenue is R=pq.
– Because a competitive firm’s marginal revenue equals the market price, a profit maximizing competitive firm produces the output where Mc(q)=p
![Page 3: Shutdown Rule Shutdown rule 1: The firm shuts down only if ...web.utk.edu/~scho9/knu/Lecture_21_5_26_2011.pdf•Short-run competitive profit maximization –Where its marginal profit](https://reader035.vdocuments.net/reader035/viewer/2022070706/5e9d5592bf0f59256703983a/html5/thumbnails/3.jpg)
How a Competitive
Firm Maximizes
Profit
![Page 4: Shutdown Rule Shutdown rule 1: The firm shuts down only if ...web.utk.edu/~scho9/knu/Lecture_21_5_26_2011.pdf•Short-run competitive profit maximization –Where its marginal profit](https://reader035.vdocuments.net/reader035/viewer/2022070706/5e9d5592bf0f59256703983a/html5/thumbnails/4.jpg)
Shutdown Rule
• Shutdown rule 1: The firm shuts down only if it can reduce its loss by doing so.
• Shutdown rule 2: The firm shuts down only if its revenue is less than its avoidable cost.
– R<VC,
• R=P*Q, VC=AVC*Q, Divide both sides by Q
– P<AVC
![Page 5: Shutdown Rule Shutdown rule 1: The firm shuts down only if ...web.utk.edu/~scho9/knu/Lecture_21_5_26_2011.pdf•Short-run competitive profit maximization –Where its marginal profit](https://reader035.vdocuments.net/reader035/viewer/2022070706/5e9d5592bf0f59256703983a/html5/thumbnails/5.jpg)
The Short-Run Shutdown Decision
![Page 6: Shutdown Rule Shutdown rule 1: The firm shuts down only if ...web.utk.edu/~scho9/knu/Lecture_21_5_26_2011.pdf•Short-run competitive profit maximization –Where its marginal profit](https://reader035.vdocuments.net/reader035/viewer/2022070706/5e9d5592bf0f59256703983a/html5/thumbnails/6.jpg)
How the Profit-Maximizing Quantity Varies with Price
![Page 7: Shutdown Rule Shutdown rule 1: The firm shuts down only if ...web.utk.edu/~scho9/knu/Lecture_21_5_26_2011.pdf•Short-run competitive profit maximization –Where its marginal profit](https://reader035.vdocuments.net/reader035/viewer/2022070706/5e9d5592bf0f59256703983a/html5/thumbnails/7.jpg)
Chapter 9
Applying the Competitive market
(Welfare Analysis)
![Page 8: Shutdown Rule Shutdown rule 1: The firm shuts down only if ...web.utk.edu/~scho9/knu/Lecture_21_5_26_2011.pdf•Short-run competitive profit maximization –Where its marginal profit](https://reader035.vdocuments.net/reader035/viewer/2022070706/5e9d5592bf0f59256703983a/html5/thumbnails/8.jpg)
Consumer Welfare
• Economists/policy makers want to know how much consumers benefit/harmed by shocks affect the equilibrium price and quantity.
• Comparison of utility function is not practical for the measure of consumer benefit/harm.– Unknown utility function– Un unified measure of utils
• Measure of welfare in terms of dollar!– Instead of asking “How many utils would you gains
if your daily commute decreased by 15 minutes?”– “How much would you pay to shorten your daily
commute by 15 min?”
![Page 9: Shutdown Rule Shutdown rule 1: The firm shuts down only if ...web.utk.edu/~scho9/knu/Lecture_21_5_26_2011.pdf•Short-run competitive profit maximization –Where its marginal profit](https://reader035.vdocuments.net/reader035/viewer/2022070706/5e9d5592bf0f59256703983a/html5/thumbnails/9.jpg)
Measuring consumer welfare using a demand curve
• Consumer welfare: the benefit a consumer gets from consuming that good minus what the consumer paid to buy the good (e.g., your willingness to pay for a soft drink ~ marginal willingness to pay ~ when you’re thirsty over what you actually pay)
• Marginal willingness to pay: the maximum amount of a consumer will spend for an extra unit.
![Page 10: Shutdown Rule Shutdown rule 1: The firm shuts down only if ...web.utk.edu/~scho9/knu/Lecture_21_5_26_2011.pdf•Short-run competitive profit maximization –Where its marginal profit](https://reader035.vdocuments.net/reader035/viewer/2022070706/5e9d5592bf0f59256703983a/html5/thumbnails/10.jpg)
Consumer Surplus: The area under the demand curve and above the market price up to the quantity the consumer buys.
![Page 11: Shutdown Rule Shutdown rule 1: The firm shuts down only if ...web.utk.edu/~scho9/knu/Lecture_21_5_26_2011.pdf•Short-run competitive profit maximization –Where its marginal profit](https://reader035.vdocuments.net/reader035/viewer/2022070706/5e9d5592bf0f59256703983a/html5/thumbnails/11.jpg)
Effect of a price change on consumer surplus
• Supply curve shifts upward, new sales tax:
• The equilibrium price rises, reducing consumer surplus.
![Page 12: Shutdown Rule Shutdown rule 1: The firm shuts down only if ...web.utk.edu/~scho9/knu/Lecture_21_5_26_2011.pdf•Short-run competitive profit maximization –Where its marginal profit](https://reader035.vdocuments.net/reader035/viewer/2022070706/5e9d5592bf0f59256703983a/html5/thumbnails/12.jpg)
Producer Welfare
• Producer surplus (PS): The difference between the price received by seller and the minimum amount necessary for the seller to be willing to produce the good.
• PS: The area above the supply curve and below the market price up to the quantity actually produced.
• Measuring producer surplus using a supply curve, marginal cost curve above its minimum average variable cost.
![Page 13: Shutdown Rule Shutdown rule 1: The firm shuts down only if ...web.utk.edu/~scho9/knu/Lecture_21_5_26_2011.pdf•Short-run competitive profit maximization –Where its marginal profit](https://reader035.vdocuments.net/reader035/viewer/2022070706/5e9d5592bf0f59256703983a/html5/thumbnails/13.jpg)
MC curve=Supply curve, above AVC
![Page 14: Shutdown Rule Shutdown rule 1: The firm shuts down only if ...web.utk.edu/~scho9/knu/Lecture_21_5_26_2011.pdf•Short-run competitive profit maximization –Where its marginal profit](https://reader035.vdocuments.net/reader035/viewer/2022070706/5e9d5592bf0f59256703983a/html5/thumbnails/14.jpg)
Producer Surplus
• PS = R - VC• π = R – C = R – (VC + F)• Difference between PS and π is Fixed cost.• Long run: PS = π