Andrea’s software business

How competitive firm sets its output

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AFC

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MC

D

• Why is Mr. Couch making me add all these stupid columns, that aren’t even on the stupid handout, and do all these stupid calculations, and make this stupid graph??? (#@*!#@)

• For one thing, at six units of output, my profit increases from $35 to $51!

• $16 !!! - That’s my biggest profit margin increase isn’t it?

• Why wouldn’t I stop there?

• Ah grasshopper – the past doesn’t matter, today is the first day of the rest of your life.

Economists do think on the margin, but marginal thinking is forward thinking

• Where ever you are is where you are –and does the benefit of producing one more exceed the cost of producing one more?

• If yes, produce one more

• If no, stop

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$48.12

Price = demand (D) = marginal revenue (MR) = average revenue (AR)

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DTotal economic PROFIT ($7.88 x 8 = $63)

$48.1

Always proceed until

MC = MRMarginal Cost = Marginal Revenue

That is when you maximize your profit!

And get this…

• for a firm • when Price equals Demand

and equals Marginal Revenue• And price equals marginal

cost, • then quantity demanded

equals quantity supplied!!!• That’s why supply meets

demand in equilibrium!

• Oh! My Gosh! It all comes together – I could just jump for joy

Questions coming up …

• What if price drops below ATC minimum?

• What if price drops below AVC minimum?

• Will a change in fixed cost affect output?

• Will a change in variable cost affect output?

• And why is that marginal cost curve decreasing and the increasing anyway?