1. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15
SATC
SMC MC
SAVC
SAVC D X
Now we add a curve to the diagram to show the Demand Curve which the firm faces.
Where is the firm’s Marginal Revenue curve (see Lecture 11 slide 7)?
Robin Naylor, Department of Economics, Warwick

2. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15
SATC
SMC
SMC
SAVC
SAVC D X MR
What is the firm’s profit-maximising output?
And the price?
Robin Naylor, Department of Economics, Warwick

3. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15 p
SATC
SMC
SAVC D X MR
What in the diagram represents the extent of the firm’s (Super-normal) Profit?
Robin Naylor, Department of Economics, Warwick

4. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15 p
SATC
SMC
SAVC D X MR
How do we represent:
STC? STVC? STFC?
Robin Naylor, Department of Economics, Warwick

5. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15
SATC p
SMC
SAVC X
Now add a curve to the diagram to show a lower Demand Curve . . .
Robin Naylor, Department of Economics, Warwick

6. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15
SATC p
SMC
SAVC X
Now add a curve to the diagram to show a lower Demand Curve . . .
Robin Naylor, Department of Economics, Warwick

7. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15
SATC p
SMC
SAVC p* D MR X* X
Now add the MR Curve to determine the profit-maximising market output by the firm and its chosen price. What can you say about the extent of profits?
Robin Naylor, Department of Economics, Warwick

8. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15
SATC p
SMC
SAVC A p* D MR X* X
What can you say about the extent of profits at X*?
What would be the extent of the loss if the firm produced nothing?
Robin Naylor, Department of Economics, Warwick

9. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15
SATC p
SMC
SAVC
SATC(X*) A p* B
SAVC(X*) D MR X* X
What would be the extent of the loss if the firm produced nothing (X = 0)?
So where does the firm produce: X = X* or X = 0?
Robin Naylor, Department of Economics, Warwick

10. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15 p
SATC
SMC
SATC(X*)
SAVC
SAVC(X*) p* D MR X* X
In the previous slide, SATC(X*) > p* > SAVC(X*).
Now consider SATC(X*) > SAVC(X*) > p* .
Robin Naylor, Department of Economics, Warwick

11. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15 p
SATC
SMC
SATC(X*)
SAVC
SAVC(X*) p* D MR X* X
What is the extent of the loss if the firm produces nothing (X = 0)?
It’s given by STFC: which is represented in the diagram by ?
Note: STFC = SAFC.X = (SATC – SAVC)X.
Robin Naylor, Department of Economics, Warwick

12. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15 p
SATC
SMC
SATC(X*)
SAVC
SAVC(X*) p* D MR X* X
So, the loss associated with producing at X = X* now exceeds the loss associated with producing at X = 0: because p* < SAVC(X*).
This suggests the following (Shut-Down) Rule . . .
Robin Naylor, Department of Economics, Warwick

13. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15 p
SATC
SMC
SATC(X*)
SAVC
SAVC(X*) p* D MR X* X
Produce at X* (where MR = MC) so long as p* ≥ SAVC(X*): otherwise produce at X = 0 (i.e., shut-down production) and make minimal losses of STFC.
Robin Naylor, Department of Economics, Warwick

14. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15
In the long-run, all inputs (K and L) are variable. p
LAC
LMC
IRS
DRS
In the long-run, we talk about ‘returns to scale’ as both labour and capital inputs can be varied. X
There is no such thing as ‘LAFC’. Hence, LATC = LAVC. We call it LAC, for short.
An important matter is the relationship between the SATC curve and the LAC:
See B&B pp and also Morgan Katz and Rosen pages and Estrin et al pages
Robin Naylor, Department of Economics, Warwick

15. Robin Naylor, Department of Economics, Warwick
Topic 2 Lecture 15
In the long-run, we get the entry/exit rules: p
LAC
LMC p*
LAC* D MR X
Enter if p* ≥ LAC(X*).
Exit (or do not enter) if p* < LAC(X*).
Robin Naylor, Department of Economics, Warwick

16. Robin Naylor, Department of Economics, Warwick
Topic 2: Lecture 15
Now revise B&B 4th Ed., Chapter 6 (especially pp ) and read pp , and then and
Robin Naylor, Department of Economics, Warwick