short run output decision & short run supply curve

description

• Because a perfectly competitive firm is a price taker, it can sell as many output as it wants at the market price ⇒ how many output would the firm choose to produce and sell, to maximize its profit

case analysis & decision

• note: P = MR
• Case 1: If P > ATC → TR > TC: Firm earns profit → Firm should produce
• Case 2: If P = ATC, the firm breaks even.
• Case 3: If P < ATC → TR < TC: Firm incurs loss
  • Case 3.1: AVC < P < ATC: Firm incurs loss and should continue to produce.
    • If firm continue to produce: $Loss=TC–TR=TFC+(AVC–P)Q$ (1)
    • When Loss (1) < Loss (2) ↔ P > AVC, firm should continue to produce.
  • Case 3.2: P < AVC: Firm incurs loss and should shut down.
    • If firm shuts down: $Loss=TFC$ (2)
    • When Loss (2) < Loss (1) ↔ P < AVC, firm should shut down.

short run supply curve

• graph