ECON130 Week 5: Producer theory II
Today is a short post – there is just a key thing I want you to remember about a profit maximising firm. [Lecturer slides here and here]
Marginal Revenue = Marginal Cost
Marginal Revenue = Marginal Cost
Marginal Revenue = Marginal Cost
As long as the firm covers average variable costs at this level they will operate in the short term, and produce at the Q where MR=MC.
As long as the firm covers average costs in the long term they will remain in the market, and produce at the Q where MR=MC.
If MR=MC occurs at a price greater than average cost then other firms are going to come in to get some of those supernormal profits (or the scale of the firm will increase). Still, produce Q where MR=MC.
Questions
- Does the above discussion depend on our price taking firm assumption?
- Is price always equal to marginal revenue?
- What is a price taking firm?
- Marginal revenue = Marginal Cost!
- What is the price that incentivises producing at the lowest average cost? What can we say about economic profit at that price?
- What are some of the reasons why a firm may not be profit maximising?