Theory of the Firm

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BSNS113
Sophia Lynch
Flashcards by Sophia Lynch, updated more than 1 year ago
Sophia Lynch
Created by Sophia Lynch over 4 years ago
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Question Answer
What does the green box symbolise? Profit/Super-normal Profit (in the short-run)
What type of profit is being made is this scenario? Normal Profit/Zero Economic Profit (It doesn't necessarily encourage people to leave or enter this industry)
What does this green box symbolise? A loss/Negative Economic Profits
What should the business do if price was = to or less than AVC? The business should stop operating.
The Marginal Cost Curve (MC) is the.... Short-run supply curve for the firm.
What is the short-run shut-down rule? Only operate if average revenue (AR) is > than or = to average variable cost (AVC) AR > = AVC
What does it mean when AR = ATC? There is normal profit.
What does it mean P = MC? There is economic efficiency hence there is no DWL.
CM: After super-normal profit has occurred, firms will continue to enter the market until... P = AR = MR = MC = AC This means that in the long-run, in competitive markets, only normal profit can be made.
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