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Short-Run Output

shut-down rule - firms may continue to produce even when losing money  

  • firm could expect to earn a profit in the future
  • shutting down might be costlier than operating in the red
  • product price > average economic cost of production >> firm makes a profit by producing
    • assuming no sunk costs, firm should shut down when price of product falls below average total cost
    • w/ sunk costs, firm should only shut down when price of product falls below average variable cost


firm short-run supply curve - shows how much firm will produce for each price   

  • supply curve
  • part of marginal curve greater than average cost curve
  • price changes >> firm changes output so that marginal cost equals price
  • higher market price or higher prices for inputs may lead to upward shifts in marginal cost and

market short-run supply curve - sum of all firm supply curves in the market  

  • overall prices changes can make adding firm supply curves more difficult
    • higher prices >> firms expand output >> demand of inputs increase >> prices of inputs could increase >> firms would then decrease output
    • market supply curve might not be as responsive
  • Es = (DQ/Q) / (DP/P)
  • perfectly inelastic supply - greater output only possible by building new plants
  • perfectly elastic supply - when marginal costs are constant
  • producer surplus - difference between revenue and variable cost
    • surplus = R - VC = profit + FC
Subject X2: 

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