|
12.4 Short-Run Profits and Losses
There are three easy steps to determine whether a firm is generating economic profits, economic losses, or zero economic profits:
1. Find where marginal revenues equal marginal costs and proceed straight down to the horizontal quantity axis to find q*, the profit-maximizing output level.
2. At q*, go straight up to the demand curve, then to the left (price) axis to find the market price, P*. Once you have identified P* and q*, you can find total revenue at the profit-maximizing output level, because TR = P x q.
3. The last step is to find total cost. Go straight up from q* to the short-run average total cost (SRATC) curve; this will give you the average cost per unit. If we multiply average total costs by the output level, we can find the total costs (TC = ATC x q).
If total revenue is greater than total costs at the profit-maximizing output level, the firm is generating economic profits. If total revenue is less than total costs, the firm is generating economic losses. If total revenue equals total cost, so the firm is earning zero economic profits, the firm is covering both its implicit costs and explicit costs. Economists sometimes call this zero economic profit a normal rate of return.
Exhibit 1: Short-Run Profits, Losses and Zero Economic Profits
A firm generating an economic loss faces a tough choice: Should it continue to produce or shut-down its operation? To make this decision, we need to consider average variable costs. If a firm cannot generate enough revenues to cover its variable costs, then it will have larger losses if it operates than if it shuts down (losses in that case = fixed costs). Thus, a firm will not produce at all unless the price is greater than its average variable cost.
At price levels greater than or equal to average variable costs, a firm may continue to operate in the short run even if average total costsCvariable and fixed costs--are not completely covered. Because fixed costs continue whether the firm produces or not, it is better to earn enough to cover a portion of these costs rather than earn nothing at all.
When price is less than average total costs but more than average variable costs, the firm produces in the short run, but at a loss. To shut down would make this firm worse off, because it can cover at least some of its fixed costs with the excess of revenue over its variable costs.
Exhibit 2: Short-Run Losses: Price Above AVC but Below ATC
When the price a firm is able to obtain for its product is below its average variable costs at all ranges of output, it is unable to cover even its variable costs in the short run, so since it is losing even more than the fixed costs it would lose if it shut down, it is most logical for the firm to cease operations.
Exhibit 3: Short-Run Losses: Price Below AVC
At all prices above minimum AVC, the firm produces in the short run, even if ATC is not completely covered, and at all prices below the minimum AVC the firm shuts down. Therefore the short-run supply curve of an individual competitive seller is identical with that portion of the MC curve that lies above the minimum of the AVC curve.
Exhibit 4: The Firm’s Short-Run Supply Curve
As a cost relation, the MC curve above minimum AVC shows the marginal cost of producing any given output. As a supply curve, the MC curve above minimum AVC shows the equilibrium output that the firm will supply at various prices in the short run. Beyond the point of lowest AVC, the MC of successively larger outputs are progressively greater, so the firm will supply larger amounts only at higher prices.
Exhibit 5: Deriving the Short-Run Market Supply Curve
The short-run market supply curve is the horizontal summation of the individual firms’ supply curves. Because the short run is too brief for new firms to enter the market, the market supply curve is the horizontal summation of existing firms.
Use What You’ve Learned: Reviewing the Short-Run Output Decision (Exhibit 6)
Use What You’ve Learned: Evaluating Short-Run Economic Losses (Exhibit7)
Do'stlaringiz bilan baham: |
