| Line 120: |
Line 120: |
| | *AVC is TVC/Q | | *AVC is TVC/Q |
| | *MC is the difference in cost between the specified Q and the good produced before it | | *MC is the difference in cost between the specified Q and the good produced before it |
| | + | |
| | + | In perfect competition, firms sell more and more Q until MR (marginal revenue) falls to the level of MC (marginal cost). Stated another way, firms sell at the point where MR = MC. Do not confuse MC with AVC; they always equal each other only when Q=1, for the first unit produced. |
| | | | |
| | Master the above and you will both ace exams and be able to run a successful business. Experienced business managers state that profitability is made by reducing expenses. This has certainly been true for Wal-Mart. It is constantly driving costs down with its suppliers. Remember: a penny saved is a penny earned. Actually, due to taxes, saving a penny is sometimes worth more than a penny earned. | | Master the above and you will both ace exams and be able to run a successful business. Experienced business managers state that profitability is made by reducing expenses. This has certainly been true for Wal-Mart. It is constantly driving costs down with its suppliers. Remember: a penny saved is a penny earned. Actually, due to taxes, saving a penny is sometimes worth more than a penny earned. |
| | + | |
| | + | == Applying Cost Measures to Perfect Competition == |
| | + | |
| | + | When there is perfect competition, what can we learn from the cost measures? By applying logic to the assumption that there is perfect competition, we can learn a great deal. |
| | + | |
| | + | ''Example Question'': Suppose the price of a widget produced by a firm in perfect competition is less than the minimum average variable cost (AVC) in the market. What will the firm do next in the short run? |
| | + | |
| | + | ''Answer'': Realize that the question is asking about the short run, so building a new factory or changing fixed costs is not possible. There is not enough time. Instead, the question is asking what can be done as a "quick fix" to the problem. What is the problem? The problem is that the price is LESS than the lowest average variable cost (AVC). Now we know that that a firm is losing money when the price, or marginal revenue, is less than marginal cost. A firm does not want to sell anything at less than marginal cost, because it loses money on it. |
| | + | |
| | + | But how does marginal cost relate to AVC? There is no direct relation, except when Q=1 they are the same. Ah, but that is the key. Read the question again carefully, which is so important in Economics. The question says that the price (which is marginal revenue (MR)) is less than the MINIMUM AVC, so MR<MC when Q=1. That means the firm loses money on its first unit made, because MR<AVC for all Q that loss on the initial unit is never regained. The firm is best off by completely shutting down. |
| | + | |
| | + | <continue discussion of other cost measures, and explain above better> |
| | | | |
| | == Obstacles to Reducing Costs == | | == Obstacles to Reducing Costs == |