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Economics Lecture Twelve (view source)

Revision as of 15:55, December 2, 2009

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== Review:  Cost Measures==
 
== Review:  Cost Measures==
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Consider Figure B to the right.  <>
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Consider Figure B to the right.  In order to master economics, develop of habit of asking yourselves what you would do if you were the owner of a firm with these costs.  Ask yourself:  if your output is selling at a price of P<sub>1</sub>, are you making a profit?<ref>No.</ref>  Should you stay in business?<ref>No, because the price is less than both AVC and ATC.</ref>
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Next consider if your output is selling at a price of P<sub>2</sub>.  Are you making a profit there?<ref>You are making a daily profit because P>AVC, but losing money when all your fixed costs are included because P<ATC.</ref>  Should you stay in business?<ref>Yes, because P>AVC so you are making a marginal profit, but not covering all your original costs.</ref>
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Finally consider what to do if your output is selling at a price P<sub>3</sub>.  Are you making a profit at that price point?<ref>Yes.</ref>  Should you stay in business?<ref>Yes, absolutely.  Your price is greater than both your ATC and AVC.  You're making good money at this price point for your output.</ref>
    
== The Law of Comparative Advantage ==
 
== The Law of Comparative Advantage ==
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