ECON130 Week 5: Producer theory II

Today is a short post – there is just a key thing I want you to remember about a profit maximising firm. [Lecturer slides here and here]

Marginal Revenue = Marginal Cost

Marginal Revenue = Marginal Cost

Marginal Revenue = Marginal Cost

As long as the firm covers average variable costs at this level they will operate in the short term, and produce at the Q where MR=MC.

As long as the firm covers average costs in the long term they will remain in the market, and produce at the Q where MR=MC.

If MR=MC occurs at a price greater than average cost then other firms are going to come in to get some of those supernormal profits (or the scale of the firm will increase). Still, produce Q where MR=MC.

Questions

1. Does the above discussion depend on our price taking firm assumption?
2. Is price always equal to marginal revenue?
3. What is a price taking firm?
4. Marginal revenue = Marginal Cost!
5. What is the price that incentivises producing at the lowest average cost? What can we say about economic profit at that price?
6. What are some of the reasons why a firm may not be profit maximising?