Andreas software business How competitive firm sets its

Andrea’s software business How competitive firm sets its output

$80 $70 $60 $56 Price $50 $40 $30 $20 $10 AFC 1 2 3 4 5 Quantity 6 7 8 9 10

$80 $70 $60 $56 Price $50 $40 AVC $30 $20 $10 AFC 1 2 3 4 5 Quantity 6 7 8 9 10

$80 $70 $60 $56 Price $50 ATC $40 AVC $30 $20 $10 AFC 1 2 3 4 5 Quantity 6 7 8 9 10

$80 $70 MC $60 $56 D Price $50 ATC $40 AVC $30 $20 $10 AFC 1 2 3 4 5 Quantity 6 7 8 9 10

• Why is Mr. Couch making me add all these stupid columns, that aren’t even on the stupid handout, and do all these stupid calculations, and make this stupid graph? ? ? (#@*!#@)

• For one thing, at six units of output, my profit increases from $35 to $51! • $16 !!! - That’s my biggest profit margin increase isn’t it? • Why wouldn’t I stop there?

• Ah grasshopper – the past doesn’t matter, today is the first day of the rest of your life. Economists do think on the margin, but marginal thinking is forward thinking

• Where ever you are is where you are – and does the benefit of producing one more exceed the cost of producing one more? • If yes, produce one more • If no, stop

Price = demand (D) = marginal revenue (MR) = average revenue (AR) $80 $70 MC $60 $56 D Price $50 $48. 12 ATC $40 AVC $30 $20 $10 AFC 1 2 3 4 5 Quantity 6 7 8 9 10

$80 $70 MC $60 $56 Price $48. 1 $50 D Total economic PROFIT ($7. 88 x 8 = $63) ATC $40 AVC $30 $20 $10 AFC 1 2 3 4 5 Quantity 6 7 8 9 10

Always proceed until MC = MR Marginal Cost = Marginal Revenue That is when you maximize your profit!

And get this… • for a firm • when Price equals Demand equals Marginal Revenue • And price equals marginal cost, • then quantity demanded equals quantity supplied!!! • That’s why supply meets demand in equilibrium! • Oh! My Gosh! It all comes together – I could just jump for joy

Questions coming up … • • What if price drops below ATC minimum? What if price drops below AVC minimum? Will a change in fixed cost affect output? Will a change in variable cost affect output? • And why is that marginal cost curve decreasing and the increasing anyway?