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MARKET STRUCTURE

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SHORT-RUN BEHAVIOUR

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Operate at a Profit

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Operate at a Loss

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Long-run Equilibrium

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Click on one of the following topics

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! 4 C!w-00(MARKETS IN ACTION PURE COMPETITION "!{ x"h2(

Shutdown

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LONG-RUN BEHAVIOUR

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REVENUE BEHAVIOUR

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Short-run Supply Curve

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Product

Markets

+? ,PVxͱ0 ǵrH츕8R pʑ(+(O8,3;/b/YꪔzVEi^t:vxnKlSSaq i@3g͋hm<9SȪ TyNˋ*-6dH?"_B)@,4,QݢB}(Y%cdJ)INTRODUCTION

In this tutorial we will examine how Product A is supplied by firms in a market structure or industry environment called Pure Competition.

MARKET STRUCTURE

The features of Pure Competition are:

1. Numerous Competitors: A large number of independent sellers of Product A; each firm is small relative to the total market supply.

2. Identical Product: Each rival firm supplies an identical product.

3. Price Taker: The firm simply takes the price that the market sets, as a given. That is, the firm faces a perfectly elastic demand curve.

4. Easy Entry and Exit: No significant obstacles for new firms wishing to enter the industry. Figure 1 provides illustrative examples.

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Key Concepts: Pure Competiton, Price Taker , Easy Entry

Read the notes on the left of this screen, then click on the Figure 1 link below.

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REVENUE BEHAVIOUR

Total Revenue (TR)

To understand how a product is supplied by a typical firm under pure competition, we must first study how revenue behaves, as Firm X changes the quantity of Product A supplied.

Total Revenue (TR) refers to the total dollars received by Firm X, in selling Product A. It is often called Total Sales.

It is computed using the formula:

TR = P x q where:

P = price set by the market

q = quantity supplied by the firm

Note that P, the price, stays the same as quantity increases, as the firm is a price taker. In Figure 2 we illustrate total revenue behaviour for NorEast, a purely competitive pulp firm.

># ?T2(

Key Concepts: Total Revenue and Marginal Revenue. Total Revenue Curve

and Marginal Revenue Curve.

Read the notes on the left of this screen, then click on the Figure 2 link below.

? l  @w02(After you have completed all the slides and figures in this tutorial re-visit this page and see if you can answer Application Question 1 below. @  Ao 2333(

Application Question 1

In a large city there are many small law firms. Does this imply that the legal industry is an example of perfect competition?

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Marginal Revenue (MR)

Marginal Revenue refers to the change in total revenue that Firm X receives when selling one more unit of Product A. In other words, Marginal Revenue equals the extra revenue received in selling one more unit of the product.

When Firm X increases quantity supplied, Marginal Revenue equals:

Change in TR/ Change In Quantity

Graphically, the Marginal Revenue Curve is the same as the firm's demand curve, under Pure Competition. This means that for each quantity level, MR = Price under Pure Competition. Figure 3 provides an illustrative example.

H# IT2(

Key Concepts: Total Revenue and Marginal Revenue. Total Revenue Curve

and Marginal Revenue Curve.

Read the notes on the left of this screen, then click on the Figure 3 link below.

I l  Jw02(After you have completed all the slides and figures in this tutorial re-visit this page and see if you can answer Application Question 2 below. J  3Koz2333(

Application Question 2

What aspects of the milk

producing industry are

similar to the perfect

competition model?

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Here we examine the short-run supply behaviour-output and profit behaviour- of a purely competitive firm. We assume that the firm ends up supplying a level of output that maximizes profits or minimizes losses.

In the short-run, each firm, is faced with fixed costs (fixed inputs) and variable costs (variable inputs) . In supplying Product A, Firm X must compare the market price with the costs of A and answer the following 3 short-run (SR) questions:

Q1: Should the firm operate?

Q2: If yes,what is the best quantity?

Q3: What is the best dollar profit?

Answering these questions, typically leads to 1 of 3 short-run situations:

Sit 1: Firm operates at a profit

Sit 2: Firm operates at a loss

Sit 3: Firm shuts down in the short run

Proceed to the next slide.

P# QT2(

Key Concepts: Total Revenue and Marginal Revenue. Total Revenue Curve

and Marginal Revenue Curve.

Read the notes on the left of this screen, then proceed to the next slide.

Q l  Rw02(After you have completed all the slides and figures in this tutorial re-visit this page and see if you can answer Application Question 3 below. R  Soǀ2333(

Application Question 3

What aspects of the milk

producing industry are

NOT similar to the perfect

competition model? Indeed,

dairy farmers know the

meaning of the saying" Don't

cry over spilt milk."

Do you know why?

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Key Concepts: Operate at a Profit Situation, Total Approach

Read the notes on the left of this screen, then click on the Figure 4 link below.

Z l  [[w}P2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Total Approach

In Figure 4 we will illustrate the "operate at a profit" situation by focusing on total revenue and total cost information. This approach is called the Total Approach.

In the Total Approach we apply the following rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Total Revenue exceeds Total Variable Cost, the firm should operate.

Q2: If it operates, the best quantity, q*, is that quantity which maximizes: Profit = (Total Revenue -Total Cost).

Q3: The best dollar profit is the total dollar profit (or loss) earned at q*.

[# \o 2333(

Application Question 4

Do doctors, especially

general practioners, operate in a perfectly competitive market structure? Explain.

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Key Concepts: Operate at a Profit Situation, Unit Approach

Read the notes on the left of this screen, then click on the Figure 5 link below.

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SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If it operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

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Application Question 5

Two computer graduates

set up rival computer repair firms offering identical services. One graduate financed her computer education through personal loans; the other had his education paid for by his parents. Is it correct to say that each graduate faces a different set of costs, in supplying services to clients? Explain.

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Key Concepts: Minimizing Losses, Total Approach

Read the notes on the left of this screen, then click on the Figure 6 link below.

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SHORT-RUN BEHAVIOUR

Operate at a Loss: Total Approach

In Figure 6 we will illustrate the "operate at a loss" situation by focusing on total revenue and total cost information. This approach is called the Total Approach.

In the Total Approach we apply the following rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Total Revenue exceeds Total Variable Cost, the firm should operate.

Q2: If it operates, the best quantity, q*, is that quantity which maximizes: Profit = (Total Revenue -Total Cost).

Q3: The best dollar profit is the total dollar profit (or loss) earned at q*.

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As a store owner, does it

make economic sense to

lower the price of your slow

moving merchandise to a

level below its average total

cost? Explain.

s8~h tw02(After you have completed all the slides and figures in this tutorial re-visit this page and see if you can answer Application Question 6 below. t  <uo0333(Click here for the solution. u8H@?v qv(@ w w+Yd  ;xo-0((Click here to view Figure 7 x ?y,2(

Key Concepts: Operate at a Loss, Unit Approach

Read the notes on the left of this screen, then click on the Figure 7 link below.

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SHORT-RUN BEHAVIOUR

Operate at a Loss: Unit Approach

In Figure 7 we will illustrate the "operate at a loss" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If it operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

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Application Question 7

Can you think of a cost

related reason why hotels

often offer large discounts

(specials) during non-peak

periods?

{~h <|o0333(Click here for the solution. |Hʨ }w02(After you have completed all the slides and figures in this tutorial re-visit this page and see if you can answer Application Question 7 below. } ?~xml}Ő#JlK(G/w"E OowI"MQ y")2ϢH6%ʥ$ u "K"{]2XaPRlktY 6`ȷysGR,і!@Y/֏繦?x/Mԇk_{;hۛ7^&&&>ߝQn?ltttwOb7˞^?L?jc_{aOy޽_+\LY^w߽`oíIX'K}!t⟿a!˄<kԥZ w?裩罟-K7t|ewhwy5~5O?Wtzo~E|_+?}w6Bvo^\8om_俿{qyWPoó]]|wS?MK|.FSWґg1'bw.:6T*#bT݀θ+*vl5 (<5xTwlt!dSS[F,ӹ0eg[>kʇ3>|ˋea$:%V_lW.ǰj@g`aT31ڪ_sp[/&wDL4y)G**~?XOT*g&"+)pL%јU{^ѩo0&f ٌ\yK#ʑ֪I,iX Yì [ >nݺ'GKtsqæ3EG]2W884OU-bNآ I-%f=.ߒrgW@ͬ6ٗ'gbk>gWg㾥[f륥ϼtcґp +PƨPh]>"XgVavjJyTqvU?  (& QOD|dpi^_*(Ϯkyji~j5ެ\?}75[iH*[7X"RpOG$Tr|u rlU`^W6 㳫clZ0vVp|A[RB,%;I]%u$Ⴠf<>;, z~yLP8;6&? _:EhHdF 0b}<ޯ.M_Z𭂟8FҦ&oGKEm0<+L)O47???zUZ U =}E686KgEш+̪ȇt"P Y\X+ x:\0ΛṀI%0&3Z;IAHz+| J6 qP#g;զn=О\h3N[_Th17/4v*h6j$LQmtTZ~F>Xx.B-x~'0FMUjvD+Hg;R%ˮp^dl %H4'¥w>1BtT\ϻ-z %V;c^v[d_UN@ˊcbD# +MWoB)bӎcEA95_.5DcE@ 6wISWT[QψIA|%e Qd!J 7JڣU03{͆8&HqL*};N^Rvlm%!ۃD "K)k.Ńv`ĠURU$lqǡ})@ju&Ƿ{{aVn+d0 7/{+9;Y QZL(@)FTԘV.\G94Sr1V8%s&_eU|T. vF!157_)5( R "%/2w `r% :2^P*v8M?$lS#!i;B=uɧR°='gD0W`ЊVkJ<ɖ84qQWF$\%q &3dVsR h o%٘dZ|@Ri&={En SR!+,!)^ P*.^H)SQ\Ͱ/Lk4WK|Jan qZTWwC2!3v4@ 2+jrP-h0Bhq&cMC@E3(B{{o0}&pH @2W-Y8.BJFfVx4"0 HipDA6d3"sݪ'%xgV2T$TK}H4 '\&Y o|BDDJQDr|O4'p!p_c/2w_]||mEWnAm pZF]ƏFX>GH_pBR8u.$ػvINjII\li:hH G +QaPTQ/-+Ed# % ;四 m}}ێ{d{S p*Ys%޸S*IqTN5cllm$gH o'B+j9&"חFVNΑ2}6y/*]nFOw\\L_,+mƗ!eԥLW(ιInFۮ2̤3ޓ?m~EdϤBͅF:Ot^$G$.דn( yKmQD88̚j0@BKh`3_]:cd*% /Rx-=άuLg-eNT.֘kEbc5ta >&{k8uљ;PhmrڐCkr G8UIF&C0XnSNg'CC36U(`e.PLnmm>'E (Za8T&[۱ guj dBh}VnwlKnq"&=X_To" ;OdrUUU 7)ԣ*{^0"dXq_2Y0Fy-Yq2Њ}~xBVY~ SklêA)_y {d3QУ@gZDjW8 o9gO/&k4V-,!.!&-ca9<ĻgdU?[N)[|=5bNh-6'#[Gx!V4آMSꖡܓv#e `^+A7Uy@T# bdL&r*tA;PFe{sN 1qz1V 41a5ck6`"m>]#F8G@gT]&muݟuTW^}m8NZfGq49n6߮o?~&wE.l7eNajA흏<ŕd,Tj[D۵t.35 @|;N&6MQ {znim !l^k|B{o{_o___{KK{o&_/ lP+kgar4kuV{ob,W{{VA_lI+j4:B$D$jj~>c?j¬+ nP?SSB _78xEzD8NuH`s+F!c\գP_9GXZgPgtDqǢ%5aFc;/<L;GOPFp)rh-޶- N,;2GCR>) ,Σόu ƻ%5<-P>ǛY@y FjY@"!al'N3*6r_oA@A~@K ϽvN`@@? }--@ X0  +Ydܬ  ;o-0((Click here to view Figure 8  6wȭ2(

Key Concepts: Shutdown, Total Approach

Read the notes on the left of this screen, then click on the Figure 8 link below.

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SHORT-RUN BEHAVIOUR

Shutdown at a Loss: Total Approach

In Figure 8 we will illustrate the "shutdown at a loss" situation by focusing on total revenue and total cost information. This approach is called the Total Approach.

In the Total Approach we apply the following rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Total Revenue exceeds Total Variable Cost, the firm should operate.

Q2: If it operates, the best quantity, q*, is that quantity which maximizes: Profit = (Total Revenue -Total Cost).

Q3: The best dollar profit is the total dollar profit (or loss) earned at q*.

# Bo[2333(

Application Question 8

You operate a restaurant

in a downtown office tower.

You are really busy during

the week, but business has

been slow on weekends.

What information should

you examine in order to

decide whether you should

stay open on weekends?

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Key Concepts: Shutdown, Unit Approach

Read the notes on the left of this screen, then click on the Figure 9 link below.

 l  Vw}2(

SHORT-RUN BEHAVIOUR

Shutdown at a Loss: Unit Approach

In Figure 9 we will illustrate the shutdown at a loss" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

# o2333(

Application Question 9

As the owner of a local

Canadian optical store

you are suing a large U.S

owned department store

for "dumping" or selling the

identical glasses at below

cost. You claim that the U.S

firm's intent is to drive you

out of business. How might

you argue your case?

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and Industry Supply Curve

Read the notes on the left of this screen, then click on the Figure 10 link below.

 l  w2(

SHORT-RUN SUPPLY CURVE

In Figure 10 we will apply concepts presented in previous figures to

derive the firm's and the industry's short-run supply curve in Pure Competition.

Recall from the demand and supply tutorial that the firm's supply curve describes the quantity that the firm wishes to supply at different possible prices.

As you will see, in Figure 10a, the portion of the firm's marginal cost curve lying above its average variable cost curve is the firm's short-run supply curve.

In Figure 10b, you will begin to view the industry supply curve as the horizontal sum of all of the firms' marginal cost curves.

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In order to maximize profit

a firm should always seek

to produce its product at

the lowest cost per unit.

Is this true? Explain.

8~h <o0333(Click here for the solution.  w02(After you have completed all the slides and figures in this tutorial re-visit this page and see if you can answer Application Question 10 below.  @? +@ +Ye, <o0((Click here to view Figure 11 d w2(

Key Concepts: Long-run Equilibrium, Normal Profit, Productive Efficiency, Allocative Efficiency

Read the notes on the left of this screen, then click on the Figure 11 link below.

 l  w 2(

LONG-RUN BEHAVIOUR

Long-run Equilibrium

The long-run is a time period sufficient to allow new firms to enter the industry.

In the long-run, in Pure Competition, the typical firm will end up in "long-run equilibrium" where the price will just equal minimum average total cost (P=min ATC), which implies that

1. the firm earns zero economic profit or a "normal profit" as P=ATC.

2. the firm is productively efficient, as the quantity, q, is at min ATC.

3. the firm is allocatively efficient, as P=MC for the last unit of output produced. There is no shortage or surplus of the product.

Figure 11 explains how the typical firm ends up at long-run equilibrium.

# ko52333(

Application Question 11

Why don't you typically see

professionals like dentists,

accountants, lawyers, and

doctors price advertise, as

follows:

Shoppers special:

"Two fillings for $199.99."

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Solution to Application Question 1

While the legal industry does consist of many law firms, there are a number of reasons why lawyers are NOT perfectly competitive firms. There are barriers to entry in terms of high qualifications to become a lawyer. There are typically barriers to entry in practising law in another province. Also, it can be argued that some lawyers offer better services than others so that the product is not identical between competing law firms.

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Application Question 1

In a large city there are many small law firms. Does this imply that the legal industry is an example of perfect competition?

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Solution to Application Question 2

A product like 1% milk is virtually identical between rival Canadian milk producers. As well, there are numerous dairy producers all across Canada.

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Application Question 2

What aspects of the milk

producing industry are

similar to the perfect

competition model?

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Solution to Application Question 3

Typically, in each Canadian province, a milk marketing board is in operation. This means that the existing farmers do NOT independently compete with each other. Rather, all the dairy producers sell all their milk through their one selling agency - the marketing board. As well, there are significant barriers to entry. You cannot start up a new dairy farm unless an existing dairy producer is willing to sell you its license to operate. You would have to spend a lot of money just purchasing the license to operate.

Like a typical monopoly, the milk marketing board often restricts the sale of milk, to drive the price up in an inelastic market. Indeed, dairy farmers should know the saying "Don't cry over spilt milk" only too well. By spilling excess milk production, the farmers drive up the milk price and increase their profits.

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Application Question 3

What aspects of the milk

producing industry are

NOT similar to the perfect

competition model? Indeed,

dairy farmers know the

meaning of the saying" Don't

cry over spilt milk."

Do you know why?

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Solution to Application Question 4

In a large Canadian city you will find numerous independent general practitioners and medical clinics offering what may look to be similar services, such as annual check-ups and prescriptions for various diagnosed ailments. However, there are a number of reasons this industry is NOT perfect competition. For one, there are barriers to entry in the form of strict licensing qualifications including a lengthy, challenging university education, and required internship. Second, in each province doctors do NOT independently price compete. Through their medical association, doctors negotiate a set of common medical fees with the provincial government. Finally, one could argue whether two different doctors provide the same level of service.

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Application Question 4

Do doctors, especially

general practioners, operate in a perfectly competitive market structure? Explain.

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Solution to Application Question 5

In the short-run, the extra personal education costs incurred by the graduate who borrowed the funds would be considered "sunk costs" and NOT legitimate marginal costs. In deciding whether to supply services to different customers, in the short-run, only the marginal or extra costs of providing the service should be compared with the price of the service, in making the supply decision, and NOT the education costs incurred in the past.

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Application Question 5

Two computer graduates

set up rival computer repair firms offering identical services. One graduate financed her computer education through personal loans; the other had his education paid for by his parents. Is it correct to say that each graduate faces a different set of costs, in supplying services to clients? Explain.

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Solution to Application Question 6

In the short-run, it makes economic sense to

lower the price of the slow moving goods below average total cost, as long as the price exceeds average variable cost. In this case, the store owner manages to get some contribution towards covering his/her fixed costs. This reasoning suggests that one might consider the average variable cost to be the lowest discounted price a store owner would hope to sell his/her goods at.

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Application Question 6

As a store owner, does it

make economic sense to

lower the price of your slow

moving merchandise to a

level below its average total

cost? Explain.

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Solution to Application Question 7

In the hotel business most of the costs are fixed costs related to the financing, maintenance, and utilities of the building.

The extra costs or marginal costs of

putting another customer in an otherwise vacant room is very low (extra cleaning costs). With a very low marginal cost during non-peak periods, a low hotel room price can still end up contributing towards the fixed costs of operating the hotel.

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Application Question 7

Can you think of a cost

related reason why hotels

often offer large discounts

(specials) during non-peak

periods?

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Application Question 8

You operate a restaurant

in a downtown office tower.

You are really busy during

the week, but business has

been slow on weekends.

What information should

you examine in order to

decide whether you should

stay open on weekends?

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Solution to Application Question 8

When demand drops off during non peak periods, such as weekends in this example, compare the total revenue received during a typical weekend with the total variable costs incurred during a typical weekend. If the total revenue is below total variable costs, you are likely better off NOT operating during non-peak periods. We are assuming that shutting down on weekends does not turn off your loyal customers or your loyal staff.

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Solution to Application Question 9

According to the theory in this tutorial, a

rational firm would be better off NOT operating, if the price it charged for its product was set below its average variable cost. If, as the owner of the Canadian optical firm, you could prove that the U.S. firm was charging prices on its glasses below its average variable costs, you would be putting up a strong case against the U.S. firm.

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Application Question 9

As the owner of a local

Canadian optical store

you are suing a large U.S

owned department store

for "dumping" or selling the

identical glasses at below

cost. You claim that the U.S

firm's intent is to drive you

out of business. How might

you argue your case?

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Solution to Application Question 10

According to the theory in this tutorial, the profit maximizing quantity is determined by comparing marginal cost with marginal revenue and NOT by producing at minimum average total cost. Consider a lumber firm that decides to pay its workers "double time and one half" overtime (which is not minimizing cost) because the price of lumber is so high that the marginal revenue exceeds the overtime pay made to the employees.

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Application Question 10

In order to maximize profit

a firm should always seek

to produce its product at

the lowest cost per unit.

Is this true? Explain.

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Solution to Application Question 11

One assumption made about perfect competition is that consumers have "perfect information." This implies that consumers have full knowledge of all the different prices charged by all competitors in the industry. Thus, if one competitor was to charge more than another for the identical product, the consumers will switch their purchases to the firm offering the lower price. In other words, the demand for the firm's product is perfectly elastic. Price advertising helps bring about this perfect information.

Professionals like dentists, doctors, accountants, and lawyers typically prohibit price advertising in their industry. From an economic view, this reduces the degree of consumer knowledge and thus reduces competition in these industries. Without this "perfect knowledge" the professionals can increase their profit levels by charging higher fees (prices).

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Application Question 11

Why don't you typically see

professionals like dentists,

accountants, lawyers, and

doctors price advertise, as

follows:

Shoppers special:

"Two fillings for $199.99."

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INTRODUCTION

In this tutorial we will examine how Product A is supplied by firms in a market structure or industry environment called Pure Competition.

MARKET STRUCTURE

The features of Pure Competition are:

1. Numerous Competitors: A large number of independent sellers of Product A; each firm is small relative to the total market supply.

2. Identical Product: Each rival firm supplies an identical product.

3. Price Taker: The firm simply takes the price that the market sets, as a given. That is, the firm faces a perfectly elastic demand curve.

4. Easy Entry and Exit: No significant obstacles for new firms wishing to enter the industry. Figure 1 provides illustrative examples.

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Figure 1: Examples of Pure Competition

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Example 1: Wheat Producers Market

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Numerous Competitors and Identical Product: Wheat is produced and sold in a purely competitive market.Canadian farmers compete with farmers around the globe, in markets such as #1 Red Spring Wheat. This means that there are thousands of farmers selling the identical product- #1 Red Spring Wheat. Click here to continue.

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Example 1: Wheat Producers Market

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Easy Entry: There is easy entry in the wheat industry in that existing Canadian producers cannot limit or control the degree to which new farmers can start additional wheat production any where in the world. Indeed, if profits are high in the wheat industry, existing producers can expect to see new wheat production take place, around the globe.

Click here to continue.

  9PůExample 1: Wheat Producers Market

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Price Taker:The typical wheat farmer is a price-taker. This means that the world market demand and world market supply sets the wheat price, rather than a single farmer.

Click here to continue.

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Example 1: Wheat Producers Market

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Price Taker: At the given world price, the farmer can sells all he or she wants, without affecting the world price. This is because each farmer's total production is so small relative to the total world wheat supply. Moreover, since the farmer sells a product that is identical to his/her rivals, if the farmer were to raise the price, just a little over the world price, the farmer's quantity sold would go to zero- perfectly elastic demand situation. Click here to continue.

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Example 2: Lumber Manufacturers Market

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Numerous Competitors and Identical Product: Lumber is manufactured in a purely competitive North American market. Small Canadian sawmill operators and larger lumber manufacturers compete with firms in North America, in markets such as 2" x 4" SPF (Spruce-Pine-Fir) lumber. Thus, there are hundreds of firms selling the identical product, 2" x 4" SPF lumber.

Easy Entry: Existing Canadian lumber firms cannot control or limit the entry of new firms manufacturing 2" x 4" SPF lumber. Click here to continue.

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Example 2: Lumber Manufacturers Market

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Price Taker: At the given world price, the lumber firm can sells all he or she wants, without affecting the N.A. price. This is because each firm's total production is so small relative to the total N.A. lumber supply. Moreover, since the firm sells a product that is identical to his/her rivals, if the firm were to raise the price, just a little over the N.A. price, the firm's quantity sold would go to zero- a perfectly elastic demand situation. Click here to continue.

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Woods Ltd. Demand Curve:

Perfectly Elastic at $212

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d =firm's demand curve

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Market Demand and Supply:

All lumber firms in N. America.

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N.A.

price =

$212

per

000

bd feet

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Quantity in 000's board ft.

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Quantity in 000's board ft.

0 gO<2((

N.A.

price =

$212

per

000

bd feet

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Numerous Competitors and Identical Product: Consider the new release VHS movie videos rented by your local video rental store, Arnies Video. Arnie supplies the same new release videos as many competing movie firms or supermarkets or gas stations, all of which are convenient to you.

Easy Entry: As you can imagine, it is relatively easy to set up a new movie video store.

Price Taker: Graphically, Arnies Video faces a perfectly elastic demand curve. Click here to continue.

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Example 3: VHS Movie Rentals: New Releases

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Arnie's Demand Curve:

Perfectly Elastic:

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d =firm's demand curve

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# videos rented per day

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$4.00

per

video

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If Arnie tries to raise the price above the existing $4.00 price, he risks losing all his customers on the new release videos as they are readily available at many other convenient outlets.

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Example 4: DVD Movie Retail Sales

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Numerous Competitors and Identical Product: Consider the new release DVD videos sold by your local video rental store, Arnies Video. Arnie supplies the same new release videos as many competing movie firms or supermarkets or gas stations, all of which are convenient to you. As well, you can purchase DVDs on-line.

Easy Entry: As you can imagine, it is relatively easy to set up a new movie video store.

Price Taker: Graphically, Arnies Video faces a perfectly elastic demand curve in the DVD market.

Click here to continue.

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Arnie's Demand Curve:

Perfectly Elastic:

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# DVD's sold per day

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$29.95

per

DVD

k| Ho2((

If Arnie tries to raise the price above the existing $29.95 price, he risks losing all his customers on the new release DVDs as they are readily available at many other convenient outlets.

;@     ?lO<yFF^(%.\GJ0^3RzH*P\cE z)C݂#\N^R buz+È7TSE0^G3k=H=@.YExample 5: Pulp Market

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Numerous Competitors and Identical Product: Canadian pulp manufacturers face a purely competitive market. As an example, Bleached Softwood Kraft pulp (BSK) is produced all around the globe. It is used to produce many different paper grades and tissues.

Easy Entry: Any existing Canadian firm cannot limit or control the addition of new global BSK pulp capacity.

Price Taker: The world market sets the pulp price. Each Canadian firm takes the price as a given-a perfectly elastic demand curve. The example below shows a market price of

$465 per tonne, being set by market demand and supply.

Click here to continue.

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NorEast Pulp Firm:

Perfectly Elastic Demand:

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# tonnes sold per month

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$465

per

tonne

k| xoE2((

World Pulp market

 x _Maိ2((

$465

per

tonne

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INTRODUCTION

In this tutorial we will examine how Product A is supplied by firms in a market structure or industry environment called Pure Competition.

MARKET STRUCTURE

The features of Pure Competition are:

1. Numerous Competitors: A large number of independent sellers of Product A; each firm is small relative to the total market supply.

2. Identical Product: Each rival firm supplies an identical product.

3. Price Taker: The firm simply takes the price that the market sets, as a given. That is, the firm faces a perfectly elastic demand curve.

4. Easy Entry and Exit: No significant obstacles for new firms wishing to enter the industry. Figure 1 provides illustrative examples.

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Click here to exit Figure 2

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REVENUE BEHAVIOUR

Total Revenue (TR)

To understand how a product is supplied by a typical firm under pure competition, we must first study how revenue behaves, as Firm X changes the quantity of Product A supplied.

Total Revenue (TR) refers to the total dollars received by Firm X, in selling Product A. It is often called Total Sales.

It is computed using the formula:

TR = P x q where:

P = price set by the market

q = quantity supplied by the firm

Note that P, the price, stays the same as quantity increases, as the firm is a price taker. In Figure 2 we illustrate total revenue behaviour for NorEast,

a purely competitive pulp firm.

# w 2(

Figure 2: Total Revenue Under Pure Competition

 l V yF (%<=*)ؼ^Ť6Dc#9ŤizVX%F/0𾝋F*ʖ@kKc69N#GkQ@` ҲNggӳz10mFm `^tfcg3lz10m%ӣ69N#GkQ@` N@#@ lv};<G/G]s>gցj3i1Iu̺ds+Sp^tfcg3h j=h6zzћHhϧg5b0`KFm 6s;>F-G/M];9N#gցj3i1zgRћHhϧg5b0`Kg3yk>0mFm 0.Vhͤ4ggӣѰ }J0`ԯeFtz6ZϩF @\V%Ѱ }J0`ڌ@#@ lv}8+Rfcg3yk>0mבo_,Yܻ9Nb=@ e 3i1lIn the month of September, the market demand and supply of Bleached

Softwood Kraft (BSK) pulp set a market price of $261 a tonne. NorEast, a

Canadian pulp manufacturer takes the $261 as a given, and can sell all possible

quantities at this $261 price - a perfectly elastic firm demand curve.

If Noreast sells 1 tonne a month,each tonne will be sold at a $261 price.

Click here to continue.

 ! "oC2((

NorEast's Demand Curve

 "B< #o2((

d = firm's demand curve

 # x$g>7 2((

quantity in tonnes

 $f` %oB2((

Market Demand and Supply:

All firms around the world.

 %l8 &Wm 0((S & 8 'Wt 0((D '̽x (g?22((

World

Price

= $261

per

tonne

( x)g? 2((

Quantity in tonnes

)\٘ !*W{ 0((1 *; +g?22((

World

Price

= $261

per

tonne

+*` ,W2(

Figure 2a: NorEast is a Price Taker- Perfectly Elastic Firm Demand Curve

, @      -w}ݘ2(

REVENUE BEHAVIOUR

Total Revenue (TR)

To understand how a product is supplied by a typical firm under pure competition, we must first study how revenue behaves, as Firm X changes the quantity of Product A supplied.

Total Revenue (TR) refers to the total dollars received by Firm X, in selling Product A. It is often called Total Sales.

It is computed using the formula:

TR = P x q where:

P = price set by the market

q = quantity supplied by the firm

Note that P, the price, stays the same as quantity increases, as the firm is a price taker. In Figure 2 we illustrate total revenue behaviour for NorEast,

a purely competitive pulp firm.

-# .w 2(

Figure 2: Total Revenue Under Pure Competition

. l  9Půgցj3i1Iu̺ds+Sp^tfcg3h j=h6zzћHhϧg5b0`KFm 6s;>F-G/M];9N#gցj3i1zgRћHhϧg5b0`Kg3yk>0mFm 0.[| vy< F QHhn-ϧgQ@`Fn6"3lz10mFm 6s8-fcg3lz10mYB@#@ lv};In the month of September, the market demand and supply of Canadian

Bleached Softwood Kraft (BSK) pulp set a market price of $261 a tonne. NorEast, a

Canadian pulp manufacturer takes the $261 as a given, and can sell all possible

quantities at this $261 price - a perfectly elastic firm demand curve.

If Noreast sells 2 tonnes a month,each tonne will be sold at a $261 price.

Click here to continue.

0 1oC2((

NorEast's Demand Curve

1B< 2o2((

d = firm's demand curve

2 x3g>7 2((

quantity in tonnes

3f` 4oB2((

Market Demand and Supply:

All firms around the world.

4l8 5Wm 0((S 5 8 6Wt 0((D 6̽x 7g?22((

World

Price

= $261

per

tonne

7 x8g? 2((

Quantity in tonnes

8\٘ %9_O`0(( 2 99` :g?22((

World

Price

= $261

per

tonne

:*` ;W2(

Figure 2a: NorEast is a Price Taker- Perfectly Elastic Firm Demand Curve

; @\<yF (%<=*)ؼ^Ť6Dc#9ŤizVX%F/0𾝋F*ʖ@kKc69N#GkQ@` ҲNggӳz10mFm `^tfcg3lz10m%ӣ69N#GkQ@` N@#@ lv};<G/G]s>gցj3i1Iu̺ds+Sp^tfcg3h j=h6zzћHhϧg5b0`KFm 6s;>F-G/M];9N#gցj3i1zgRћHhϧg5b0`Kg3yk>0mFm 0._| tz6ZZ# ͤ4gX@#@ lv}:=-G._eͤ4ggӣѰ z10mXތ@#@ lv}:=-G._e(ͤ4ggӣѰ z10mW+S|dr< d=yĀ2((

In the month of September, the market demand and supply of Canadian

Bleached Softwood Kraft (BSK) pulp set a market price of $261 a tonne. NorEast, a

Canadian pulp manufacturer takes the $261 as a given, and can sell all possible

quantities at this $261 price - a perfectly elastic firm demand curve.

If Noreast sells 3 tonnes a month,each tonne will be sold at a $261 price.

Click here to continue.

= >oC2((

NorEast's Demand Curve

>B< ?o2((

d = firm's demand curve

? x@g>7 2((

quantity in tonnes

@f` AoB2((

Market Demand and Supply:

All firms around the world.

Al8 BWm 0((S B 8 CWt 0((D C̽x Dg?22((

World

Price

= $261

per

tonne

D xEg? 2((

Quantity in tonnes

E\٘ 'F_`_`0(( 3 F6 Gg?22((

World

Price

= $261

per

tonne

G*` HW2(

Figure 2a: NorEast is a Price Taker- Perfectly Elastic Firm Demand Curve

H @VIyF (%<=*)ؼ^Ť6Dc#9ŤizVX%F/0𾝋F*ʖ@kKc69N#GkQ@` ҲNggӳz10mFm `^tfcg3lz10m%ӣ69N#GkQ@` N@#@ lv};<G/G]s>gցj3i1Iu̺ds+Sp^tfcg3h j=h6zzћHhϧg5b0`KFm 6s;>F-G/M];9N#gցj3i1zgRћHhϧg5b0`Kg3yk>0mFm 0.c{(ͤ4ggӣѰ }J0`x-Ftz6ZϩF @69NF3Y(h1fcg3yk>0mIn the month of September, the market demand and supply of Canadian

Bleached Softwood Kraft (BSK) pulp set a market price of $261 a tonne. NorEast, a

Canadian pulp manufacturer takes the $261 as a given, and can sell all possible

quantities at this $261 price - a perfectly elastic firm demand curve.

If Noreast sells 4 tonnes a month,each tonne will be sold at a $261 price.

Click here to continue.

J KoC2((

NorEast's Demand Curve

KB< Lo2((

d = firm's demand curve

L xMg>7 2((

quantity in tonnes

Mf` NoB2((

Market Demand and Supply:

All firms around the world.

Nl8 OWm 0((S O 8 PWt 0((D P̽x Qg?22((

World

Price

= $261

per

tonne

Q xRg? 2((

Quantity in tonnes

R\٘ mS_c`2((

4

S6 Tg?22((

World

Price

= $261

per

tonne

T*` UW2(

Figure 2a: NorEast is a Price Taker- Perfectly Elastic Firm Demand Curve

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In the month of September, the market demand and supply of Canadian

Bleached Softwood Kraft (BSK) pulp set a market price of $261 a tonne. NorEast, a

Canadian pulp manufacturer takes the $261 as a given, and can sell all possible

quantities at this $261 price - a perfectly elastic firm demand curve.

If Noreast sells 5 tonnes a month,each tonne will be sold at a $261 price.

Click here to continue.

W XoC2((

NorEast's Demand Curve

XB< Yo2((

d = firm's demand curve

Y xZg>7 2((

quantity in tonnes

Zf` U[oB0((Market Demand and Supply: All firms around the world. [l8 \Wm 0((S \ 8 ]Wt 0((D ]̽x ^g?22((

World

Price

= $261

per

tonne

^ x_g? 2((

Quantity in tonnes

_\٘ k`W 2((

5

`#6 ag?22((

World

Price

= $261

per

tonne

a*` bW2(

Figure 2a: NorEast is a Price Taker- Perfectly Elastic Firm Demand Curve

b @\cyF (%<=*)ؼ^Ť6Dc#9ŤizVX%F/0𾝋F*ʖ@͐e@#@ lv}:=-G.lhͤ4ggӣѰ z10mXz@#@ lv}:=-G.lͤ4ggӣѰ z10mYB@#@ lv}:=-G/KZ]:3i14x F @+)tv};<Gf9KFm 6s;>F-G/I]:3i14x F @ tͤ4ggӳz10m{e3yj=h669 ԗ\˯O,]9_r7KFm 6s;>F֣ցh.Fvy<ZZ# ^tfcg3lz10mޥӳ6yj=h66u.Fvy<ZZ# ^vs;>gQfcW+S|drc ddyĀ2((

In the month of September, the market demand and supply of Canadian

Bleached Softwood Kraft (BSK) pulp set a market price of $261 a tonne. NorEast, a

Canadian pulp manufacturer takes the $261 as a given, and can sell all possible

quantities at this $261 price - a perfectly elastic firm demand curve.

If Noreast sells 6 tonnes a month,each tonne will be sold at a $261 price.

Click here to continue.

d eoC2((

NorEast's Demand Curve

eB< fo2((

d = firm's demand curve

f xgg>7 2((

quantity in tonnes

gf` hoB2((

Market Demand and Supply:

All firms around the world.

hl8 iWm 0((S i 8 jWt 0((D j̽x kg?22((

World

Price

= $261

per

tonne

k xlg? 2((

Quantity in tonnes

l\٘ mg?22((

World

Price

= $261

per

tonne

m*` fnW~{ 2((

6

n9` oW2(

Figure 2a: NorEast is a Price Taker- Perfectly Elastic Firm Demand Curve

o @VpyF (%<=*)ؼ^Ť6Dc#9ŤizVX%F/0𾝋F*ʖ@-ϧG``F\ћHhϧG`` 9a3i1lgQ.p(ͤ4ggӣѰ }J0`kKFm 6s;>F֣ցhe.ϧg5b0`ڌ@3')tͤ4ggӳb0` KFm 6s;>F֣ցh.Fvy<ZZ# ^l}:=-Gfcg3z:u˳+W<@)tͤ4ggӳz10m%ӣ69N#GkQ@` ӞN@#@ lv};F-GfcΥӣ69N#GkQ@` NggӣѰ }J0`ڌ@#@ `\1eso_,Yܻ9N@p dqyĀ2((

In the month of September, the market demand and supply of Canadian

Bleached Softwood Kraft (BSK) pulp set a market price of $261 a tonne. NorEast, a

Canadian pulp manufacturer takes the $261 as a given, and can sell all possible

quantities at this $261 price - a perfectly elastic firm demand curve.

If Noreast sells 7 tonnes a month,each tonne will be sold at a $261 price.

Click here to continue.

q roC2((

NorEast's Demand Curve

rB< so2((

d = firm's demand curve

s xtg>7 2((

quantity in tonnes

tf` uoB2((

Market Demand and Supply:

All firms around the world.

ul8 vWm 0((S v 8 wWt 0((D w̽x xg?22((

World

Price

= $261

per

tonne

x xyg? 2((

Quantity in tonnes

y\٘ zg?22((

World

Price

= $261

per

tonne

z*` {W~{ 0((7 {9` |W2(

Figure 2a: NorEast is a Price Taker- Perfectly Elastic Firm Demand Curve

| @V}yF (%<=*)ؼ^Ť6Dc#9ŤizVX%F/0𾝋F*ʖ@Ψe@#@ lv};F-G.uE(ͤ4ggӳb0`kKFm 6s;>F֣ցhe.ϧg5b0`ڌ@3')tͤ4ggӳb0` KFm 6s;>F֣ցh.Fvy<ZZ# ^l}:=-Gfcg3z:u˳+W<@)tͤ4ggӳz10m%ӣ69N#GkQ@` ӞN@#@ lv};F-GfcΥӣ69N#GkQ@` NggӣѰ }J0`ڌ@#@ `\1eso_,Yܻ9N@} d~yĀ2((

In the month of September, the market demand and supply of Canadian

Bleached Softwood Kraft (BSK) pulp set a market price of $261 a tonne. NorEast, a

Canadian pulp manufacturer takes the $261 as a given, and can sell all possible

quantities at this $261 price - a perfectly elastic firm demand curve.

If Noreast sells 8 tonnes a month,each tonne will be sold at a $261 price.

Click here to continue.

~ oC2((

NorEast's Demand Curve

B< o2((

d = firm's demand curve

 xg>7 2((

quantity in tonnes

f` oB2((

Market Demand and Supply:

All firms around the world.

l8 Wm 0((S  8 Wt 0((D ̽x g?22((

World

Price

= $261

per

tonne

 xg? 2((

Quantity in tonnes

\٘ g?22((

World

Price

= $261

per

tonne

*` fW~{ 2((

8

#9` W2(

Figure 2a: NorEast is a Price Taker- Perfectly Elastic Firm Demand Curve

 @\yF (%<=*)ؼ^Ť6Dc#9ŤizVX%F/0𾝋F*ʖ@B=ggӣѰ z10mFm 0.y(ͤ4ggӣѰ z10mXfggӣѰ z10mFm 0.yͤ4ggӣѰ z10mY.@#@ lv}:=-G/KZ]:3i14x F @+)tv};<Gf9KFm 6s;>F-G/I]:3i14x F @ tͤ4ggӳz10m{e3yj=h669 ԗ\˯O,]9_r7KFm 6s;>F֣ցh.Fvy<ZZ# ^tfcg3lz10mޥӳ6yj=h66u.Fvy<ZZ# ^vs;>gQfcW+S|dr dyĀ2((

In the month of September, the market demand and supply of Canadian

Bleached Softwood Kraft (BSK) pulp set a market price of $261 a tonne. NorEast, a

Canadian pulp manufacturer takes the $261 as a given, and can sell all possible

quantities at this $261 price - a perfectly elastic firm demand curve.

If Noreast sells 9 tonnes a month,each tonne will be sold at a $261 price.

Click here to continue.

 oC2((

NorEast's Demand Curve

B< o2((

d = firm's demand curve

 xg>7 2((

quantity in tonnes

f` oB2((

Market Demand and Supply:

All firms around the world.

l8 Wm 0((S  8 Wt 0((D ̽x g?22((

World

Price

= $261

per

tonne

 xg? 2((

Quantity in tonnes

\٘ fW~{ 2((

9

{9` g?22((

World

Price

= $261

per

tonne

*` W2(

Figure 2a: NorEast is a Price Taker- Perfectly Elastic Firm Demand Curve

 @Jy ㄿ%%Z9 0 Q@rҎvӑiڔ^|k%;z M?Ā2((

NorEast's demand schedule is a table that shows the price that NorEast can sell

different quantity levels of pulp at. The total revenue curve describes how total

revenue (TR) varies as the quantity levels of pulp sold varies.

If Noreast sells 1 tonne a month,each tonne will be sold at a $261 price.

The total revenue received by NorEast will be: P x q = $261 x 1 = $261 of sales

Click on point a below, to build the Total Revenue Curve for Noreast.

 oM2((

NorEast's Total Revenue Curve

l W2(

Figure 2b: NorEast' s Demand Schedule and Total Revenue Curve

  gW{ 2((

TR

NorEast's Demand Schedule

" fW 2((

q

b fW{ 2((

P

b sg7 2((

Total Revenue

b fWf{ 2((

1

œ  j_Q`2((

$261

  Wl 0((a  Wl 0(a  Wl 0((a *!r`. tg9 2((

261 x 1 = $261

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NorEast's demand schedule is a table that shows the price that NorEast can sell

different quantity levels of pulp at. The total revenue curve describes how total

revenue (TR) varies as the quantity levels of pulp sold varies.

If Noreast sells 2 tonnes a month,each tonne will be sold at a $261 price.

The total revenue received by NorEast will be: P x q = $261 x2 = $522 of sales

Click on point b below, to build the Total Revenue Curve for Noreast.

  o)2((

NorEast's Demand Schedule

" oM2((

NorEast's Total Revenue Curve

l W2(

Figure 2b: NorEast' s Demand Schedule and Total Revenue Curve

  fW 2((

q

b fW{ 2((

P

b sg7 2((

Total Revenue

b gW{ 2((

TR

$261

lh fWf{ 2((

1

 Wf{ 0((a H o2((

firm's quantity in tonnes

h fWf{ 2((

1

œ  j_Q`2((

$261

 $r`/ tg9 2((

261 x 1 = $261

œ  Wf{ 0((2  @ #_Q`0(($261 !@ tg9 2((

261 x 2 = $522

"@ Wl 0((b  Wt 0(b  Wl 0((b *!# /@ !"# y ㄿE%{&vnLpF-MxK0 yYj50R6nSF&\ƴֆ /f4hi@%j\ٴl9vFk&ʘ Oa/DžhW4.C1FN4r{ r\@-(',@= 9biJc69N#gցhY7ϧgQ@`F hͤ4ggӳb0`討Fm 6s;>F֣ցh7gq4x F @'ɽhͤ4ggӣѰ z10m%#69N#GkQ@` 14x F QH/Go[9N#GkQ@`F!hͤ4ggӳz10md&l< F QHh Ѵ֌@#@ lv};<G/Fw3i1l< F @1ͤ;ϧg5b0`0g3h j=h66"=N#GkQ@`F^s;>F֣ցj3i1z_vy<ZZ# ͤ4uOFm 6s;>F֣ցh=Fvy<ZZ# ^fs;>F֣ցj3i1zHhϧg5b0`ig3h j=h66@YFvy< F @.ͤ4ggӳz10m#69N#GkQ@` @#@ lv};<G/KƂ*<ZZ# ͤ4ggӳ!lvy<ZZ# ͤ4gGh j=h669 @#@ lv};<G M?d2((

NorEast's demand schedule is a table that shows the price that NorEast can sell

different quantity levels of pulp at. The total revenue curve describes how total

revenue (TR) varies as the quantity levels of pulp sold varies.

If Noreast sells 3 tonnes a month,each tonne will be sold at a $261 price.

The total revenue received by NorEast will be: P x q = $261 x 3 = $783 of sales

Click on point c below, to build the Total Revenue Curve for Noreast.

  o)2((

NorEast's Demand Schedule

" oM2((

NorEast's Total Revenue Curve

l W2(

Figure 2b: NorEast' s Demand Schedule and Total Revenue Curve

  fW 2((

q

b fW{ 2((

P

b sg7 2((

Total Revenue

b gW{ 2((

TR

$261

lh fWf{ 2((

1

 Wf{ 0((a H o2((

firm's quantity in tonnes

h fWf{ 2((

1

œ  j_Q`2((

$261

  tg9 2((

261 x 1 = $261

œ  Wf{ 0((2  @ #_Q`0(($261 !@ tg9 2((

261 x 2 = $522

"@$# 0 fWf{ 2((

2

%u j_Q`2((

$522

&l Wf{ 0((b '(Ӹ)rAJ8h%8i_r{piGl8h@(Z Wf{ 0((3 )` #_Q`0(($261 *` tg9 2((

261 x 3 = $783

+` Wd{ 0((c  Wl 0(c  Wl 0(c  Wd{ 0((c 4+,%0@ !"%&'()*+,&y ㄿE%{&vnLpF-MxK0 yYj50R6nSF&\ƴֆ Ѡ 1r[_fӍk`Hk*`2l/NfPfTeKٹMP s)`e6i-iOa/DžhW4.C1FNJ;akNG vö֜jSJc69N#gցh3MFvy< F @qlv};<gԣ ͤ4Fm 6s;>F-G/F\f3i14x F @1lv};<Gfci69N#GkQ@` ҟggӳz10mFm 0/Kf3i14x F @%hͤ4ggӣѰ z10mLm# ͤ4ggӳ`Y7ϧgQ@`F hͤ4ggӳb0`討Fm 6s;>F֣ցh7gq4x F @'ɽhͤ4ggӣѰ z10m%#69N#GkQ@` 14x F QH/Go[9N#GkQ@`F!hͤ4ggӳz10md&l< F QHh Ѵ֌@#@ lv};<G/Fw3i1l< F @1ͤ;ϧg5b0`0g3h j=h66"=N#GkQ@`F^s;>F֣ցj3i1z_vy<ZZ# ͤ4uOFm 6s;>F֣ցh=Fvy<ZZ# ^fs;>F֣ցj3i1zqc4ћHhϧG`b0`鳌G`b0`ڌ@#@ lv}8N3Mgq4x F @>9v};9Ҝ6yj=h669NNƀvy< F QH/OVwV3i16yj=h6z|s9vy< F QHh ՞@#@ lv};F֣ցj3i1zQHhϧg5b0`Oӳb0`ڌ@#@ lp/Or}~4ggӳb0`ڌ@zz1HhϧgQ@` P@#@ lv};<G/K~3i14x F @.ͤ4ggӳz10mh"5b0`ڌ@#@ lv};< 6ϧg5b0`ڌ@#@ lp/HD~k>F֣ցj3i1 ͤ4ggӳz10m Yd2((

NorEast's demand schedule is a table that shows the price that NorEast can sell

different quantity levels of pulp at. The total revenue curve describes how total

revenue (TR) varies as the quantity levels of pulp sold varies.

If Noreast sells 4 tonnes a month,each tonne will be sold at a $261 price.

The total revenue received by NorEast will be: P x q = $261 x 4 = $1044 of sales

Click on point d below, to build the Total Revenue Curve for Noreast.

  o)2((

NorEast's Demand Schedule

" oM2((

NorEast's Total Revenue Curve

l W2(

Figure 2b: NorEast' s Demand Schedule and Total Revenue Curve

  fW 2((

q

b fW{ 2((

P

b sg7 2((

Total Revenue

b gW{ 2((

TR

$261

lh fWf{ 2((

1

 Wf{ 0((a H o2((

firm's quantity in tonnes

h fWf{ 2((

1

œ  j_Q`2((

$261

  tg9 2((

261 x 1 = $261

œ  Wf{ 0((2  @ #_Q`0(($261 !@ tg9 2((

261 x 2 = $522

"@ Wf{ 0((3 %` #_Q`0(($261 &` tg9 2((

261 x 3 = $783

'`.(%1 fWf{ 2((

2

*u j_Q`2((

$522

+l Wf{ 0((b ,(Ӹ W^ 0((c -H fWf{ 2((

3

. j_Q`2((

$783

/h Wf{ 0((4 0P #_Q`0(($261 1P ug>_ 2((

261 x 4 = $1044

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NorEast's demand schedule is a table that shows the price that NorEast can sell

different quantity levels of pulp at. The total revenue curve describes how total

revenue (TR) varies as the quantity levels of pulp sold varies.

If Noreast sells 5 tonnes a month,each tonne will be sold at a $261 price.

The total revenue received by NorEast will be: P x q = $261 x 5 = $1305 of sales

Click on point e below, to build the Total Revenue Curve for Noreast.

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NorEast's Demand Schedule

" oM2((

NorEast's Total Revenue Curve

l W2(

Figure 2b: NorEast' s Demand Schedule and Total Revenue Curve

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q

b f W{ 2((

P

 b s g7 2((

Total Revenue

 b g W{ 2((

TR

 $261

 lh f Wf{ 2((

1

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firm's quantity in tonnes

h fWf{ 2((

1

œ  j_Q`2((

$261

  tg9 2((

261 x 1 = $261

œ  Wf{ 0((2  @ #_Q`0(($261 !@ tg9 2((

261 x 2 = $522

"@ Wf{ 0((3 %` #_Q`0(($261 &` tg9 2((

261 x 3 = $783

'` Wf{ 0((4 *P #_Q`0(($261 +P ug>_ 2((

261 x 4 = $1044

,P$-sa2 fWf{ 2((

2

/u j_Q`2((

$522

0l Wf{ 0((b 1(Ӹ  W^ 0((c 2 H !Wf{ 0((d 3!ذ f"Wf{ 2((

3

4" f#Wf{ 2((

4

5#% j$_Q`2((

$783

6$h k%_d_`2((

$1044

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261 x 5 = $1305

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NorEast's demand schedule is a table that shows the price that NorEast can sell

different quantity levels of pulp at. The total revenue curve describes how total

revenue (TR) varies as the quantity levels of pulp sold varies.

To complete the Total Revenue Curve, join points a, b, c, d, and e in the graph.

Click here to see the completed Total Revenue Curve.

.  /o)2((

NorEast's Demand Schedule

/" 0oM2((

NorEast's Total Revenue Curve

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Figure 2b: NorEast' s Demand Schedule and Total Revenue Curve

1  f2W 2((

q

2b f3W{ 2((

P

3b s4g7 2((

Total Revenue

4b g5W{ 2((

TR

5$261

6lh f7Wf{ 2((

1

7 8Wf{ 0((a 8H 9o2((

firm's quantity in tonnes

9h f:Wf{ 2((

1

:œ  j;_Q`2((

$261

;  t<g9 2((

261 x 1 = $261

<œ  =Wf{ 0((2  =@ #>_Q`0(($261 !>@ t?g9 2((

261 x 2 = $522

"?@ @Wf{ 0((3 %@` #A_Q`0(($261 &A` tBg9 2((

261 x 3 = $783

'B` CWf{ 0((4 *CP #D_Q`0(($261 +DP uEg>_ 2((

261 x 4 = $1044

,EP FWf{ 0((5 /FÌ #G_Q`0(($261 0G㌠ uHg>_ 2((

261 x 5 = $1305

1HÌ$I)*+2IÛ3 fJWf{ 2((

2

4Ju jK_Q`2((

$522

5Kl LWf{ 0((b 6L(Ӹ MW^ 0((c 7MH NWf{ 0((d 8Nذ OWf{ 0((e 9O fPWf{ 2((

3

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4

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5

<R} jS_Q`2((

$783

=Sh kT_d_`2((

$1044

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$1305

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NorEast's demand schedule is a table that shows the price that NorEast can sell

different quantity levels of pulp at. The total revenue curve describes how total

revenue (TR) varies as the quantity levels of pulp sold varies.

As you can see, the firm's Total Revenue Curve is an upward sloping straight

line curve that will always go through the origin. The slope of this line will be

the price that the firm is given-the slope is $261. Click here to continue.

W  Xo)2((

NorEast's Demand Schedule

X" YoM2((

NorEast's Total Revenue Curve

Yl ZW2(

Figure 2b: NorEast' s Demand Schedule and Total Revenue Curve

Z  f[W 2((

q

[b f\W{ 2((

P

\b s]g7 2((

Total Revenue

]b g^W{ 2((

TR

^$261

_lh f`Wf{ 2((

1

` aWf{ 0((a aH bo2((

firm's quantity in tonnes

bh fcWf{ 2((

1

cœ  jd_Q`2((

$261

d  teg9 2((

261 x 1 = $261

eœ  fWf{ 0((2  f@ #g_Q`0(($261 !g@ thg9 2((

261 x 2 = $522

"h@ iWf{ 0((3 %i` #j_Q`0(($261 &j` tkg9 2((

261 x 3 = $783

'k` lWf{ 0((4 *lP #m_Q`0(($261 +mP ung>_ 2((

261 x 4 = $1044

,nP oWf{ 0((5 /oÌ #p_Q`0(($261 0p㌠ uqg>_ 2((

261 x 5 = $1305

1qÌ frWf{ 2((

2

4ru js_Q`2((

$522

5sl tWf{ 0((b 6t(Ӹ uW^ 0((c 7uH vWf{ 0((d 8vذ wWf{ 0((e 9w fxWf{ 2((

3

:x fyWf{ 2((

4

;y% fzWf{ 2((

5

<z} j{_Q`2((

$783

={h k|_d_`2((

$1044

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$1305

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REVENUE BEHAVIOUR

Total Revenue (TR)

To understand how a product is supplied by a typical firm under pure competition, we must first study how revenue behaves, as Firm X changes the quantity of Product A supplied.

Total Revenue (TR) refers to the total dollars received by Firm X, in selling Product A. It is often called Total Sales.

It is computed using the formula:

TR = P x q where:

P = price set by the market

q = quantity supplied by the firm

Note that P, the price, stays the same as quantity increases, as the firm is a price taker. In Figure 2 we illustrate total revenue behaviour for NorEast,

a purely competitive pulp firm.

~# 0om0((End of Figure 2 m@ ? 6a6 oO2((

Click here to exit Figure 3

 w  `2(

Figure 3: Marginal Revenue Under Pure Competition

 l  #ိ2((

Given NorEast's demand table, based on a market price of $261, we can

compute NorEast's marginal revenue table and curve, once we compute total

revenue at each output level.

` w}ح2(

REVENUE BEHAVIOUR

Marginal Revenue (MR)

Marginal Revenue refers to the change in total revenue that Firm X receives when selling one more unit of Product A. In other words, Marginal Revenue equals the extra revenue received in selling one more unit of the product.

When Firm X increases quantity supplied, Marginal Revenue equals:

Change in TR/ Change In Quantity

Graphically, the Marginal Revenue Curve is the same as the firm's demand curve, under Pure Competition. This means that for each quantity level, MR = Price under Pure Competition. Figure 3 provides an illustrative example.

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q

 a fW{ 2((

P

 ! sg7 2((

Total Revenue

 a fWf{ 2((

1

 b  j_Q`2((

$261

  tg9 2((

261 x 1 = $261

b  fWf{ 2((

2

b[@ j_Q`2((

$261

[@ tg9 2((

261 x 2 = $522

b[@:k 6 fWf{ 2((

3

b` j_Q`2((

$261

`:6 fWf{ 2((

4

bӀ j_Q`2((

$261

Ӏ6 fWf{ 2((

5

c j_Q`2((

$261

 "Ic 6 zoS2((

Marginal Revenue =

$  rg5 2((

Change in TR

%s( qg0 2((

Change in Q

&؀H tR2((

If NorEast increases its quantity sold from 1 tonne a month to 2 tonnes a month,

the Total Revenue increases from $261 to $522. The extra revenue received by

selling the 2nd tonne = MR = $522 - $261 = $261. Click on Point b in the table

below to build both the Marginal Revenue Table and Curve.

'  W{ 0((MR (n` 2oK0((firm's q in tonnes )|eX@     $%&'()S3Oc8bx7yC% "q'[L%Y-ogցj3iʽcg3h j=h66\kHhϧg5b0`bP 3h j=h66m@Fvy<ZZ# ^Ux F QHhϧgyV(Hhϧg5b0`  #ိ0((Given NorEast's demand table, based on a market price of $261, we can compute NorEast's marginal revenue table and curve, once we compute total revenue at each output level.  ` fW 2((

q

 a fW{ 2((

P

 ! sg7 2((

Total Revenue

 a fWf{ 2((

1

b  j_Q`2((

$261

  tg9 2((

261 x 1 = $261

b  Wf{ 0((2 b[@ #_Q`0(($261 [@ tg9 2((

261 x 2 = $522

b[@:k 7 fWf{ 2((

3

b` j_Q`2((

$261

` fWf{ 2((

4

bӀ j_Q`2((

$261

Ӏ fWf{ 2((

5

c j_Q`2((

$261

  zoS2((

Marginal Revenue =

$  rg5 2((

Change in TR

%s( qg0 2((

Change in Q

&؀H 2o0(($261 = $522 - $261 'r[@ R2((

If NorEast increases its quantity sold from 1 tonne a month to 2 tonnes a month,

the Total Revenue increases from $261 to $522. The extra revenue received by

selling the 2nd tonne = MR = $522 - $261 = $261. Click here to continue.

(  W{ 0((MR )n` 2oK0((firm's q in tonnes *|eX Wf{ 0((2 +U  #_Q`0(($261 , Wf{ 0((b -s .99Půľggӳz10mFm 0.UXͤ4ggӳz10m(s4x F QHh ʶ}@#@ lv};<G/*<ZZ# ͤ4ggӳjXͤ4ggӳz10m  #ိ0((Given NorEast's demand table, based on a market price of $261, we can compute NorEast's marginal revenue table and curve, once we compute total revenue at each output level.  ` fW 2((

q

 a fW{ 2((

P

 ! sg7 2((

Total Revenue

 a fWf{ 2((

1

b  j_Q`2((

$261

  tg9 2((

261 x 1 = $261

b  Wf{ 0((2 b[@ #_Q`0(($261 [@ tg9 2((

261 x 2 = $522

b[@ fWf{ 2((

3

b` j_Q`2((

$261

` tg9 2((

261 x 3 = $783

b`:8 fWf{ 2((

4

bӀ j_Q`2((

$261

Ӏ fWf{ 2((

5

c j_Q`2((

$261

  zoS2((

Marginal Revenue =

$  rg5 2((

Change in TR

%s( qg0 2((

Change in Q

&؀H ub2((

If NorEast increases its quantity sold from 2 tonnes a month to 3 tonnes a month,

the Total Revenue increases from $522 to $783. The extra revenue received by

selling the 3rd tonne = MR = $783 - $522 = $261. Click on Point c in the table

below to build both the Marginal Revenue Table and Curve.

'  W{ 0((MR (n` 2oK0((firm's q in tonnes )|eX Wf{ 0((2 *U  #_Q`0(($261 + j_Q`2((

$261

,[@ Wf{ 0((b -s @     $%&'()*+,-.PbaD9yC%Yf+2=) Ӝ|JlC@=fyG Lˤ Q;R A@ r]MeLT͛HZPǔM[-cNwɭQRYWi>\زʘ 7)@JX)`e6l{i5 4}Hiڔ\B4.R1`%K x-@ɇ=Í14xR66\16s;>F-Gf {4ggӳb0`ڌ@rOpƀtz6ZZ# ͤ)X>s;>F֣ցj3i1rOpY36s;>gsqz10mFm WǸc@ lv};<Gf {4ggӳz10mFm dGc@ lv};0mFm }69N#gցh/fcg3lz10m6yj=h66AFvy< F @|6yj=h669Nƀvy< F QH  #ိ2((

Given NorEast's demand table, based on a market price of $261, we can

compute NorEast's marginal revenue table and curve, once we compute total

revenue at each output level.

 ` fW 2((

q

 a fW{ 2((

P

 ! sg7 2((

Total Revenue

 a fWf{ 2((

1

b  j_Q`2((

$261

  tg9 2((

261 x 1 = $261

b  Wf{ 0((2 b[@ #_Q`0(($261 [@ tg9 2((

261 x 2 = $522

b[@ Wf{ 0((3 b` #_Q`0(($261 ` tg9 2((

261 x 3 = $783

b`:9 fWf{ 2((

4

bӀ j_Q`2((

$261

Ӏ fWf{ 2((

5

c j_Q`2((

$261

  zoS2((

Marginal Revenue =

$  rg5 2((

Change in TR

%s( qg0 2((

Change in Q

&؀H%sO&H%Y,.x)2NdalR' 2o0(($261 = $783 - $522 (r` gW{ 2((

MR

)n` ~oK2((

firm's q in tonnes

*|eX fWf{ 2((

2

+U  fWf{ 2((

3

,^  j_Q`2((

$261

- b2((

If NorEast increases its quantity sold from 2 tonnes a month to 3 tonnes a month,

the Total Revenue increases from $522 to $783. The extra revenue received by

selling the 3rd tonne = MR = $783 - $522 = $261. Click here to continue.

.  fW^ 2((

c

/ fWf{ 2((

b

0# j_Q`2((

$261

1[@2@     $%&'()*+,-./012yC%YDJ0}38UNB#Z9 0 A@ rPҥlܦM(z c\ٱ;( ˳Ik*` }תKٹMPǔM[-cNwɭQ fTMr=;R n <  #ိ2((

Given NorEast's demand table, based on a market price of $261, we can

compute NorEast's marginal revenue table and curve, once we compute total

revenue at each output level.

 ` fW 2((

q

 a fW{ 2((

P

 ! sg7 2((

Total Revenue

 a fWf{ 2((

1

b  j_Q`2((

$261

  tg9 2((

261 x 1 = $261

b  Wf{ 0((2 b[@ #_Q`0(($261 [@ tg9 2((

261 x 2 = $522

b[@ Wf{ 0((3 b` #_Q`0(($261 ` tg9 2((

261 x 3 = $783

b` fWf{ 2((

4

bӀ j_Q`2((

$261

Ӏ ug>_ 2((

261 x 4 = $1044

bӀ: fWf{ 2((

5

 c j_Q`2((

$261

! zoS2((

Marginal Revenue =

$  rg5 2((

Change in TR

%s( qg0 2((

Change in Q

&؀H xb2((

If NorEast increases its quantity sold from 3 tonnes a month to 4 tonnes a month,

the Total Revenue increases from $783 to $1044. The extra revenue received by

selling the 4th tonne = MR = $1044 - $783 = $261. Click on Point d in the table

below to build both the Marginal Revenue Table and Curve.

'  g W{ 2((

MR

( n` ~ oK2((

firm's q in tonnes

) |eX f Wf{ 2((

2

* U  f Wf{ 2((

3

+ ^  j _Q`2((

$261

,  j_Q`2((

$261

-[@ j_Q`2((

$261

. fW^ 2((

c

/ fWf{ 2((

b

0#1@     !$%&'()*+,-./01Pca;yC%Yf+2<.*>v]6IskZ}^Œʘ 7)@JX)`e6l{i5 4}<38UNJ`.]!Jڔ\  0k0zJk*`2lܦ EҀGpH8i\p],1̯=ggӣѰ z10mFm 0.f9N#GkQ@`14x F QH.K6s;>F֣ցj3iɪ=Ϝϧg5b0`ڌ@#@ `\tz6ZϩF QHh {9N#GkQ@`FH6yj=h66, hϧg5`g14x F QH.T9N#GkQ@`516yj=h66\vy< F QHh {9N#gցj3i1rs3yj=h66/>s;>F֣ցj3i1spƀvy<ZϩF QH.b!9N#gցj3i}=ϜϧgQ@`F6yj=h664dfcg3lz10mI6yj=h662AFvy< F @r|6yj=h669Nƀvy< F QH  #ိ2((

Given NorEast's demand table, based on a market price of $261, we can

compute NorEast's marginal revenue table and curve, once we compute total

revenue at each output level.

 ` fW 2((

q

 a fW{ 2((

P

 ! sg7 2((

Total Revenue

 a fWf{ 2((

1

b  j_Q`2((

$261

  tg9 2((

261 x 1 = $261

b  Wf{ 0((2 b[@ #_Q`0(($261 [@ tg9 2((

261 x 2 = $522

b[@ Wf{ 0((3 b` #_Q`0(($261 ` tg9 2((

261 x 3 = $783

b`  Wf{ 0((4  bӀ #!_Q`0(($261 !Ӏ u"g>_ 2((

261 x 4 = $1044

"bӀ; f#Wf{ 2((

5

 #c j$_Q`2((

$261

!$ z%oS2((

Marginal Revenue =

$%  r&g5 2((

Change in TR

%&s( q'g0 2((

Change in Q

&'؀H(sϛ*%* F'( 3)o0(($261 = $1044 - $783 ()rӀ g*W{ 2((

MR

)*n` ~+oK2((

firm's q in tonnes

*+|eX f,Wf{ 2((

2

+,U  f-Wf{ 2((

3

,-^  f.Wf{ 2((

4

-.g  j/_Q`2((

$261

./ 0b2((

If NorEast increases its quantity sold from 3 tonnes a month to 4 tonnes a month,

the Total Revenue increases from $783 to $1044. The extra revenue received by

selling the 4th tonne = MR = $1044 - $783 = $261. Click here to continue.

/0  j1_Q`2((

$261

01[@ j2_Q`2((

$261

12 f3W^ 2((

c

23 f4Wf{ 2((

b

34# f5Wf{ 2((

d

45C5@     !"$%&'()*+,-./012346yCTeKٹMPǔM[-cNwɭQ f5Yڃ%{R i\*b!Arp pSMeLT͛Ѡ AyKհ26=|9vi>\زʘ 7)@JX)`e6l{i5 $r}HrZpFLj } 6 7#ိ2((

Given NorEast's demand table, based on a market price of $261, we can

compute NorEast's marginal revenue table and curve, once we compute total

revenue at each output level.

 7` f8W 2((

q

 8a f9W{ 2((

P

 9! s:g7 2((

Total Revenue

 :a f;Wf{ 2((

1

;b  j<_Q`2((

$261

<  t=g9 2((

261 x 1 = $261

=b  >Wf{ 0((2 >b[@ #?_Q`0(($261 ?[@ t@g9 2((

261 x 2 = $522

@b[@ AWf{ 0((3 Ab` #B_Q`0(($261 B` tCg9 2((

261 x 3 = $783

Cb` DWf{ 0((4 DbӀ #E_Q`0(($261 EӀ uFg>_ 2((

261 x 4 = $1044

FbӀ fGWf{ 2((

5

 Gc jH_Q`2((

$261

!H uIg>_ 2((

261 x 5 = $1305

"Ic#,c < zJoS2((

Marginal Revenue =

%J  rKg5 2((

Change in TR

&Ks( qLg0 2((

Change in Q

'L؀H yMd2((

If NorEast increases its quantity sold from 4 tonnes a month to 5 tonnes a month,

the Total Revenue increases from $1044 to $1305. The extra revenue received by

selling the 5th tonne = MR = $1305 - $1044 = $261. Click on Point e in the table

below to build both the Marginal Revenue Table and Curve.

(M  gNW{ 2((

MR

)Nn` ~OoK2((

firm's q in tonnes

*O|eX fPWf{ 2((

2

+PU  fQWf{ 2((

3

,Q^  fRWf{ 2((

4

-Rg  jS_Q`2((

$261

.S jT_Q`2((

$261

/T[@ jU_Q`2((

$261

0U jV_Q`2((

$261

1V fWW^ 2((

c

2W fXWf{ 2((

b

3X# fYWf{ 2((

d

4YC@     !"#%&'()*+,-./012345PdaD=ZyC%Yf+2<.ȋjnWzseSd=fi.z͝dž "߲^ޜSӳB@-M&)MLTƴ3$K,.[`Gsgʘ 7)@JX)`e6l{i5 4>[k&<38UNJ`.]!Jڔ\  0[pzKkczqNM\ SIJSF/y).Կh.\^➝ji5iJh`2o651?'rYdr[AFLˤ L#|rZtǂO=ggӣѰ z10mFm 0.h|v};<Gfc桞ggӳz10mFm 0.kq9N#gցj3i=cg3yk>0mFm Gc@ lv};<Gf @{;ϧg5b0`ڌ@s/pƀtz6ZϩF QH.Lm|v};74x F QHh G{9N#GkQ@`F\c@ lv};<Gf d{4ggӳz10mFm Pc@ lv};s;>FֳQfc厞ggӳ}J0`ڌ@#@ `\vy< F QHh {9N#gցj3i1rs3yj=h662 hϧG`b0`ڌ@spq4x F QH.b9N#GkQ@`14x F QH._)|v};<Gfc,eggӳb0`ڌ@#@ `\1HhϧgQ@` X -ggӳb0`ڌ@#@ `^rQfcg3lz10mDsb0`ڌ@#@ lv}8Bcg3lz10mFm  Z [#ိ2((

Given NorEast's demand table, based on a market price of $261, we can

compute NorEast's marginal revenue table and curve, once we compute total

revenue at each output level.

 [` f\W 2((

q

 \a f]W{ 2((

P

 ]! s^g7 2((

Total Revenue

 ^a f_Wf{ 2((

1

_b  j`_Q`2((

$261

`  tag9 2((

261 x 1 = $261

ab  bWf{ 0((2 bb[@ #c_Q`0(($261 c[@ tdg9 2((

261 x 2 = $522

db[@ eWf{ 0((3 eb` #f_Q`0(($261 f` tgg9 2((

261 x 3 = $783

gb` hWf{ 0((4 hbӀ #i_Q`0(($261 iӀ ujg>_ 2((

261 x 4 = $1044

jbӀ kWf{ 0((5  kc #l_Q`0(($261 !l umg>_ 2((

261 x 5 = $1305

"mc#Ic = znoS2((

Marginal Revenue =

%n  rog5 2((

Change in TR

&os( qpg0 2((

Change in Q

'p؀H {qo2((

$261 = $1305 - $1044

(qs grW{ 2((

MR

)rn` ~soK2((

firm's q in tonnes

*s|eX ftWf{ 2((

2

+tU  fuWf{ 2((

3

,u^  fvWf{ 2((

4

-vg  fwWf{ 2((

5

.wqy  jx_Q`2((

$261

/x yc2((

If NorEast increases its quantity sold from 4 tonnes a month to 5 tonnes a month,

the Total Revenue increases from $1044 to $1305. The extra revenue received by

selling the 5th tonne = MR = $1305 - $1044 = $261. Click here to continue.

0y  jz_Q`2((

$261

1z[@ j{_Q`2((

$261

2{ j|_Q`2((

$261

3| f}W^ 2((

c

4} f~Wf{ 2((

b

5~# fWf{ 2((

d

6C fWf{ 2((

e

78@     !"%&'()*+,-./012345678?Ph\`yC((#5袋ʀ7D9(@ ңt VU#-*H(11.K84fo)ʗrxN^5#Ik*`2l܉+FwHX)`e6l{i5 4z͝ڃ%yYqzIrᒃt4.zSH%Gy]"aFL5F()+( "$I+# ȯ8i\  0kHdZwV. 4}ܬ0<)T]$H e50R6nR0| وR=4l*_Țb`q`P45)r[_fǶ[HV ^rGGiven NorEast's demand table, based on a market price of $261, we can

compute NorEast's marginal revenue table and curve, once we compute total

revenue at each output level.

 ` fW 2((

q

 a fW{ 2((

P

 ! sg7 2((

Total Revenue

 a fWf{ 2((

1

b  j_Q`2((

$261

  tg9 2((

261 x 1 = $261

b  Wf{ 0((2 b[@ #_Q`0(($261 [@ tg9 2((

261 x 2 = $522

b[@ Wf{ 0((3 b` #_Q`0(($261 ` tg9 2((

261 x 3 = $783

b` Wf{ 0((4 bӀ #_Q`0(($261 Ӏ ug>_ 2((

261 x 4 = $1044

bӀ Wf{ 0((5  c #_Q`0(($261 ! ug>_ 2((

261 x 5 = $1305

"c zoS2((

Marginal Revenue =

%  rg5 2((

Change in TR

&s( qg0 2((

Change in Q

'؀H >]2((

Note that, under Pure Competition, at each quantity level, Marginal Revenue

equals the Price that the firm is given. Graphically, this means that the Marginal

Revenue Curve is the same as the firm's Demand Curve.Click here to continue.

(  gW{ 2((

MR

)n` ~oK2((

firm's q in tonnes

*|eX fWf{ 2((

2

+U  fWf{ 2((

3

,^  fWf{ 2((

4

-g  fWf{ 2((

5

.qy  j_Q`2((

$261

/ j_Q`2((

$261

0[@ j_Q`2((

$261

1 j_Q`2((

$261

2 j_Q`2((

$261

3 w J 2((

Marginal Revenue Curve = Firm's Demand Curve = $261

45@      !"#%&'()*+,-./0123459 w}ح2(

REVENUE BEHAVIOUR

Marginal Revenue (MR)

Marginal Revenue refers to the change in total revenue that Firm X receives, when selling one more unit of Product A. In other words, Marginal Revenue equals the extra revenue received in selling one more unit of the product.

When Firm X increases quantity supplied, Marginal Revenue equals:

Change in TR/ Change In Quantity

Graphically, the Marginal Revenue Curve is the same as the firm's demand curve, under Pure Competition. This means that for each quantity level, MR = Price under Pure Competition. Figure 3 provides an illustrative example.

#9PůClick here to exit Figure 4

 wX `2(

Figure 4a: Operate at a Profit: Total Approach: Numeric Example

 l  _:2((

As the cost accountant for NorEast Pulp, your chore is to answer the 3 SR

questions for the firm for the month of September, given the September market

price of $261 per tonne and given the Total Fixed costs (TFC) and Total

Variable Costs (TVC) for NorEast, described in the table below.

  [w}P2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Total Approach

In Figure 4 we will illustrate the "operate at a profit" situation by focusing on total revenue and total cost information. This approach is called the Total Approach.

In the Total Approach we apply the following rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Total Revenue exceeds Total Variable Cost, the firm should operate.

Q2: If it operates, the best quantity, q*, is that quantity which maximizes: Profit = (Total Revenue -Total Cost).

Q3: The best dollar profit is the total dollar profit (or loss) earned at q*.

#cyE#P%_:Iρ8b^B#Z9G  F %Xρ^ky`  v_u?a[2((

q tonnes

   kXb`2((

TFC

  fWf{ 2((

1

   fWf{ 2((

2

 W` fWf{ 2((

3

 fWf{ 2((

4

 fWf{ 2((

5

  w?逭2((

Question 1: Should NorEast operate or shutdown in September? Answer: Compute

Total Revenue (TR) at each output level and compareTR with TVC at each Q level.

Click here to continue.

!; fWf{ 2((

6

8` fWf{ 2((

7

p fWf{ 2((

8

 fWf{ 2((

9

  kbH 2((

$70

2  kbH 2((

$70

38` kbH 2((

$70

3p kbH 2((

$70

3 kbH 2((

$70

3  kbH 2((

$70

2W` kbH 2((

$70

2 kbH 2((

$70

2 kbH 2((

$70

3  kXc`2((

TVC

 lb#7 2((

$100

   lb#7 2((

$120

!X lb#7 2((

$130

" lb#7 2((

$150

# lb#7 2((

$200

$  lb#7 2((

$300

%8` lb#7 2((

$470

&p lb#7 2((

$730

' lb(7 2((

1100

(  g2((

Total Cost

=TFC+TVC

)  hRW[2((

Total Revenue

TR = P x q

*p aO2((

Price

=$261

+I  j_Q`2((

$261

,*  j_Q`2((

$261

-*X j_Q`2((

$261

.* j_Q`2((

$261

/* j_Q`2((

$261

0+  j_Q`2((

$261

1+8` j_Q`2((

$261

2+p j_Q`2((

$261

3+ j_Q`2((

$261

4+ @     !"#$%&'()*+,-./012346aPdeT0yE#c%>YŊE$ z$#@^?-u䊝%>Tw)gdRE }$,4/ҠRbIWxNۈ) 3`bjxR^EQ):@J=I3= M$Uj~& hA %˚Ԃ嶐|ZxiVe@\%˚?OϾu*uz.TzIt!]F V r懫PU).R1dž˚?X  v_u?a[2((

q tonnes

   kXb`2((

TFC

  fWf{ 2((

1

   fWf{ 2((

2

 W` fWf{ 2((

3

 fWf{ 2((

4

 fWf{ 2((

5

  w?逭2((

Question 1: Should NorEast operate or shutdown in September? Answer: Compute

Total Revenue (TR) at each output level and compareTR with TVC at each Q level.

Since TR exceeds TVC, NorEast should operate. Click here to continue.

!; fWf{ 2((

6

8` fWf{ 2((

7

p fWf{ 2((

8

 fWf{ 2((

9

  kbH 2((

$70

2  kbH 2((

$70

38` kbH 2((

$70

3p kbH 2((

$70

3 kbH 2((

$70

3  kbH 2((

$70

2W` kbH 2((

$70

2 kbH 2((

$70

2 kbH 2((

$70

3  kXc`2((

TVC

 lb#7 2((

$100

   lb#7 2((

$120

!X lb#7 2((

$130

" lb#7 2((

$150

# lb#7 2((

$200

$  lb#7 2((

$300

%8` lb#7 2((

$470

&p lb#7 2((

$730

' lb(7 2((

1100

(  g2((

Total Cost

=TFC+TVC

)  hRW[2((

Total Revenue

TR = P x q

*p aO2((

Price

=$261

+I  g= 2((

$522 = $261 x 2

,@( g= 2((

$783 = $261 x 3

-@ o2((

$1044 = $261 x 4

., o2((

$1305= $261 x 5

/  o2((

$1566 = $261 x 6

0, o2((

$1827= $261 x 7

1 ( o2((

$2088 = $261 x 8

2,8 o2((

$2349 = $261 x 9

3,H j_Q`2((

$261

4*  j_Q`2((

$261

5*X j_Q`2((

$261

6* j_Q`2((

$261

7* j_Q`2((

$261

8+  j_Q`2((

$261

9+8` j_Q`2((

$261

:+p j _Q`2((

$261

; + j _Q`2((

$261

< +  g= 2((

$261 = $261 x 1

= @Ȇ>R9Půq tonnes

   k Xb`2((

TFC

  fWf{ 2((

1

   fWf{ 2((

2

 W` fWf{ 2((

3

 fWf{ 2((

4

 fWf{ 2((

5

  O倭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Compute (TR-TC) or total profit at each Q level. Noreast should produce the Q

that yields the maximum profit. Click here to continue.

!; fWf{ 2((

6

8` fWf{ 2((

7

p fWf{ 2((

8

 fWf{ 2((

9

  kbH 2((

$70

2  kbH 2((

$70

38` kbH 2((

$70

3p kbH 2((

$70

3 kbH 2((

$70

3  kbH 2((

$70

2W` kbH 2((

$70

2 kbH 2((

$70

2 k bH 2((

$70

 3  k!Xc`2((

TVC

! l"b#7 2((

$100

 "  l#b#7 2((

$120

!#X l$b#7 2((

$130

"$ l%b#7 2((

$150

#% l&b#7 2((

$200

$&  l'b#7 2((

$300

%'8` l(b#7 2((

$470

&(p l)b#7 2((

$730

') l*b(7 2((

1100

(*  +g2((

Total Cost

=TFC+TVC

)+  j,b^ 2((

TR

*,  -aO2((

Price

=$261

+-I  ._H`2((

$522

,.( /_H`2((

$783

-/ 0_zX`2((

$1044

.0 l1_zX`2((

$1305

/1 2_^_`2((

$1566

02 m3_^_`2((

$1827

13( 4_^_`2((

$2088

248 5_^_`2((

$2349

35H j6_Q`2((

$261

46*  j7_Q`2((

$261

57*X j8_Q`2((

$261

68* j9_Q`2((

$261

79* j:_Q`2((

$261

8:+  j;_Q`2((

$261

9;+8` j<_Q`2((

$261

:<+p j=_Q`2((

$261

;=+ j>_Q`2((

$261

<>+  ?_H`2((

$261

=?@     !"#$%&'()*+,-./0123456789:;<=>7Ma Pf,e@xcP%'As;P\`"U NC8tVl*k%H* EȪxW^ Exg.IHC7\=ku1 /E^z䊄<+.| UFȧz`7b08Yˠ0YJd8cP\a+G" rPK8t.l*.gq=Cǂ#^ @ vA_u?a[2((

q tonnes

 A  kBXb`2((

TFC

 B fCWf{ 2((

1

 C  fDWf{ 2((

2

 DW` fEWf{ 2((

3

E fFWf{ 2((

4

F fGWf{ 2((

5

G  HO逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Compute (TR-TC) or total profit at each Q level. Noreast should produce 8

tonnes a month as this yields the maximum profit. Click here to continue.

H!; fIWf{ 2((

6

I8` fJWf{ 2((

7

Jp fKWf{ 2((

9

K  kLbH 2((

$70

L2  kMbH 2((

$70

M38` kNbH 2((

$70

N3p kObH 2((

$70

O3 kPbH 2((

$70

P3  kQbH 2((

$70

Q2W` kRbH 2((

$70

R2 kSbH 2((

$70

S2 kTbH 2((

$70

T3  kUXc`2((

TVC

U lVb#7 2((

$100

V  lWb#7 2((

$120

 WX lXb#7 2((

$130

!X lYb#7 2((

$150

"Y lZb#7 2((

$200

#Z  l[b#7 2((

$300

$[8` l\b#7 2((

$470

%\p l]b#7 2((

$730

&] l^b(7 2((

1100

'^  _g2((

Total Cost

=TFC+TVC

(_  j`b^ 2((

TR

)`  aaO2((

Price

=$261

*aI  b_H`2((

$522

+b( c_H`2((

$783

,c d_zX`2((

$1044

-d le_zX`2((

$1305

.e f_^_`2((

$1566

/f mg_^_`2((

$1827

0g( h_^_`2((

$2088

1h8 i_^_`2((

$2349

2iH jj_Q`2((

$261

3j*  jk_Q`2((

$261

4k*X jl_Q`2((

$261

5l* jm_Q`2((

$261

6m* jn_Q`2((

$261

7n+  jo_Q`2((

$261

8o+8` jp_Q`2((

$261

9p+p jq_Q`2((

$261

:q+ jr_Q`2((

$261

;r+  s_H`2((

$261

<s ktbH 2((

170

=t  kubH 2((

190

>uX kvbH 2((

200

?vꏠ kwbH 2((

220

@w kxbH 2((

270

Ax  kybH 2((

370

By8` kzbH 2((

540

Czp k{bH 2((

800

D{ l|b(7 2((

1170

E|  }h[2((

Total Profit

= TR-TC

F}p v~hRo2((

$91 = 261-170

G~ԇ who2((

$332 = 522-190

H( who2((

$583 = 783-200

I xh]2((

$824 = 1044-220

J yhJ12((

$1035 = 1305-270

K yhL2((

$1196 = 1566-370

L yhJ12((

$1287 = 1827-540

M( yhJ12((

$1288 = 2088-800

N8 zh<2((

$1179 = 2349-1170

OHP pg& 2((

best q = 8

Ww#@     !"#$%&'()*+,-./0123456789:;<=>?@ABCDEFGHIJKLMNOPW6aPaexcP%xkB Ǩxg%X .EQФ[$ٵUJ* <ȩ<+/E^tG!r5 B䔄ٿ_#Iz*+*xW\+U#\SĽ0Y،C< P^,G j q tonnes

   kXb`2((

TFC

  fWf{ 2((

1

   fWf{ 2((

2

 W` fWf{ 2((

3

 fWf{ 2((

4

 fWf{ 2((

5

  逭2((

Question 3: Find the maximum dollar profit possible in September. Answer:

At the best Q level of 8 tonnes a month, there will be an economic

profit of $1288 as shown in the table below. Click here to continue.

!; fWf{ 2((

6

8` fWf{ 2((

7

p pg& 2((

best q = 8

w# fWf{ 2((

9

  kbH 2((

$70

2  kbH 2((

$70

38` kbH 2((

$70

3p kbH 2((

$70

3 kbH 2((

$70

3  kbH 2((

$70

2W` kbH 2((

$70

2 kbH 2((

$70

2 kbH 2((

$70

3  kXc`2((

TVC

 lb#7 2((

$100

   lb#7 2((

$120

!X lb#7 2((

$130

" lb#7 2((

$150

# lb#7 2((

$200

$  lb#7 2((

$300

%8` lb#7 2((

$470

&p lb#7 2((

$730

' lb(7 2((

1100

(  g2((

Total Cost

=TFC+TVC

)  jb^ 2((

TR

*  aO2((

Price

=$261

+I  _H`2((

$522

,( _H`2((

$783

- _zX`2((

$1044

. l_zX`2((

$1305

/ _^_`2((

$1566

0 m_^_`2((

$1827

1( _^_`2((

$2088

28 _^_`2((

$2349

3H j_Q`2((

$261

4*  j_Q`2((

$261

5*X j_Q`2((

$261

6* j_Q`2((

$261

7* j_Q`2((

$261

8+  j_Q`2((

$261

9+8` j_Q`2((

$261

:+p j_Q`2((

$261

;+ j_Q`2((

$261

<+  _H`2((

$261

= kbH 2((

170

>  kbH 2((

190

?X kbH 2((

200

@ꏠ kbH 2((

220

A kbH 2((

270

B  kbH 2((

370

C8` kbH 2((

540

Dp kbH 2((

800

E lb(7 2((

1170

F  h[2((

Total Profit

= TR-TC

Gp vhRo2((

$91 = 261-170

Hԇ who2((

$332 = 522-190

I( who2((

$583 = 783-200

J xh]2((

$824 = 1044-220

K yhJ12((

$1035 = 1305-270

L yhL2((

$1196 = 1566-370

M yhJ12((

$1287 = 1827-540

N( yhJ12((

$1288 = 2088-800

O8 zh<2((

$1179 = 2349-1170

PHQ@      !"#$%&'()*+,-./0123456789:;<=>?@ABCDEFGHIJKLMNOPQPAeTYyvõO22% ~Figure 4b: Operate at a Profit: Total Approach: Graphic Example

 l  j+2((

Given a graph of the Total Revenue and Total Cost Curve, we can describe

Total Profit as the vertical distance between the TR and TC curves, at any

quantity level. This means that the maximum profit output level will be the one

that yields the greatest vertical distance between the TR and TC curves.

  Xw}P2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Total Approach

In Figure 4 we will illustrate the "operate at a profit" situation by focusing on total revenue and total cost information. This approach is called the Total Approach.

In the Total Approach we apply the following rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Total Revenue exceeds Total Variable Cost, the firm should operate.

Q2: If operates, the best quantity, q*, is that quantity which maximizes: Profit = (Total Revenue -Total Cost).

Q3: The best dollar profit is the total dollar profit (or loss) earned at q*.

 # o2((

q = quantity in tonnes per month

 s Mwr0(($2500 $2000 $1500 $1000 $500 0  1 W{ 0((TC  ( W{ 0((TR  v W_ 0((2 #` W_ 0((3 k` W_ 0((4 , W_ 0((5 , W_ 0((6 T W_ 0((7 T W_ 0((8 s.gZ8%`7yC wuX2((

At Q = 2 tonnes the total profit of $332 can be shown as the red vertical

distance between the Total Revenue and Total Cost curve, as shown

below. Click here to continue.

!; hW `2((

332

#@PZ$e"s/4:8%`7yC9\  hW `2((

332

# hW `2((

583

ہ wuX2((

At Q = 3 tonnes the total profit of $583 can be shown as the red vertical

distance between the Total Revenue and Total Cost curve, as shown

below. The Total Profit has increased! Click here to continue.

!;@PYe*y9N%`7yC9\ /C~aT hW `2((

332

# hW `2((

583

ہ hW `2((

824

و wuX2((

At Q = 4 tonnes the total profit of $824 can be shown as the red vertical

distance between the Total Revenue and Total Cost curve, as shown

below. The Total Profit has increased! Click here to continue.

!;@PZ$e2yūN%`7yC9\ /C~aTzCם-H hW `2((

332

# hW `2((

583

ہ hW `2((

824

و j_E_`2((

1035

,h wX2((

At Q = 5 tonnes the total profit of $1035 can be shown as the red vertical

distance between the Total Revenue and Total Cost curve, as shown

below. The Total Profit has increased! Click here to continue.

!;@6aI:yEBN%`7yC9\ /C~aTzCם-H iy@ hW `2((

332

# hW `2((

583

ہ hW `2((

824

و j_E_`2((

1035

,h j_C?`2((

1196

|( wX2((

At Q = 6 tonnes the total profit of $1196 can be shown as the red vertical

distance between the Total Revenue and Total Cost curve, as shown

below. The Total Profit has increased! Click here to continue.

!;@ 6aJPZ$eTAy,DN%`7yC9\ /C~aTzCם-H iy@^Lj hW `2((

332

# hW `2((

583

ہ hW `2((

824

و j_E_`2((

1035

,h j_C?`2((

1196

|( j_E_`2((

1287

, wX2((

At Q = 7 tonnes the total profit of $1287 can be shown as the red vertical

distance between the Total Revenue and Total Cost curve, as shown

below. The Total Profit has increased! Click here to continue.

!;@? wX2((

At Q = 8 tonnes the total profit of $1288 can be shown as the red vertical

distance between the Total Revenue and Total Cost curve.The Total Profit

has been maximized at Q = 8 tonnes. Click here to continue.

!;Iy~WN%`7yC9\ /C~aTzCם-H lA/RL6P^D !W `0((332 # !W `0((583 ہ !W `0((824 و #_E_`0((1035 ,h #_C?`0((1196 |( #_E_`0((1287 , #_E_`0((1288 |h@     R X w}P2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Total Approach

In Figure 4 we will illustrate the "operate at a profit" situation by focusing on total revenue and total cost information. This approach is called the Total Approach.

In the Total Approach we apply the following rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Total Revenue exceeds Total Variable Cost, the firm should operate.

Q2: If operates, the best quantity, q*, is that quantity which maximizes: Profit = (Total Revenue -Total Cost).

Q3: The best dollar profit is the total dollar profit (or loss) earned at q*.

 #9PůClick here to exit Figure 5

  wX `2(

Figure 5a: Operate at a Profit: Unit Approach: Numeric Example

  l  ~i2((

As the cost accountant for NorEast Pulp, you wish to answer the 3 SR questions

for the firm for the month of September, given the September market price of $261

per tonne, TFC = $70, and given the average variable costs (AVC), average total

costs (ATC) and marginal costs (MC) for NorEast, described in the table below.

  bw}2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If it operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

#8yD%/w4qfiɀxw8e#>Gh"G7h]Z"E #D =%Question 1: Should NorEast operate or shutdown in September? Answer: Compare

the price with AVC at each output level. Since there are quantity levels where the

Price exceeds AVC, NorEast should operate. Click here to continue.

 !; v_u?a[2((

q tonnes

   kXc_`2((

AVC

  fWf{ 2((

1

  ` fWf{ 2((

2

X fWf{ 2((

3

 fWf{ 2((

4

 fWf{ 2((

5

  fWf{ 2((

6

8` fWf{ 2((

7

p fWf{ 2((

8

 fWf{ 2((

9

  kbH 2((

$50

8` na_ 2((

$67.14

p na_ 2((

$91.25

ì o aŽ 2((

$122.22

   k!bH 2((

$60

!X n"a_ 2((

$43.33

" n#a_ 2((

$37.50

# k$bH 2((

$40

$  k%Xb`2((

ATC

%! l&b#7 2((

$170

& ` k'bH 2((

$95

 'X n(a_ 2((

$66.67

!(2 k)bH 2((

$55

") k*bH 2((

$54

#*  n+a_ 2((

$61.67

$+38` n,a_ 2((

$77.14

%,3p l-b#7 2((

$100

&- l.b#7 2((

$130

'.  /b82((

Price

=MR

(/)  j0_Q`2((

$261

)0$ j1_Q`2((

$261

*1$( j2_Q`2((

$261

+2$ j3_Q`2((

$261

,3$ j4_Q`2((

$261

-4$ j5_Q`2((

$261

.5$ j6_Q`2((

$261

/6$( j7_Q`2((

$261

07$( j8_Q`2((

$261

18$H l9b#7 2((

$100

29 ` j:X\?`2((

MC

3:y l;b#7 2((

$100

4; ` k<bH 2((

$20

5< X k=bH 2((

$10

6=  k>bH 2((

$20

7>  k?bH 2((

$50

8?  l@b#7 2((

$100

9@8` lAb#7 2((

$170

:Ap lBb#7 2((

$260

;B lCb#7 2((

$370

<C @      !"#$%&'()*+,-./0123456789:;<6aP_xe DoO2((

Click here to exit Figure 5

D9PůFigure 5a: Operate at a Profit: Unit Approach: Numeric Example

 E l  ~Fi2((

As the cost accountant for NorEast Pulp, you wish to answer the 3 SR questions

for the firm for the month of September, given the September market price of $261

per tonne, TFC = $70, and given the average variable costs (AVC), average total

costs (ATC) and marginal costs (MC) for NorEast, described in the table below.

 F  _Gw}2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

G#WHyDbc6%Pʂ+M|H9TBrP^R1gl9*/F&Abt_kH I逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

1st tonne as MR=$261 exceeds MC=$100. Click here to continue.

I!; vJ_u?a[2((

q tonnes

J  kKXc_`2((

AVC

K kLXb`2((

ATC

L! Mb82((

Price

=MR

M)  jNX\?`2((

MC

Ny OoO2((

In producing and selling the

1st tonne, the extra revenue

gained (MR) of $261 exceeds

the extra cost of $100. The 1st

tonne contributes $161 towards

fixed costs and possibly a profit.

O mPWf{ 02(

1

P ` lQb#7 2((

$170

Q ` qR_Q`2(

$261

R$ lSb#7 2((

$100

S ` sTb#7 02(

$100

T `@@dP_xeT U逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

2nd tonne as MR=$261 exceeds MC=$20. Click here to continue.

U!; vV_u?a[2((

q tonnes

V  kWXc_`2((

AVC

W fXWf{ 2((

1

X ` mYWf{ 02(

2

YX kZbH 2((

$60

ZX k[Xb`2((

ATC

[! l\b#7 2((

$170

\ ` k]bH 2((

$95

]X ^b82((

Price

=MR

^)  j__Q`2((

$261

_$ q`_Q`2(

$261

`$( lab#7 2((

$100

a ` jbX\?`2((

MC

by lcb#7 2((

$100

c ` rdbH 02(

$20

d X eoO2((

In producing and selling the

2nd tonne, the extra revenue

gained (MR) of $261 exceeds

the extra cost of $20. The 2nd

tonne contributes $241 towards

fixed costs and possibly a profit.

 e@ P^d f逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

3rd tonne as MR=$261 exceeds MC=$10. Click here to continue.

f!; vg_u?a[2((

q tonnes

g  khXc_`2((

AVC

h fiWf{ 2((

1

i ` fjWf{ 2((

2

jX mkWf{ 02(

3

k klbH 2((

$60

lX nma_ 2((

$43.33

m knXb`2((

ATC

n! lob#7 2((

$170

o ` kpbH 2((

$95

pX nqa_ 2((

$66.67

q2 rb82((

Price

=MR

r)  js_Q`2((

$261

s$ jt_Q`2((

$261

t$( qu_Q`2(

$261

u$ lvb#7 2((

$100

 v ` jwX\?`2((

MC

!wy lxb#7 2((

$100

"x ` kybH 2((

$20

#y X rzbH 02(

$10

$z  {oO2((

In producing and selling the

3rd tonne, the extra revenue

gained (MR) of $261 exceeds

the extra cost of $10. The 3rd

tonne contributes $251 towards

fixed costs and possibly a profit.

%{@ !"#$%P^`e |逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

4th tonne as MR=$261 exceeds MC=$20. Click here to continue.

|!; v}_u?a[2((

q tonnes

}  k~Xc_`2((

AVC

~ fWf{ 2((

1

 ` fWf{ 2((

2

X fWf{ 2((

3

 mWf{ 02(

4

 kbH 2((

$60

X na_ 2((

$43.33

 na_ 2((

$37.50

 kXb`2((

ATC

! lb#7 2((

$170

 ` kbH 2((

$95

X na_ 2((

$66.67

2 kbH 2((

$55

 b82((

Price

=MR

)  j_Q`2((

$261

 $ j_Q`2((

$261

!$( j_Q`2((

$261

"$ q_Q`2(

$261

#$ lb#7 2((

$100

$ ` jX\?`2((

MC

%y lb#7 2((

$100

& ` kbH 2((

$20

' X kbH 2((

$10

(  rbH 02(

$20

)  oO2((

In producing and selling the

4th tonne, the extra revenue

gained (MR) of $261 exceeds

the extra cost of $20. The 4th

tonne contributes $241 towards

fixed costs and possibly a profit.

*@ !"#$%&'()* 逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

5th tonne as MR=$261 exceeds MC=$50. Click here to continue.

!; v_u?a[2((

q tonnes

  kXc_`2((

AVC

 fWf{ 2((

1

 ` fWf{ 2((

2

X fWf{ 2((

3

 fWf{ 2((

4

 mWf{ 02(

5

  kbH 2((

$60

X na_ 2((

$43.33

 na_ 2((

$37.50

 kbH 2((

$40

  kXb`2((

ATC

! lb#7 2((

$170

 ` kbH 2((

$95

X na_ 2((

$66.67

2 kbH 2((

$55

  kbH 2((

$54

!  b82((

Price

=MR

")  j_Q`2((

$261

#$ j_Q`2((

$261

$$( j_Q`2((

$261

%$ j_Q`2((

$261

&$ q_Q`2(

$261

'$ lb#7 2((

$100

( ` jX\?`2((

MC

)y lb#7 2((

$100

* ` kbH 2((

$20

+ X kbH 2((

$10

,  kbH 2((

$20

-  rbH 02(

$50

.  oO2((

In producing and selling the

5th tonne, the extra revenue

gained (MR) of $261 exceeds

the extra cost of $50. The 5th

tonne contributes $211 towards

fixed costs and possibly a profit.

/@ !"#$%&'()*+,-./P_xe 逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

6th tonne as MR=$261 exceeds MC=$100. Click here to continue.

!; v_u?a[2((

q tonnes

  kXc_`2((

AVC

 fWf{ 2((

1

 ` fWf{ 2((

2

X fWf{ 2((

3

 fWf{ 2((

4

 fWf{ 2((

5

  mWf{ 02(

6

8` kbH 2((

$50

8` kbH 2((

$60

X na_ 2((

$43.33

 na_ 2((

$37.50

 kbH 2((

$40

  kXb`2((

ATC

! lb#7 2((

$170

 ` kbH 2((

$95

 X na_ 2((

$66.67

!2 kbH 2((

$55

" kbH 2((

$54

#  na_ 2((

$61.67

$38` b82((

Price

=MR

%)  j_Q`2((

$261

&$ j_Q`2((

$261

'$( j_Q`2((

$261

($ j_Q`2((

$261

)$ j_Q`2((

$261

*$ q_Q`2(

$261

+$ lb#7 2((

$100

, ` jX\?`2((

MC

-y lb#7 2((

$100

. ` kbH 2((

$20

/ X kbH 2((

$10

0  kbH 2((

$20

1  kbH 2((

$50

2  sb#7 02(

$100

38` oO2((

In producing and selling the

6th tonne, the extra revenue

gained (MR) of $261 exceeds

the extra cost of $100. The 6th

tonne contributes $161 towards

fixed costs and possibly a profit.

4@ !"#$%&'()*+,-./01234P_xeT 逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

7th tonne as MR=$261 exceeds MC=$170. Click here to continue.

!; v_u?a[2((

q tonnes

  kXc_`2((

AVC

 fWf{ 2((

1

 ` fWf{ 2((

2

X fWf{ 2((

3

 fWf{ 2((

4

 fWf{ 2((

5

  fWf{ 2((

6

8` mWf{ 02(

7

p kbH 2((

$50

8` na_ 2((

$67.14

p kbH 2((

$60

X na_ 2((

$43.33

 na_ 2((

$37.50

 kbH 2((

$40

  kXb`2((

ATC

 ! lb#7 2((

$170

! ` kbH 2((

$95

"X na_ 2((

$66.67

#2 kbH 2((

$55

$ kbH 2((

$54

%  na_ 2((

$61.67

&38` na_ 2((

$77.14

'3p b82((

Price

=MR

()  j_Q`2((

$261

)$ j_Q`2((

$261

*$( j_Q`2((

$261

+$ j_Q`2((

$261

,$ j_Q`2((

$261

-$ j_Q`2((

$261

.$ q_Q`2(

$261

/$( lb#7 2((

$100

0 ` jX\?`2((

MC

1y lb#7 2((

$100

2 ` kbH 2((

$20

3 X kbH 2((

$10

4  kbH 2((

$20

5  kbH 2((

$50

6  lb#7 2((

$100

78` sb#7 02(

$170

8p oO2((

In producing and selling the

7th tonne, the extra revenue

gained (MR) of $261 exceeds

the extra cost of $170. The 7th

tonne contributes $91 towards

fixed costs and possibly a profit.

9@ !"#$%&'()*+,-./0123456789P_xe 逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

8th tonne as MR=$261 exceeds MC=$260. Click here to continue.

!; v_u?a[2((

q tonnes

  kXc_`2((

AVC

 f Wf{ 2((

1

  ` f Wf{ 2((

2

 X f Wf{ 2((

3

  f Wf{ 2((

4

  f Wf{ 2((

5

   fWf{ 2((

6

8` fWf{ 2((

7

p mWf{ 02(

8

 kbH 2((

$50

8` na_ 2((

$67.14

p na_ 2((

$91.25

ì kbH 2((

$60

X na_ 2((

$43.33

 na_ 2((

$37.50

  kbH 2((

$40

!  kXb`2((

ATC

"! lb#7 2((

$170

# ` kbH 2((

$95

$X na_ 2((

$66.67

%2 kbH 2((

$55

& kbH 2((

$54

'  na_ 2((

$61.67

(38` na_ 2((

$77.14

)3p l b#7 2((

$100

*  !b82((

Price

=MR

+!)  j"_Q`2((

$261

,"$ j#_Q`2((

$261

-#$( j$_Q`2((

$261

.$$ j%_Q`2((

$261

/%$ j&_Q`2((

$261

0&$ j'_Q`2((

$261

1'$ j(_Q`2((

$261

2($( q)_Q`2(

$261

3)$( l*b#7 2((

$100

4* ` j+X\?`2((

MC

5+y l,b#7 2((

$100

6, ` k-bH 2((

$20

7- X k.bH 2((

$10

8.  k/bH 2((

$20

9/  k0bH 2((

$50

:0  l1b#7 2((

$100

;18` l2b#7 2((

$170

<2p s3b#7 02(

$260

=3 4oO2((

In producing and selling the

8th tonne, the extra revenue

gained (MR) of $261 exceeds

the extra cost of $260. The 8th

tonne contributes $1 towards

fixed costs and possibly a profit.

>4@ !"#$%&'()*+,-./0123456789:;<=>P\e5yčT%FAeIs>\ZHr_k8_^L%^^ Kz.~ z:ʂ# P!eIrTi`tE/pRC @Ex%N!P5 6O逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

The best q = 8 tonnes a month. NorEast should NOT produce the 9th tonne as

MR ($261) is less than the MC ($370). Click here to continue.

6!; v7_u?a[2((

q tonnes

7  k8Xc_`2((

AVC

8 f9Wf{ 2((

1

9 ` f:Wf{ 2((

2

:X f;Wf{ 2((

3

; f<Wf{ 2((

4

< f=Wf{ 2((

5

=  f>Wf{ 2((

6

>8` f?Wf{ 2((

7

?p n@g"G 2((

best q=8

@~ fAWf{ 2((

9

A  kBbH 2((

$50

B8` nCa_ 2((

$67.14

Cp nDa_ 2((

$91.25

Dì oEaŽ 2((

$122.22

E  kFbH 2((

$60

 FX nGa_ 2((

$43.33

!G nHa_ 2((

$37.50

"H kIbH 2((

$40

#I  kJXb`2((

ATC

$J! lKb#7 2((

$170

%K ` kLbH 2((

$95

&LX nMa_ 2((

$66.67

'M2 kNbH 2((

$55

(N kObH 2((

$54

)O  nPa_ 2((

$61.67

*P38` nQa_ 2((

$77.14

+Q3p lRb#7 2((

$100

,R lSb#7 2((

$130

-S  Tb82((

Price

=MR

.T)  jU_Q`2((

$261

/U$ jV_Q`2((

$261

0V$( jW_Q`2((

$261

1W$ jX_Q`2((

$261

2X$ jY_Q`2((

$261

3Y$ jZ_Q`2((

$261

4Z$ j[_Q`2((

$261

5[$( q\_Q`2(

$261

6\$( j]_Q`2((

$261

7]$H l^b#7 2((

$100

8^ ` j_X\?`2((

MC

9_y l`b#7 2((

$100

:` ` kabH 2((

$20

;a X kbbH 2((

$10

<b  kcbH 2((

$20

=c  kdbH 2((

$50

>d  leb#7 2((

$100

?e8` lfb#7 2((

$170

@fp sgb#7 02(

$260

Ag lhb#7 2((

$370

Bh  ioY2((

Do NOT produce the 9th tonne,

as it adds $370 to costs (MC),

but only $261 to revenue (MR).

Stop at 8 tonnes a month.

CiȈ@ !"#$%&'()*+,-./0123456789:;<=>?@ABCP_xeH j=倭2((

Question 3: What is the dollar amount of the maximum profit? Answer: At q*=8

ATC = $100, so the profit per tonne = P - ATC = $261 - 100 = $161 per tonne.

At 8 tonnes total profit = $161 x 8 = $1288. Click here to continue.

j!; vk_u?a[2((

q tonnes

k  klXc_`2((

AVC

l fmWf{ 2((

1

m ` fnWf{ 2((

2

nX foWf{ 2((

3

o fpWf{ 2((

4

p fqWf{ 2((

5

q  frWf{ 2((

6

r8` fsWf{ 2((

7

sp utg$/ 02(

best q=8

t~ fuWf{ 2((

9

u  kvbH 2((

$50

v8` nwa_ 2((

$67.14

wp nxa_ 2((

$91.25

xì oyaŽ 2((

$122.22

y  kzbH 2((

$60

 zX n{a_ 2((

$43.33

!{ n|a_ 2((

$37.50

"| k}bH 2((

$40

#}  k~Xb`2((

ATC

$~! lb#7 2((

$170

% ` kbH 2((

$95

&X na_ 2((

$66.67

'2 kbH 2((

$55

( kbH 2((

$54

)  na_ 2((

$61.67

*38` na_ 2((

$77.14

+3p sb#7 02(

$100

, lb#7 2((

$130

-  b82((

Price

=MR

.)  j_Q`2((

$261

/$ j_Q`2((

$261

0$( j_Q`2((

$261

1$ j_Q`2((

$261

2$ j_Q`2((

$261

3$ j_Q`2((

$261

4$ j_Q`2((

$261

5$( q_Q`2(

$261

6$( j_Q`2((

$261

7$H lb#7 2((

$100

8 ` jX\?`2((

MC

9y lb#7 2((

$100

: ` kbH 2((

$20

; X kbH 2((

$10

<  kbH 2((

$20

=  kbH 2((

$50

>  lb#7 2((

$100

?8` lb#7 2((

$170

@p sb#7 02(

$260

A lb#7 2((

$370

B  ro2((

In computing total profit compare

price and average total cost, at

the best quantity level. At 8 tonnes

a month, NorEast will earn a profit

per tonne of $261 - 100 = $161.

If NorEast produces 8 tonnes, the

total profit will be $161 x 8 = $1288.

This is all positive economic profit.

C̈@   !"#$%&'()*+,-./0123456789:;<=>?@ABCPIeySτ((2(%ٌ6A#8CxBls˝58F&K|j`%ʪ=kaVVdUE('(%˚5x"5 Tka/f._Q͗\/}F6^  wL `2(

Figure 5b: Operate at a Profit: Unit Approach: Graphic Example

  l  iိ2((

As the cost accountant for NorEast Pulp, you wish to answer the 3 SR questions

for the firm for the month of September, given the September market price of $261

per tonne, TFC = $70, and given per unit cost curves for NorEast shown below.

  _w}2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

# rg-G 2((

Price = $261

} og( 2((

AVC =$100

H` g"O2((

Price,

Costs

per tonne

! o2((

NorEast's demand curve

" i_D_`2((

AVC

Ř W_ 0((9 L W_ 0((7 h W_ 0((6 (h W_ 0((5  W_ 0((4 ٠ W_ 0((3 ٠ W_ 0((2 ϓ  W_ 0((1   W_ 0((8 h {o2((

q = tonnes per month

] Wx2((

Question 1: Should NorEast operate or shutdown in September? Answer: Compare

the demand (price) curve with the AVC curve. Since there are quantities such as

q =1 where the demand curve is above AVC (Price exceeds AVC), NorEast

should operate. Click here to continue.

! w (2((

By producing the 1st tonne, NorEast receives $261 of

revenue which exceeds the extra $100 of variable cost

needed to produce the first tonne. The first tonne thus

contributes $161 towards fixed costs and a profit.

 @  PbHaD`yTn(("˪@gMPZU  sU'/R tg%4ȻTPkzk%ňy@V=Ejw*}@tU a^xngGuU.ʴ=io_,Yܻ9Nb=@ \R>F-Gfcg3rMKg3lz10mFm 0.Xlv};<Gfc669N#gց\RћHhϧg5b0`5-ϧG``F  wX `2(

Figure 5b: Operate at a Profit: Unit Approach: Graphic Example

  l  iိ2((

As the cost accountant for NorEast Pulp, you wish to answer the 3 SR questions

for the firm for the month of September, given the September market price of $261

per tonne, TFC = $70, and given per unit cost curves for NorEast shown below.

  _w}2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

# ng% 2((

MC =$100

@ g"O2((

Price,

Costs

per tonne

! rg-G 2((

Price = $261

} W_ 0((9 L W_ 0((7 h W_ 0((6 (h W_ 0((5  W_ 0((4 ٠ W_ 0((3 ٠ W_ 0((2 ϓ  W_ 0((1   W_ 0((8 h {o2((

q = tonnes per month

]r *| *@#@ lv}:=-G.^[v}:=-Gfc"ggӣѰ z10mFm 0.^yhhͤ4ggӣѰ z10mggӣѰ z10mFm 0.^ytͤ4ggӣѰ z10m-Gfcg3.^lv}:=-Gfc1l< F QH.^y(ͤ4ggӣѰ z10mggӣѰ z10mFm 0.^yèͤ4ggӣѰ z10m眞@#@ lv}:=-G.^y(ͤ4ggӣѰ z10mf@#@ lv}:=-G.^ܬv}:=-Gfc.@#@ lv}:=-G.^,v}:=-Gfc O逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce

the 1st tonne as MR=$261 exceeds MC=$100. Click here to continue.

! _;a2((

MR

=261

D` bG52((

MC

=100

 s @  P^`yTn(((">MPZU  sUNip Z`//كCLI9z 6-YM=D`_.}]+SSU:zS@*|2K`eoha8TdIAϤ X9=)ӠJY7;,R2 m( x/˃ }[*e-ʪ)@]3 hz ;gӳz10mFm 6s82f}:=-Gfcg3s4Fm 6s;>F֣ցhW.tFvy< F BW{,vy<ZZ# ͤ4goތ@#@ lv}:=-gԣ \ћHhϧg5b0`6/m 6s;>F֣ցhW.eN#gցj3i1tw69N#GkQ@` wz3i14x F @hgw69N#gցh18f};Figure 5b: Operate at a Profit: Unit Approach: Graphic Example

  l  iိ2((

As the cost accountant for NorEast Pulp, you wish to answer the 3 SR questions

for the firm for the month of September, given the September market price of $261

per tonne, TFC = $70, and given per unit cost curves for NorEast shown below.

  _w}2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

# g"O2((

Price,

Costs

per tonne

! rg-G 2((

Price = $261

} mg!? 2((

MC =$20

s` W_ 0((9 L W_ 0((7 h W_ 0((6 (h W_ 0((5  W_ 0((4 ٠ W_ 0((3 ٠ W_ 0((2 ϓ  W_ 0((1   W_ 0((8 h {o2((

q = tonnes per month

]"sH 4)| #)@#@ lv};<G.iUv};<Gfc昕ggӳz10mFm 0.ib,v};<Gfc669N#GkQ@.inv};<Gfc摗N@#@ lv};<G.i|4x F QHhϧ摘@#@ lv};<G.ij3i14x 摘ތ@#@ lv};<G.i(ͤ4ggӳz10mϧg5b0`ڌ@#@ lp.iͤ4ggӳz10m|669N#GkQ@.i,v};<Gfc昛6ggӳz10mFm 0.ihͤ4ggӳz10m摞@#@ lv};<G _;a2((

MR

=261

D` _;a2((

MR

=261

D` bG52((

MC

=100

 s  bc32((

MC

=20

!o 逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

2nd tonne as MR=$261 exceeds MC=$20. Click here to continue.

"!@  !"P^aDyTn(((")@@SA~T8p%@?/,ZAH_%u._&S12u.KLWW20x` '/RR>y)KGڢ\J?4Ch W@T@-V/gjA0/,ꬊzTU_Ξ 9 X}Pc% eUN?/ ˌ`{VL\q%v kǎL7 r0G*k2$gGuˋ {zTU_Ξ a^)@Fٶ< i\@-g U>ʴ=i  F֣ցh4fcg3h j=h6stO!g3h j=h66 0.l(ͤ4ggӳb0`5<ϧG``F69N#GkQ@`+:Q@#@ lv};Figure 5b: Operate at a Profit: Unit Approach: Graphic Example

  l  iိ2((

As the cost accountant for NorEast Pulp, you wish to answer the 3 SR questions

for the firm for the month of September, given the September market price of $261

per tonne, TFC = $70, and given per unit cost curves for NorEast shown below.

  _w}2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

# g"O2((

Price,

Costs

per tonne

! rg-G 2((

Price = $261

} mg!? 2((

MC =$10

s W_ 0((9 L W_ 0((7 h W_ 0((6 (h W_ 0((5  W_ 0((4 ٠ W_ 0((3 ٠ W_ 0((2 ϓ  W_ 0((1   W_ 0((8 h {o2((

q = tonnes per month

]=s`*0| E*=@#@ lv}:=-G.r)X(ͤ4ggӣѰ z10m)ggӣѰ z10mFm 0.r)dͤ4ggӣѰ z10m&1l< F QH.r)q(ͤ4ggӣѰ z10m"v@#@ lv}:=-G.r}v}:=-Gfc">@#@ lv}:=-G.r,v}:=-Gfc)ggӣѰ z10mFm 0.r)ͤ4ggӣѰ z10m)ggӣѰ z10mFm 0.r)(ͤ4ggӣѰ z10m&1l< F QH.rv}:=-Gfc)^ggӣѰ z10mFm 0.r,v}:=-Gfc+d14x F QH.r9N#GkQ@` _;a2((

MR

=261

D` _;a2((

MR

=261

D` _;a2((

MR

=261

 D` bG52((

MC

=100

!s  bc32((

MC

=20

"o bc32((

MC

=10

#3w@ 逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

3rd tonne as MR=$261 exceeds MC=$10. Click here to continue.

$!@  !"#$P^aDyTn((("i@P_%\ P!5Y}2R_H @% sf{/}u.KLW_2`?/7ZAH_%us._r+ˁ l[璚z}(5)@~P_%\ P!OzTJ  A* ?ӗW35 uVEjw*}*OgR&h)@'pfFjc;HU:zS@*\]ȓ*PcΛ+I`eUL5rS-p°\q%v kǎ\XW {pȒMIU.,@+r+SSU:zS@*-zo8w8TH+k-)Ӫ@Jrn`J(p6Ҁ0R-0K¬VQRܪ8V<|  [Fvy<ZZ# ͤ4hϧg5b0`ڌ@s?g3yj=h663hϧG`b0`ڌ@sg3yk>0mFm 0.oH9N#GkQ@`]zggӳz10mFm `\ۮ6s;>F-Gf u4ggӳz10mFm 7]#@ lv};F-Gfc*t14x F QH.z׬v};<gԣ ͤ4cg3h j=h66\ҏfcg3lz10m ]z4x F QHh u4ggӳz10mFm &ͤ4ggӳz10m t@ lv}:=-Gf 3u4ggӳb0`ڌ@rۮg3lz10mFm 0.YH9N#GkY(j3i̚ϧg5b0`ڌ@37]#@ lv};<Gf mu9N#GkQ@`F]#@ lv};<Gf  wX `2(

Figure 5b: Operate at a Profit: Unit Approach: Graphic Example

  l  iိ2((

As the cost accountant for NorEast Pulp, you wish to answer the 3 SR questions

for the firm for the month of September, given the September market price of $261

per tonne, TFC = $70, and given per unit cost curves for NorEast shown below.

  _w}2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

# mg!? 2((

MC =$20

s g"O2((

Price,

Costs

per tonne

! rg-G 2((

Price = $261

} W_ 0((9 L W_ 0((7 h W_ 0((6 (h W_ 0((5  W_ 0((4 ٠ W_ 0((3 ٠ W_ 0((2 ϓ  W_ 0((1   W_ 0((8 h {o2((

q = tonnes per month

] s頻| ώ@#@ lv};<G.|[v};<GfcV"ggӳz10mFm 0.|uhhͤ4ggӳz10mVggӳz10mFm 0.|utͤ4ggӳz10mW@#@ lv};<G.|lv};<GfcXz@#@ lv};<G.|uͤ4ggӳz10mYB@#@ lv};<G.|]Hj3i14x Z @#@ lv};<G.|uͤ4ggӳz10mZggӳz10mFm 0.|lv};<Gfc<ϧg5b0`ڌ@#@ lp.|(ͤ4ggӳz10m  _;a2((

MR

=261

 D` _;a2((

MR

=261

 D` _;a2((

MR

=261

 D` _;a2((

MR

=261

! D` bG52((

MC

=100

"s  bc32((

MC

=20

#o bc32((

MC

=10

$3w@ bc32((

MC

=20

%ʓj 逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

4th tonne as MR=$261 exceeds MC=$20. Click here to continue.

&!@  !"#$%&P^8aDyTn((("^P8?( h/ʇ[U~%n\) %˗\`FF&JKsRAH_.l/e0x##/^Y9ne iJ\y~L4beZ\) $e`N^yp M|SOQF-GЮ` z3i14x F @  wX `2(

Figure 5b: Operate at a Profit: Unit Approach: Graphic Example

  l  iိ2((

As the cost accountant for NorEast Pulp, you wish to answer the 3 SR questions

for the firm for the month of September, given the September market price of $261

per tonne, TFC = $70, and given per unit cost curves for NorEast shown below.

  _w}2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

# og( 2((

AVC =$100

H` g"O2((

Price,

Costs

per tonne

! rg-G 2((

Price = $261

} W_ 0((9 L W_ 0((7 h W_ 0((6 (h W_ 0((5  W_ 0((4 ٠ W_ 0((3 ٠  W_ 0((2  ϓ  !W_ 0((1 !  "W_ 0((8 "h {#o2((

q = tonnes per month

#]!$z?eKd| qJc69N#GkQ@` ߕ669N#GkQ@/CW9N#GkQ@`F)eͤ4ggӳz10m<3h j=h669 &ggӳz10mFm 0/C~^b0`ڌ@#@ lv};<G ~v};<Gfc869N#GkQ@` ggӳz10mFm 0/Cdk9N#GkQ@`F j3i14x <&x4x F QHh 윲@#@ lv};<gԣ ^dfcg3h k>0m<]#@ lv};<gԣ ͤ;ϧg5`F,v};<gԣ ͤ4}OSg3h k>0mFm 0$ %_;a2((

MR

=261

%D` &_;a2((

MR

=261

&D` '_;a2((

MR

=261

 'D` (_;a2((

MR

=261

!(D` )_;a2((

MR

=261

") *bG52((

MC

=100

#*s  +bc32((

MC

=20

$+o ,bc32((

MC

=10

%,3w@ -bc32((

MC

=20

&-ʓj .bc32((

MC

=50

'.3;@ /逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

5th tonne as MR=$261 exceeds MC=$50. Click here to continue.

(/! 0W_ 0((9 )0L 1W_ 0((7 *1h 2W_ 0((6 +2(h 3W_ 0((5 ,3 4W_ 0((4 -4٠ 5W_ 0((3 .5٠ 6W_ 0((2 /6ϓ  7W_ 0((1 07  8W_ 0((8 18h@  !"#$%&'()*+,-./01P^`9yTn((("^P8?( h/ʇ[T`(&( h/ʇ[K6CAH_.Lmb/DRRKܸR-0K/xL, i\پ^`FF&_|rjˁ ̹~F-GЮ` z3i14x F @ 9 :wX `2(

Figure 5b: Operate at a Profit: Unit Approach: Graphic Example

 : l  ;iိ2((

As the cost accountant for NorEast Pulp, you wish to answer the 3 SR questions

for the firm for the month of September, given the September market price of $261

per tonne, TFC = $70, and given per unit cost curves for NorEast shown below.

;  _<w}2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

<# o=g( 2((

AVC =$100

=H` >g"O2((

Price,

Costs

per tonne

>! r?g-G 2((

Price = $261

?} @W_ 0((9 @L AW_ 0((7 Ah BW_ 0((6 B(h CW_ 0((5 C DW_ 0((4 D٠ EW_ 0((3 E٠ FW_ 0((2 Fϓ  GW_ 0((1 G  HW_ 0((8 Hh {Io2((

q = tonnes per month

I]Jz>FP| Jc69N#gցh+!N#gցj3i1y_Hj3i16yj=h,gӳb0`ڌ@#@ lp/H"Z9N#gցj3i1z>fcg3lz0 ϧgQ@`F^D`Fvy< ~69N#gցh6ٟN#gցj3i1yj3i16yj=hgӳb0`ڌ@#@ lp/Gr*3i16yj=h6z?SћHhϧgQ@` `ϧgQ@`F^$`Fvy< 3lz10mFm 6s8=0mFm 6s;>F-GJ K_;a2((

MR

=261

KD` L_;a2((

MR

=261

LD` M_;a2((

MR

=261

 MD` N_;a2((

MR

=261

!ND` O_;a2((

MR

=261

"O P_;a2((

MR

=261

#P@ QbG52((

MC

=100

$Qs  Rbc32((

MC

=20

%Ro Sbc32((

MC

=10

&S3w@ Tbc32((

MC

=20

'Tʓj Ubc32((

MC

=50

(U3;@ VbG52((

MC

=100

)Vr@ W逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

6th tonne as MR=$261 exceeds MC=$100. Click here to continue.

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Figure 5b: Operate at a Profit: Unit Approach: Graphic Example

 Y l  Ziိ2((

As the cost accountant for NorEast Pulp, you wish to answer the 3 SR questions

for the firm for the month of September, given the September market price of $261

per tonne, TFC = $70, and given per unit cost curves for NorEast shown below.

Z  _[w}2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

[# o\g( 2((

AVC =$100

\H` ]g"O2((

Price,

Costs

per tonne

]! r^g-G 2((

Price = $261

^} _W_ 0((9 _L `W_ 0((7 `h aW_ 0((6 a(h bW_ 0((5 b cW_ 0((4 c٠ dW_ 0((3 d٠ eW_ 0((2 eϓ  fW_ 0((1 f  gW_ 0((8 gh {ho2((

q = tonnes per month

h]CizfAn| Jc69NF3Q@` \nggӣѰ z10mFm 0/L`Z3i14x F @4H9N#GkQ@`Φ769N#GkQ@` :B@#@ lv};<G/M.f>F֣ցj3i13ͤ4ggӳz10mf#@ lv};<Gf Hggӳz10mFm 0/Ll3i14x F @4vy<ZZ# ͤ4gf#@ lv};<Gf A\14x F QH/Ls3i14x F @3Ҩͤ4ggӳz10mg3h j=h669 A14x F QH/MyB4ggӳz10mFm 4v};<Gfci j_;a2((

MR

=261

jD` k_;a2((

MR

=261

kD` l_;a2((

MR

=261

 lD` m_;a2((

MR

=261

!mD` n_;a2((

MR

=261

"n o_;a2((

MR

=261

#o@ p_;a2((

MR

=261

$p qbG52((

MC

=100

%qs  rbc32((

MC

=20

&ro sbc32((

MC

=10

's3w@ tbc32((

MC

=20

(tʓj ubc32((

MC

=50

)u3;@ vbG52((

MC

=100

*vr@ wbG52((

MC

=170

+w x逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

7th tonne as MR=$261 exceeds MC=$170. Click here to continue.

,x!@  !"#$%&'()*+,P_(aDyyTn((("^P8?( h/ʇ[T`(&( h/ʇ[< d9PZU ЉU<ّI P_\G:*P Z5蕊P&>)p Z`/._q)/YK |Lyd՗ @% +r0xҟNip Z`//كCLI9z 6-YM=D`_>TL< i\@-dHRsS!p Z`/&Ovw: i@S~\) %!$ R(p6Ҁ0R-0K¬NQQϫ uVEjw*}*OJtROŬ̍>( DZw2tNU0}a&U$+ǝ7W6%ʫҙ2ѹi[)tyj}xˉ.3K\<`(Cޢ,[(JF-GЮ` z3i14x F @ y zwX `2(

Figure 5b: Operate at a Profit: Unit Approach: Graphic Example

 z l  {iိ2((

As the cost accountant for NorEast Pulp, you wish to answer the 3 SR questions

for the firm for the month of September, given the September market price of $261

per tonne, TFC = $70, and given per unit cost curves for NorEast shown below.

{  _|w}2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

|# g}W 2((

MC

}@t ~g"O2((

Price,

Costs

per tonne

~! W_ 0((9 L W_ 0((7 h W_ 0((6 (h W_ 0((5  W_ 0((4 ٠ W_ 0((3 ٠ W_ 0((2 ϓ  W_ 0((1   W_ 0((8 h {o2((

q = tonnes per month

]Gzun| 3Kuc69N#gցh.Fvy< F @Fi{(ͤ4ggӳb0`3L Fm 6s;>F-G/Qa9N#gցj3i1zћHhϧgQ@` fB@#@ lv};F-G/Qnj3i16yj=h6z6s;>F-Gf tbggӳb0`ڌ@#@ `^44fcg3lz10mJ69N#gցh;Fvy< F @F9N#gցj3i:O+g3lz10mFm 0/Qz9N#gցj3i1 _;a2((

MR

=261

| bG52((

MC

=260

p _;a2((

MR

=261

D` _;a2((

MR

=261

 D` _;a2((

MR

=261

!D` _;a2((

MR

=261

"D` _;a2((

MR

=261

# _;a2((

MR

=261

$@ _;a2((

MR

=261

% bG52((

MC

=100

&s  bc32((

MC

=20

'o bc32((

MC

=10

(3w@ bc32((

MC

=20

)ʓj bc32((

MC

=50

*3;@ bG52((

MC

=100

+r@ bG52((

MC

=170

, 逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

8th tonne as MR=$261 exceeds MC=$260. Click here to continue.

-! rg-G 2((

Price = $261

.}@  !"#$%&'()*+,-.PhaD wX `2(

Figure 5b: Operate at a Profit: Unit Approach: Graphic Example

  l  iိ2((

As the cost accountant for NorEast Pulp, you wish to answer the 3 SR questions

for the firm for the month of September, given the September market price of $261

per tonne, TFC = $70, and given per unit cost curves for NorEast shown below.

  ^w}2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) xq*

# gW 2((

MC

@t g"O2((

Price,

Costs

per tonne

! rg-G 2((

Price = $261

} W_ 0((9 L W_ 0((7 h W_ 0((6 (h W_ 0((5  W_ 0((4 ٠ W_ 0((3 ٠ W_ 0((2 ϓ  W_ 0((1   W_ 0((8 h {o2((

q = tonnes per month

]&zuxPr!Ň䲭]/g$lɎ\S$%Ap^lEʤҝ:L=.3`r/wFCt>4c@ lv};<Gf գϧg5b0`ڌ@3^Tfcg3yk>0m_C69NF3Y(h"Ftz6ZϩF @XY9NF3Y(j3iIg3yk>0mFm 0/Q[3i16yj=h6z24x F QHhgӳz10mFm 6s8 ,90mFm 6s;>F֣ց^̴};<Gfcg3zܑfcg3h j=hˤgӳz10mFm 6s83/YN#GkQ@`F^,`Fvy<ZZz34x F QHhLeFm 6s;>F֣ցh32yN#GkQ@`F^̖s;>F֣ցj3i1z@fcg3h j=h4gӳz10mFm 6s8 50mFm 6s;>F֣ց^4tfcg3lz10m69N#gցh0-Fvy< F @GIv};F-G/Qe 3i16yj=h6z4ћHhϧgQ@` f @#@ lv};F-Gfc&6yj=h666mFvy< F @Fiͤ4ggӳb0`6Fvy< F QH/Qq9N#gցj3i1zӘћHhϧgQ@` f*@#@ lv};F֣ցh3:IN#GkQ@`F^s;>F֣ցj3i1zћHhϧg5b0`(gӳz10mFm 6s8 =i0mFm 6s;>F֣ց bG52((

MC

=260

p _;a2((

MR

=261

̑ _;a2((

MR

=261

  bG52((

MC

=370

!d~ m逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

The best q = 8 tonnes a month where MR = MC. NorEast should NOT produce

the 9th tonne as MR ($261) is less than the MC ($370). Click here to continue.

"! ub9 `2(

best q

#E w R(P2((

Theoretically, the profit maximizing quantity

level will be where MR= MC. The closest

whole quantity value to this situation is

q = 8 tonnes per month.

$@  !"#$?P\0fD?yTnfM((((f((333%P9hUO,TELKEM ZTi1-R=`\Z3׳ޡEqA)'ie\!D۽Jfge-æu<5;L[ц@\{\]8F u98 !O=7 դntjƒPq4p8`ZBz;|ɵC7?H{)gH<з5 ;UE( X{r:j dUU?$.M.UUJ-U-h.Kr;q)r\C֋\ϫo{*ҥK ͅQ6s;>F֣ցj3iMFm 6s;>F֣ցhm7Fvy<ZZ# ^fcg3h j=h6zӔHhϧg5b0`NFm 6s;>F֣ցh:ќϧg5b0`ڌ@#@ `^dfcg3h j=h6zHhϧg5b0`"OJg3h j=h66W.tFvy< F @  wX `2(

Figure 5b: Operate at a Profit: Unit Approach: Graphic Example

  l  iိ2((

As the cost accountant for NorEast Pulp, you wish to answer the 3 SR questions

for the firm for the month of September, given the September market price of $261

per tonne, TFC = $70, and given per unit cost curves for NorEast shown below.

  _w}2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

# gW 2((

MC

@t g"O2((

Price,

Costs

per tonne

! i_B`2((

ATC

 rg-G 2((

Price = $261

` pg* 2((

ATC = $100

KF  fW_ 2((

a

o  fW_ 2((

b

 fW^ 2((

c

 fW_ 2((

d

K_  W_ 0((9 L W_ 0((7 h W_ 0((6 (h W_ 0((5  W_ 0((4 ٠ W_ 0((3 ٠ W_ 0((2 ϓ  W_ 0((1    W_ 0((8 !h {o2((

q = tonnes per month

"]sJ%J#DOP8 v=2((

Question 3: What is the dollar amount of the maximum profit? Answer: At q*=8

ATC = $100, so the profit per tonne = P - ATC = $261 - 100 = $161 per tonne =

height of rectangle shown below. At 8 tonnes total profit = $161 x 8 = $1288

= shaded area of rectangle shown below. Click here to continue.

$!)_~V=%C lqS܂%S w  `2((

Profit per unit = P - ATC = rectangle height = $161

&r'ͬtl(ˆM@| )ˆMP zo?2((

q=8=rectangle width

*ٓ?@ w)(2((

Area of rectangle abcd below is:

height x width = (P-ATC) x q =

profit per tonne x number of tonnes =

$161 x 8 = $1288 = total profit

+  ub9 `2(

best q

,@   !"#$%&'()*+, _w}2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Unit Approach

In Figure 5 we will illustrate the "operate at a profit" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

 # 0om0((End of Figure 5  m@  ? @ddPxd oO2((

Click here to exit Figure 6

  wX `2(

Figure 6a: Operate at a Loss Total Approach: Numeric Example

  l  Wc2((

In October the market price of pulp declined to $51 per tonne due to a world-wide

recession. Your chore is to answer the 3 SR questions for NorEast for the month

of October, given the Total Fixed costs (TFC) and Total VariableCosts (TVC)

for NorEast, described in the table below.

   Ww}P2(

SHORT-RUN BEHAVIOUR

Operate at a Loss: Total Approach

In Figure 6 we will illustrate the "operate at a loss" situation by focusing on total revenue and total cost information. This approach is called the Total Approach.

In the Total Approach we apply the following rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Total Revenue exceeds Total Variable Cost, the firm should operate.

Q2: If it operates, the best quantity, q*, is that quantity which maximizes: Profit = (Total Revenue -Total Cost).

Q3: The best dollar profit is the total dollar profit (or loss) earned at q*.

 #  v_u?a[2((

q tonnes

  kXb`2((

TFC

 fWf{ 2((

1

  fWf{ 2((

2

W` fWf{ 2((

3

 fWf{ 2((

4

 fWf{ 2((

5

  s逭2((

Question 1: Should NorEast operate or shutdown in October? Answer: Compute

Total Revenue (TR) at each output level and compare TR with TVC at each q level.

Click here to continue.

!; fWf{ 2((

6

8` fWf{ 2((

7

p fWf{ 2((

8

 fWf{ 2((

9

  kbH 2((

$70

2  kbH 2((

$70

38` kbH 2((

$70

3p kbH 2((

$70

3 kbH 2((

$70

3  kbH 2((

$70

2W` kbH 2((

$70

 2 kbH 2((

$70

!2 kbH 2((

$70

"3  kXc`2((

TVC

# lb#7 2((

$100

$  lb#7 2((

$120

%X lb#7 2((

$130

& lb#7 2((

$150

' lb#7 2((

$200

(  lb#7 2((

$300

)8` lb#7 2((

$470

*p lb#7 2((

$730

+ lb(7 2((

1100

,  g2((

Total Cost

=TFC+TVC

-  hRW[2((

Total Revenue

TR = P x q

.p b82((

Price

=$51

/I  !W 0(($51 0  !W 0(($51 1X !W 0(($51 2 !W 0(($51 3 !W 0(($51 4  !W 0(($51 58` !W 0(($51 6p !W 0(($51 7 !W 0(($51 8 @ !"#$%&'()*+,-./012345678ഠe  v_u?a[2((

q tonnes

  kXb`2((

TFC

 fWf{ 2((

1

  fWf{ 2((

2

W` fWf{ 2((

3

 fWf{ 2((

4

 f Wf{ 2((

5

    x逭2((

Question 1: Should NorEast operate or shutdown in September? Answer: Compare

TR with TVC at each q level. There is at least one quantity, (e.g. q=3) where

TR exceeds TVC, so NorEast should operate. Click here to continue.

 !; f Wf{ 2((

6

 8` f Wf{ 2((

7

 p f Wf{ 2((

8

  fWf{ 2((

9

  kbH 2((

$70

2  kbH 2((

$70

38` kbH 2((

$70

3p kbH 2((

$70

3 kbH 2((

$70

3  kbH 2((

$70

2W` kbH 2((

$70

 2 kbH 2((

$70

!2 kbH 2((

$70

"3  kXc`2((

TVC

# lb#7 2((

$100

$  lb#7 2((

$120

%X lb#7 2((

$130

& lb#7 2((

$150

' lb#7 2((

$200

(  lb#7 2((

$300

)8` lb#7 2((

$470

*p l b#7 2((

$730

+  l!b(7 2((

1100

,!  "g2((

Total Cost

=TFC+TVC

-"  #hRW[2((

Total Revenue

TR = P x q

.#p $b82((

Price

=$51

/$I  %g8 2((

$102 = $51 x 2

0%Ė( &g8 2((

$153 = $51 x 3

1&ģ 'g9 2((

$204 = $51 x 4

2' (g9 2((

$255 = $51 x 5

3( )g8 2((

$306 = $51 x 6

4) *g9 2((

$357 = $51 x 7

5*( +g;/ 2((

$408 = $51 x 8

6+8 ,g;/ 2((

$459 = $51 x 9

7,H -g8w 2((

$51 = $51 x 1

8-Ȇ9:9Půq tonnes

7  k8Xb`2((

TFC

8 f9Wf{ 2((

1

9  f:Wf{ 2((

2

:W` f;Wf{ 2((

3

; f<Wf{ 2((

4

< f=Wf{ 2((

5

=  >9倭2((

Question 2: What quantity level should NorEast produce in October? Answer:

Compute (TR-TC) or total profit at each q level. Noreast should produce the q

that yields the maximum profit or minimum loss. Click here to continue.

>!; f?Wf{ 2((

6

?8` f@Wf{ 2((

7

@p fAWf{ 2((

8

A fBWf{ 2((

9

B  kCbH 2((

$70

C2  kDbH 2((

$70

D38` kEbH 2((

$70

E3p kFbH 2((

$70

F3 kGbH 2((

$70

G3  kHbH 2((

$70

H2W` kIbH 2((

$70

 I2 kJbH 2((

$70

!J2 kKbH 2((

$70

"K3  kLXc`2((

TVC

#L lMb#7 2((

$100

$M  lNb#7 2((

$120

%NX lOb#7 2((

$130

&O lPb#7 2((

$150

'P lQb#7 2((

$200

(Q  lRb#7 2((

$300

)R8` lSb#7 2((

$470

*Sp lTb#7 2((

$730

+T lUb(7 2((

1100

,U  Vg2((

Total Cost

=TFC+TVC

-V  jWb^ 2((

TR

.W 怆/ !XW 0(($51 ?X  !YW 0(($51 @YX !ZW 0(($51 AZ ![W 0(($51 B[ !\W 0(($51 C\  !]W 0(($51 D]8` !^W 0(($51 E^p !_W 0(($51 F_ !`W 0(($51 G`  ab82((

Price

=$51

HaI  #b_H`0(($102 Ib((cX Y@lx ((VZJc+dXilx ((XH\Kd #eXX`0(($255 Le+fXMalx (*I PPMf #g_U`0(($357 Ng( #h_U`0(($408 Oh8+iXMalx (+!] (PPPiH*jXOY@lx ((PCVQj@  !"#$%&'()*+,-./?@ABCDEFGHIJKLMNOPQPbekxP%'Ask\p"䊄=1O8b\,3%X!dGB.gq}[Iz*Kr5䔀zbt%X!dAK[d9/Lep"A !/\~e=-Ke%!Ked8cP\a+G"r?%X#tH.gq^| %F2NáOk lO逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

Compute (TR-TC) or total profit at each q level. Noreast should produce 5

tonnes as this yields the minimum loss ($15). Click here to continue.

l!; vm_u?a[2((

q tonnes

?m  knXb`2((

TFC

@n foWf{ 2((

1

Aoz  pWf{ 0((2 BpzW` qWf{ 0((3 Cqz rWf{ 0((4 Drz *sg)W 0(( best q =5 Esxc tWf{ 0((6 Ft{8` uWf{ 0((7 Gu{p vW 0(( 8 Hvc wWf{ 0((9 Iw{  "xbH 0(($70 Jx2  "ybH 0(($70 Ky38` "zbH 0(($70 Lz3p "{bH 0(($70 M{3 "|bH 0(($70 N|3  "}bH 0(($70 O}2W` "~bH 0(($70 P~2 "bH 0(($70 Q2 "bH 0(($70 R3  kXc`2((

TVC

S #b#7 0(($100 T  #b#7 0(($120 UX #b#7 0(($130 V #b#7 0(($150 W #b#7 0(($200 X  #b#7 0(($300 Y8` #b#7 0(($470 Zp #b#7 0(($730 [ #b(7 0((1100 \  3g0((Total Cost =TFC+TVC ]  !b^ 0((TR ^  "bH 0((170 _  "bH 0((190 `X "bH 0((200 aꏠ "bH 0((220 b "bH 0((270 c  "bH 0((370 d8` "bH 0((540 ep "bH 0((800 f #b(7 0((1170 g  4h[0((Total Profit = TR-TC hp .hy0(($-119 = 51-170 iԇ -hR0(($-88 =102-190 jt( -hR0(($-47= 153-200 kt .hw0(($-16 = 204-220 l .hw0(($-15 = 255-270 m .hw0(($-64 = 306-370 n /hdS_0(($-183 = 357-540 o( /hdS_0(($-392 = 408-800 p8 0hV0(($-711 = 459-1170 qH !W 0(($51 r  !W 0(($51 sX !W 0(($51 t !W 0(($51 u !W 0(($51 v  !W 0(($51 w8` !W 0(($51 xp !W 0(($51 y !W 0(($51 z  )b80((Price =$51 {I  #_H`0(($102 |(}c~d #XX`0(($255 f #_U`0(($357 ( #_U`0(($408 8iHj@?@ABCDEFGHIJKLMNOPQRSTUVWXYZ[\]^_`abcdefghijklmnopqrstuvwxyz{|~P^`exP%'Ask\p"䊄=1O8b\,3%X!dGB.| }[Hzbt%X!dAK[Uzb 9/Lep"䔀0Y}^p*Y{/C`0YΗY%̲܍p ƠH8VEQB#e+pSHYzZ3/K[UYz[,  ?逭2((

Question 3: Find the maximum dollar profit possible in September? Answer:

At the best q level of 5 tonnes a month, there will be an economic

loss of $15 as shown in the table below. Click here to continue.

!; v_u?a[2((

q tonnes

?  kXb`2((

TFC

@ fWf{ 2((

1

Az  Wf{ 0((2 BzW` Wf{ 0((3 Cz Wf{ 0((4 Dz Wf{ 0((6 E{8` Wf{ 0((7 F{p W 0(( 8 Gc Wf{ 0((9 H{  "bH 0(($70 I2  "bH 0(($70 J38` "bH 0(($70 K3p "bH 0(($70 L3 "bH 0(($70 M3  "bH 0(($70 N2W` "bH 0(($70 O2 "bH 0(($70 P2 "bH 0(($70 Q3  kXc`2((

TVC

R #b#7 0(($100 S  #b#7 0(($120 TX #b#7 0(($130 U #b#7 0(($150 V #b#7 0(($200 W  #b#7 0(($300 X8` #b#7 0(($470 Yp #b#7 0(($730 Z #b(7 0((1100 [  3g0((Total Cost =TFC+TVC \  !b^ 0((TR ]  "bH 0((170 ^  "bH 0((190 _X "bH 0((200 `ꏠ "bH 0((220 a "bH 0((270 b  "bH 0((370 c8` "bH 0((540 dp "bH 0((800 e #b(7 0((1170 f  4h[0((Total Profit = TR-TC gp .hy0(($-119 = 51-170 hԇ -hR0(($-88 =102-190 it( -hR0(($-47= 153-200 jt .hw0(($-16 = 204-220 k .hw0(($-15 = 255-270 l .hw0(($-64 = 306-370 m /hdS_0(($-183 = 357-540 n( /hdS_0(($-392 = 408-800 o8 0hV0(($-711 = 459-1170 pH !W 0(($51 q  !W 0(($51 rX !W 0(($51 s !W 0(($51 t !W 0(($51 u  !W 0(($51 v8` !W 0(($51 wp !W 0(($51 x !W 0(($51 y  )b80((Price =$51 zI  #_H`0(($102 {(|c}d #XX`0(($255 ~f #_U`0(($357 ( #_U`0(($408 8iHj *g)W 0(( best q =5 xc@    ?@ABCDEFGHIJKLMNOPQRSTUVWXYZ[\]^_`abcdefghijklmnopqrstuvwxyz{|}~PBeTiyv%C%ڹj(#ͱ.gu v^ qnZB-.1.fb]O@  wX `2(

Figure 6b: Operate at a Loss: Total Approach: Graphic Example

  l  Xw}P2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Total Approach

In Figure 4 we will illustrate the "operate at a profit" situation by focusing on total revenue and total cost information. This approach is called the Total Approach.

In the Total Approach we apply the following rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Total Revenue exceeds Total Variable Cost, the firm should operate.

Q2: If operates, the best quantity, q*, is that quantity which maximizes: Profit = (Total Revenue -Total Cost).

Q3: The best dollar profit is the total dollar profit (or loss) earned at q*.

 # fWf{ 2((

1

 @ fWf{ 2((

2

@ fWf{ 2((

3

+@ fWf{ 2((

4

 fWf{ 2((

5

D fWf{ 2((

6

 fWf{ 2((

7

t fWf{ 2((

8

  fWf{ 2((

9

 fWf{ 2((

0

` gW{ 2((

TC

( gW{ 2((

TR

 | o2((

q in tonnes per month

 dh k 2((

Given a graph of the Total Revenue and Total Cost Curve, we can describe

Total Profit as the vertical distance between the TR and TC curves, at any

quantity level. Since, at each q, the TC curve is above the TR curve, a loss

is inevitable. We therefore look for the smallest vertical distance or loss.

   s99%f   w^X2((

At q = 1 tonne the total profit of $-119 can be shown as the red vertical

distance between the Total Cost and Total Revenue curves, as shown

below. Click here to continue.

 !; i W `2((

-119

? @?PVe" s99%Ts;p@   w`X2((

At q = 2 tonnes the total profit of $-88 can be shown as the red vertical

distance between the Total Cost and Total Revenue curves, as shown

below. The loss is getting smaller! Click here to continue.

 !; i W `2((

-119

?  h W `2((

-88

@ +@?@PVeT) s9N9d%fsj0wY   w`X2((

At q = 3 tonnes the total profit of $-47 can be shown as the red vertical

distance between the Total Cost and Total Revenue curves, as shown

below. The loss is getting smaller! Click here to continue.

 !; i W `2((

-119

?  h W `2((

-88

@ + h W `2((

-47

A +`@?@APVeT1 y!' X%fsj0wY@   w`X2((

At q = 4 tonnes the total profit of $-16 can be shown as the red vertical

distance between the Total Cost and Total Revenue curves, as shown

below. The loss is getting smaller! Click here to continue.

 !; i W `2((

-119

?  h W `2((

-88

@ + h W `2((

-47

A +` h W `2((

-16

B `@?@ABP\e8 yn܏X%fsj0wY@/Fnu   w`X2((

At q = 5 tonnes the total profit of $-15 can be shown as the red vertical

distance between the Total Cost and Total Revenue curves, as shown

below. The loss is at a minimum at q = 5! Click here to continue.

 !; i W `2((

-119

?  h W `2((

-88

@ + h W `2((

-47

A +` h W `2((

-15

B Hx h W `2((

-16

C `@?@ABCPZdL y&PԀ%@5xU\k;^f7jp   w`X2((

At q = 6 tonnes the total profit of $-64 can be shown as the red vertical

distance between the Total Cost and Total Revenue curves, as shown

below. After q = 5, the loss gets larger. Click here to continue.

 !; i W `2((

-119

?  h W `2((

-88

@ + h W `2((

-47

A +` h W `2((

-15

B Hx h! W `2((

-16

C! ` h" W `2((

-64

D" 8 # w(2((

At every q, the TC curve is above the

TR curve, which means a loss at every q.

The best quantity is q =5 tonnes, as this

minimizes losses at $15 for NorEast.

E# i l$ _Z`2((

best q

F$  @    ?@ABCDEF?̆tC~2 % wX `2(

Figure 6c: Why Operate at a Loss. Why Not Shutdown?

 %  l  X& w}P2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Total Approach

In Figure 4 we will illustrate the "operate at a profit" situation by focusing on total revenue and total cost information. This approach is called the Total Approach.

In the Total Approach we apply the following rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Total Revenue exceeds Total Variable Cost, the firm should operate.

Q2: If operates, the best quantity, q*, is that quantity which maximizes: Profit = (Total Revenue -Total Cost).

Q3: The best dollar profit is the total dollar profit (or loss) earned at q*.

 & # A' N_ A2((

In the last figure, we noted that if NorEast operates, the best it could do would

be to earn a loss of $15 per month. In this market situation, would it not be

better to simply shutdown during the month of October?

Answer: Since this is the short run, NorEast must still pay out its total fixed costs

of $70, if it shuts down. Since total revenue would be zero, total profit would

equal (TR - TC) = ($0 - $70)= $-70 profit or $70 loss, if NorEast shuts down.

You can see that NorEast is better off operating at 5 tonnes with a profit of $-15

($15 loss) compared to shutting down and having a loss of $70.

.

This is because, for the 5 tonnes produced, the TR of $255 exceeds the

TVC of $200, by $55. This means that the 5 tonnes contribute $55 towards

paying for the $70 fixed costs.

Thus, compared to shutting down, the loss is reduced from $70 to ($70 - $55)

or to a $15 loss if NorEast operates at 5 tonnes a month.

Click here to continue.

 '   @    : X( w}P2(

SHORT-RUN BEHAVIOUR

Operate at a Profit: Total Approach

In Figure 4 we will illustrate the "operate at a profit" situation by focusing on total revenue and total cost information. This approach is called the Total Approach.

In the Total Approach we apply the following rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Total Revenue exceeds Total Variable Cost, the firm should operate.

Q2: If operates, the best quantity, q*, is that quantity which maximizes: Profit = (Total Revenue -Total Cost).

Q3: The best dollar profit is the total dollar profit (or loss) earned at q*.

 ( #  9PůClick here to exit Figure 7

+  , wX `2(

Figure 7a: Operate at a Loss: Unit Approach: Numeric Example

,  l  z- f?2((

In October the market price of pulp declined to $51 per tonne due to a world-wide

recession. Your chore is to answer the 3 SR questions for NorEast for the month

of October, given TFC =$70 and given the average variable costs (AVC), average

total costs (ATC) and marginal costs (MC) as described in the table below.

-   ^. w}2(

SHORT-RUN BEHAVIOUR

Operate at a Loss: Unit Approach

In Figure 7 we will illustrate the "operate at a loss" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If it operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

. # / V?倭2((

Question 1: Should NorEast operate or shutdown in October? Answer: Compare

the price with AVC at each output level. Since there are quantity levels where the

Price exceeds AVC, NorEast should operate. Click here to continue.

/ !; v0 _u?a[2((

q tonnes

0   k1 Xc_`2((

AVC

1  f2 Wf{ 2((

1

2  ` f3 Wf{ 2((

2

3 X f4 Wf{ 2((

3

4  f5 Wf{ 2((

4

5  f6 Wf{ 2((

5

6   f7 Wf{ 2((

6

7 8` f8 Wf{ 2((

7

8 p f9 Wf{ 2((

8

9  f: Wf{ 2((

9

:   k; bH 2((

$50

; 8` n< a_ 2((

$67.14

< p n= a_ 2((

$91.25

 = ì o> aŽ 2((

$122.22

!>   k? bH 2((

$60

"? X n@ a_ 2((

$43.33

#@  nA a_ 2((

$37.50

$A  kB bH 2((

$40

%B   kC Xb`2((

ATC

&C ! lD b#7 2((

$170

'D  ` kE bH 2((

$95

(E X nF a_ 2((

$66.67

)F 2 kG bH 2((

$55

*G  kH bH 2((

$54

+H   nI a_ 2((

$61.67

,I 38` nJ a_ 2((

$77.14

-J 3p lK b#7 2((

$100

.K  lL b#7 2((

$130

/L   M b82((

Price

=MR

0M )  jN _H_`2((

$ 51

1N $ jO _H_`2((

$ 51

2O $( jP _H_`2((

$ 51

3P $ jQ _H_`2((

$ 51

4Q $ jR _H_`2((

$ 51

5R $ jS _H_`2((

$ 51

6S $ jT _H_`2((

$ 51

7T $( jU _H_`2((

$ 51

8U $( jV _H_`2((

$ 51

9V $H lW b#7 2((

$100

:W  ` jX X\?`2((

MC

;X y lY b#7 2((

$100

<Y  ` kZ bH 2((

$20

=Z  X k[ bH 2((

$10

>[   k\ bH 2((

$20

?\   k] bH 2((

$50

@]   l^ b#7 2((

$100

A^ 8` l_ b#7 2((

$170

B_ p l` b#7 2((

$260

C`  la b#7 2((

$370

Da  @ !"#$%&'()*+,-./0123456789:;<=>?@ABCDPad b oO2((

Click here to exit Figure 7

b  9PůQuestion 2: What quantity level should NorEast produce in October? Answer:

In this case, produce the 1st tonne, even though MR is less than MC, as you will

find that MR will exceed MC, at larger quantities. Click here to continue.

c !; vd _u?a[2((

q tonnes

d   ke Xc_`2((

AVC

e  kf Xb`2((

ATC

f ! g b82((

Price

=MR

g )  jh X\?`2((

MC

h y i og`2((

In producing and selling the

1st tonne, the extra revenue

gained (MR) of $ 51 is less than

the extra cost of $100. However,

produce the 1st tonne as the MR

will end up exceeding MC at

larger quantity levels.

i  mj Wf{ 02(

1

j  ` lk b#7 2((

$170

k  ` ql _H_`2(

$ 51

l $ lm b#7 2((

$100

m  ` sn b#7 02(

$100

n  `@P]eT o 逭2((

Question 2: What quantity level should NorEast produce in October? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

2nd tonne as MR=$51 exceeds MC=$20. Click here to continue.

o !; vp _u?a[2((

q tonnes

p   kq Xc_`2((

AVC

q  fr Wf{ 2((

1

r  ` ms Wf{ 02(

2

s X kt bH 2((

$60

t X ku Xb`2((

ATC

u ! lv b#7 2((

$170

v  ` kw bH 2((

$95

w X x b82((

Price

=MR

x )  jy _H_`2((

$ 51

y $ qz _H_`2(

$ 51

z $( l{ b#7 2((

$100

{  ` j| X\?`2((

MC

| y l} b#7 2((

$100

 }  ` r~ bH 02(

$20

!~  X  oO2((

In producing and selling the

2nd tonne, the extra revenue

gained (MR) of $51 exceeds

the extra cost of $20. The 2nd

tonne contributes $31 towards

fixed costs and possibly a profit.

" @ !"P]pe  逭2((

Question 2: What quantity level should NorEast produce in October? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

3rd tonne as MR=$51 exceeds MC=$10. Click here to continue.

 !; v _u?a[2((

q tonnes

   k Xc_`2((

AVC

  f Wf{ 2((

1

  ` f Wf{ 2((

2

 X m Wf{ 02(

3

  k bH 2((

$60

 X n a_ 2((

$43.33

  k Xb`2((

ATC

 ! l b#7 2((

$170

  ` k bH 2((

$95

 X n a_ 2((

$66.67

 2 b82((

Price

=MR

 )  j _H_`2((

$ 51

 $ j _H_`2((

$ 51

 $( q _H_`2(

$ 51

! $ l b#7 2((

$100

"  ` j X\?`2((

MC

# y l b#7 2((

$100

$  ` k bH 2((

$20

%  X r bH 02(

$10

&    oO2((

In producing and selling the

3rd tonne, the extra revenue

gained (MR) of $51 exceeds

the extra cost of $10. The 3rd

tonne contributes $41 towards

fixed costs and possibly a profit.

' @ !"#$%&'P]pe  逭2((

Question 2: What quantity level should NorEast produce in October? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

4th tonne as MR=$51 exceeds MC=$20. Click here to continue.

 !; v _u?a[2((

q tonnes

   k Xc_`2((

AVC

  f Wf{ 2((

1

  ` f Wf{ 2((

2

 X f Wf{ 2((

3

  m Wf{ 02(

4

  k bH 2((

$60

 X n a_ 2((

$43.33

  n a_ 2((

$37.50

  k Xb`2((

ATC

 ! l b#7 2((

$170

  ` k bH 2((

$95

 X n a_ 2((

$66.67

 2 k bH 2((

$55

  b82((

Price

=MR

! )  j _H_`2((

$ 51

" $ j _H_`2((

$ 51

# $( j _H_`2((

$ 51

$ $ q _H_`2(

$ 51

% $ l b#7 2((

$100

&  ` j X\?`2((

MC

' y l b#7 2((

$100

(  ` k bH 2((

$20

)  X k bH 2((

$10

*   r bH 02(

$20

+    oO2((

In producing and selling the

4th tonne, the extra revenue

gained (MR) of $51 exceeds

the extra cost of $20. The 4th

tonne contributes $31 towards

fixed costs and possibly a profit.

, @ !"#$%&'()*+,P]eT  逭2((

Question 2: What quantity level should NorEast produce in October? Answer:

Continue to expand q, when MR (Price) exceeds MC. NorEast should produce the

5th tonne as MR=$51 exceeds MC=$50. Click here to continue.

 !; v _u?a[2((

q tonnes

   k Xc_`2((

AVC

  f Wf{ 2((

1

  ` f Wf{ 2((

2

 X f Wf{ 2((

3

  f Wf{ 2((

4

  m Wf{ 02(

5

   k bH 2((

$60

 X n a_ 2((

$43.33

  n a_ 2((

$37.50

  k bH 2((

$40

   k Xb`2((

ATC

 ! l b#7 2((

$170

  ` k bH 2((

$95

 X n a_ 2((

$66.67

! 2 k bH 2((

$55

"  k bH 2((

$54

#   b82((

Price

=MR

$ )  j _H_`2((

$ 51

% $ j _H_`2((

$ 51

& $( j _H_`2((

$ 51

' $ j _H_`2((

$ 51

( $ q _H_`2(

$ 51

) $ l b#7 2((

$100

*  ` j X\?`2((

MC

+ y l b#7 2((

$100

,  ` k bH 2((

$20

-  X k bH 2((

$10

.   k bH 2((

$20

/   r bH 02(

$50

0    oO2((

In producing and selling the

5th tonne, the extra revenue

gained (MR) of $51 exceeds

the extra cost of $50. The 5th

tonne contributes $1 towards

fixed costs and possibly a profit.

1 @ !"#$%&'()*+,-./01P[e y6%FAeIsZ!my%j1?)!D\^&DrP\cl*   v _u?a[2((

q tonnes

   k Xc_`2((

AVC

  f Wf{ 2((

1

  ` f Wf{ 2((

2

 X f Wf{ 2((

3

  f Wf{ 2((

4

  f Wf{ 2((

5

   m Wf{ 02(

6

 8` k bH 2((

$50

 8` k bH 2((

$60

 X n a_ 2((

$43.33

  n a_ 2((

$37.50

  k bH 2((

$40

   k Xb`2((

ATC

 ! l b#7 2((

$170

  ` k bH 2((

$95

! X n a_ 2((

$66.67

" 2 k bH 2((

$55

#  k bH 2((

$54

$   n a_ 2((

$61.67

% 38` b82((

Price

=MR

& )  j _H_`2((

$ 51

' $ j _H_`2((

$ 51

( $( j _H_`2((

$ 51

) $ j _H_`2((

$ 51

* $ j _H_`2((

$ 51

+ $ q _H_`2(

$ 51

, $ l b#7 2((

$100

-  ` j X\?`2((

MC

. y l b#7 2((

$100

/  ` k bH 2((

$20

0  X k bH 2((

$10

1   k bH 2((

$20

2   k bH 2((

$50

3   s b#7 02(

$100

4 8`  O逭2((

Question 2: What quantity level should NorEast produce in October? Answer:

The best q = 5 tonnes a month. NorEast should NOT produce the 6th tonne as

MR ($51) is less than the MC ($100). Click here to continue.

5 !; u oY2((

Do NOT produce the 6th tonne,

as it adds $100 to costs (MC),

but only $51 to revenue (MR).

Stop at 5 tonnes a month.

At larger quantities, the MC

continues to exceed MR.

6  h@ !"#$%&'()*+,-./0123456P`dH v _u?a[2((

q tonnes

   k Xc_`2((

AVC

  f Wf{ 2((

1

  ` f Wf{ 2((

2

 X f Wf{ 2((

3

  f Wf{ 2((

4

  m Wf{ 02(

5

   k bH 2((

$60

 X n a_ 2((

$43.33

  n a_ 2((

$37.50

  k bH 2((

$40

  k Xb`2((

ATC

 ! l b#7 2((

$170

  ` k bH 2((

$95

 X n a_ 2((

$66.67

  2 k bH 2((

$55

!  r bH 02(

$54

"    b82((

Price

=MR

# )  j _H_`2((

$ 51

$ $ j _H_`2((

$ 51

% $( j _H_`2((

$ 51

& $ j _H_`2((

$ 51

' $ q _H_`2(

$ 51

( $ l b#7 2((

$100

)  ` j X\?`2((

MC

* y l b#7 2((

$100

+  ` k bH 2((

$20

,  X k bH 2((

$10

-   k bH 2((

$20

.   k bH 2((

$50

/    =倭2((

Question 3: What is the dollar amount of the maximum profit? Answer: At q*=5

ATC = $54, so the profit per tonne = P - ATC = $51 - 54 = $-3.00 per tonne.

At 5 tonnes total profit =$-3.00 x 5 = $-15.00. Click here to continue.

0 !;  o`2((

In computing total profit compare

price and average total cost, at

the best quantity level. At 5 tonnes

a month, NorEast will earn a profit

per tonne of $51 - 54 = $-3.00.

If NorEast produces 5 tonnes, the

total profit will be $-3 x5 = $-15.

1 ̈@ !"#$%&'()*+,-./01PIctz yPEcx((%,8*cXoiC\8pU8G48CfF rnz;aKiRb^6.'6E@#@ lv}:=-gԣ \3dYvy<ZZ# ͤ46Egq4x F @&ȣ69N#gցh5|fcg3h j=h6sN͑g3h j=h663fcg3yj=h6s5͑g3yj=h669fcg3yj=h6s Ftz6ZZ# ͤ9Ls;>gցj3i1sNcFm 6s;>gցh9Tfcg3yj=h6sNFm 6s;>gցh90dhϧG`b0`ڌ@s+g3yj=h669Ls;>gցj3i1r͑Fm 6s;>F֣ցh+y<ZZ# ͤ4ggӁrMgQ@`Fp.d(ͤ;ϧg5b0`s6Eϧg5b0`ڌ@#@ `\3dQHhϧg5b0`6EFvy<ZZ# \dQHhϧG`b0`˫6}F-Gfcg3o&ϳb0`ڌ@#@ lv}8-y<ZϩF QHhϧ   wX `2(

Figure 7b: Operate at a Loss: Unit Approach: Graphic Example

  l   g"O2((

Price,

Costs

per tonne

   o2((

NorEast's demand curve

 \8 i _D_`2((

AVC

 X  W_ 0((9  L  W_ 0((7  (  W_ 0((6  ((  W_ 0((5    W_ 0((4   ! W_ 0((3 !  " W_ 0((2 " ϓ  # W_ 0((1 #   $ W_ 0((8 $ ( {% o2((

q = tonnes per month

% ]( Q& XB2((

Your chore is to answer the 3 SR questions for NorEast for the month of October,

given the price of $51 per tonne and given per unit cost curves, as shown below.

&   p' g(' 2((

Price = MR

' C' [( w}2(

SHORT-RUN BEHAVIOUR

Operate at a Loss: Unit Approach

In Figure 7 we will illustrate the "operate at a loss" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

( # U) O2((

Question 1: Should NorEast operate or shutdown in October? Answer: Compare

the demand (price) curve with the AVC curve. Since there are quantities such as

q =3 where the demand curve is above AVC (Price exceeds AVC), NorEast

should operate. Click here to continue.

 ) !@ * w (2((

If q = 3 tonnes, the Price of $51 exceeds the AVC of $43.33.

Since it is possible to operate where Price exceeds AVC,

NorEast can contribute a positive amount towards covering

its fixed costs, if it operates.

!*  q+ g( 2((

Price = $51

"+ +1 r, g1w 2((

AVC = $43.33

#, }W`@ !"# @dzPO8_d%- yRcM(((%LfF.S3Gs𙀹撸"ndon#9=ŚոC}}4{av^~8҄5L ؘs^Ti@RAThzS6ҠyWAS9^-̏4\ؗ*~Cx.~>pIsyj=h669 @#@ lv};<G/Chl3i14x F @(9N#GkQ@`6#69N#GkQ@` P@#@ lv};<G/Chr3i14x F @ шͤ4ggӳz10m8G]@ lv};<Gf ggӳz10mFm 0/Cy9N#GkQ@`Fv};<Gfc-  . wX `2(

Figure 7b: Operate at a Loss: Unit Approach: Graphic Example

.  l  Q/ XB2((

Your chore is to answer the 3 SR questions for NorEast for the month of October,

given the price of $51 per tonne and given per unit cost curves, as shown below.

/   f0 W_ 2((

0

0 [ f1 W_ 2((

1

1  f2 W_ 2((

2

2 л f3 W_ 2((

3

3  f4 W_ 2((

4

4  f5 W_ 2((

5

5 8( f6 W_ 2((

6

6 ,( f7 W_ 2((

7

7  ( f8 W_ 2((

8

8 ( f9 W_ 2((

9

9 ( : g"O2((

Price,

Costs

per tonne

:  p; g- 2((

P =$51= MR

; * g< W 2((

MC

< ,b@ {= o2((

q = tonnes per month

= WH l> _Z`2((

best q

> I  [? w}2(

SHORT-RUN BEHAVIOUR

Operate at a Loss: Unit Approach

In Figure 7 we will illustrate the "operate at a loss" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

 ? # @ O逭2((

Question 2: What quantity level should NorEast produce in September? Answer:

When presented with a per unit graph, the best quantity is where MR = MC, at

q = 5 tonnes per month. Click here to continue.

!@ !  TA omိ2((

The best quantity level is where

MR =MC, when MC is rising, which

is at q = 5 tonnes per month.

"A 1@ !"?Pe`?B yRcMfM(((f(#%4%}̹L$eZ^Ncf\Jq-R% |\Ӌ4Kqs=(-ŸƸfk.dYclK8 s#{q,֭з"KG,Ғv^#H65L |.G a{( ٝPiGl5sV@|8ޅ|LG56e& zS.΁g`s2sqЬ18 lDF֣ցh75Fvy<ZZ# ^hϧg5b0`ڌ@zCYvy<ZZ# ͤ4jcFm 6s;>F֣ցh:UFvy<ZZ# ^tfcg3h j=h6zc6s;>F֣ցj3iq+g3h j=h66=uϧg5b0`ڌ@#@ `B  C wX `2(

Figure 7b: Operate at a Loss: Unit Approach: Graphic Example

C  l  QD XB2((

Your chore is to answer the 3 SR questions for NorEast for the month of October,

given the price of $51 per tonne and given per unit cost curves, as shown below.

D   fE W_ 2((

0

E [ fF W_ 2((

1

F  fG W_ 2((

2

G л fH W_ 2((

3

H  fI W_ 2((

4

I  fJ W_ 2((

5

J 8( fK W_ 2((

6

K ,( fL W_ 2((

7

L  ( fM W_ 2((

8

M ( fN W_ 2((

9

N ( O g"O2((

Price,

Costs

per tonne

O  lP _i`2((

P =$51

P  2  gQ W 2((

MC

Q \b@ {R o2((

q = tonnes per month

R WH lS _Z`2((

best q

S I  [T w}2(

SHORT-RUN BEHAVIOUR

Operate at a Loss: Unit Approach

In Figure 7 we will illustrate the "operate at a loss" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

 T # mU g! 2((

ATC=$54

!U J V Y2((

Question 3: What is the dollar amount of the maximum profit? Answer: At q*=5

ATC = $54, so the profit per tonne = P - ATC = $51 - 54 = $-3 per tonne = $3 loss

per tonne = height of rectangle shown below. At 5 tonnes, total loss = $3 x 5

= $15 = shaded area of rectangle abcd shown below. Click here to continue.

"V  @ gW W 2((

$3

#W  nX _}?`2((

5 tonnes

$X 3'%[cBsL(Y r%뱋kܗ++`&Y '|t\(Zs iZ _B`2((

ATC

)Z  f[ W_ 2((

a

*[ B f\ W_ 2((

b

+\   f] W^ 2((

c

,] PҸ f^ W_ 2((

d

-^ CM` o_ oိ2((

Area of rectangle

abcd = height x width

$3 x 5 tonnes =$15 loss

._ ס`@ !"#$%&'()*+,-. [` w}2(

SHORT-RUN BEHAVIOUR

Operate at a Loss: Unit Approach

In Figure 7 we will illustrate the "operate at a loss" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

` # 0a om0((End of Figure 7 a m@ ? @d}Px} b oO2((

Click here to exit Figure 8

b  c wX `2(

Figure 8: Shutdown: Total Approach: Numeric Example

c  l  6d O_2((

In November the market price of pulp declined even further to a price of $30 per

tonne. Your chore is to answer the 3 SR questions for NorEast for the month

of November, given the Total Fixed costs (TFC) and Total Variable Costs (TVC)

for NorEast.

d   Ye w}P2(

SHORT-RUN BEHAVIOUR

Shutdown at a Loss: Total Approach

In Figure 8 we will illustrate the "shutdown at a loss" situation by focusing on total revenue and total cost information. This approach is called the Total Approach.

In the Total Approach we apply the following rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Total Revenue exceeds Total Variable Cost, the firm should operate.

Q2: If it operates, the best quantity, q*, is that quantity which maximizes: Profit = (Total Revenue -Total Cost).

Q3: The best dollar profit is the total dollar profit (or loss) earned at q*.

e #  vf _u?a[2((

q tonnes

 f   kg Xb`2((

TFC

 g  fh Wf{ 2((

1

 h   fi Wf{ 2((

2

 i W` fj Wf{ 2((

3

j  fk Wf{ 2((

4

k  fl Wf{ 2((

5

l   m s逭2((

Question 1: Should NorEast operate or shutdown in November? Answer: Compute

Total Revenue (TR) at each output level and compare TR with TVC at each q level.

Click here to continue.

m !; fn Wf{ 2((

6

n 8` fo Wf{ 2((

7

o p fp Wf{ 2((

8

p  fq Wf{ 2((

9

q   kr bH 2((

$70

r 2  ks bH 2((

$70

s 38` kt bH 2((

$70

t 3p ku bH 2((

$70

u 3 kv bH 2((

$70

v 3  kw bH 2((

$70

w 2W` kx bH 2((

$70

x 2 ky bH 2((

$70

y 2 kz bH 2((

$70

z 3  k{ Xc`2((

TVC

{  l| b#7 2((

$100

 |   l} b#7 2((

$120

!} X l~ b#7 2((

$130

"~  l b#7 2((

$150

#  l b#7 2((

$200

$   l b#7 2((

$300

% 8` l b#7 2((

$470

& p l b#7 2((

$730

'  l b(7 2((

1100

(   g2((

Total Cost

=TFC+TVC

)   hRW[2((

Total Revenue

TR = P x q

* p b82((

Price

=$30

+ I  h W 2((

$30

,   h W 2((

$30

- X h W 2((

$30

.  h W 2((

$30

/  h W 2((

$30

0   h W 2((

$30

1 8` h W 2((

$30

2 p h W 2((

$30

3  h W 2((

$30

4  @     !"#$%&'()*+,-./01234PYeT  v _u?a[2((

q tonnes

   k Xb`2((

TFC

  f Wf{ 2((

1

   f Wf{ 2((

2

 W` f Wf{ 2((

3

  f Wf{ 2((

4

  f Wf{ 2((

5

    p_逭2((

Question 1: Should NorEast operate or shutdown in November? Answer: Compare

TR with TVC at each q level. There is NOT one quantity where TR exceeds

TVC, so NorEast should shutdown. Click here to continue.

 !; f Wf{ 2((

6

 8` f Wf{ 2((

7

 p f Wf{ 2((

8

  f Wf{ 2((

9

   k bH 2((

$70

 2  k bH 2((

$70

 38` k bH 2((

$70

 3p k bH 2((

$70

 3 k bH 2((

$70

 3  k bH 2((

$70

 2X k bH 2((

$70

 2 k bH 2((

$70

 2 k bH 2((

$70

 3  k Xc`2((

TVC

  l b#7 2((

$100

   l b#7 2((

$120

! X l b#7 2((

$130

"  l b#7 2((

$150

#  l b#7 2((

$200

$   l b#7 2((

$300

% 8` l b#7 2((

$470

& p l b#7 2((

$730

'  l b(7 2((

1100

(   g2((

Total Cost

=TFC+TVC

)   hRW[2((

Total Revenue

TR = P x q

* p b82((

Price

=$30

+ I  g6O 2((

$ 60 = $30x 2

, D( g6 2((

$ 90 = $30 x 3

- , g9 2((

$120 = $30 x 4

.   g9 2((

$150 = $30 x 5

/   g8 2((

$180 = $30 x 6

0 $ g9 2((

$210 = $30 x 7

1  ( g;/ 2((

$240 = $30 x 8

2 8 g;/ 2((

$270 = $30 x 9

3 H g6O 2((

$30 = $30 x 1

4 DȆ569Pů$30

;   h W 2((

$30

< X h W 2((

$30

=  h W 2((

$30

>  h W 2((

$30

?   h W 2((

$30

@ 8` h W 2((

$30

A p h W 2((

$30

B  h W 2((

$30

C  @      !"#$%&'()*+,-./012345;<=>?@ABCPyP  G_逭2((

Question 2: What quantity level should NorEast produce in November? Answer:

Since NorEast should shutdown, the best quantity is q* = 0 tonnes.

Click here to continue.

 !; @ ?PyE e  ̀2((

Question 3: Find the maximum dollar profit possible in November. Answer:

If NorEast shutsdown, there will be no revenue, but NorEast must still

pay the Total Fixed Cost of $70. Therefore there will be a loss equal to the

Total Fixed Cost of $70. This is the minimum loss possible at a price

of $30 per tonne. If NorEast operates, there would be an even bigger loss.

Click here to continue.

 !;@  6 V w}P2(

SHORT-RUN BEHAVIOUR

Shutdown at a Loss: Total Approach

In Figure 8 we will illustrate the "shutdown at a loss" situation by focusing on total revenue and total cost information. This approach is called the Total Approach.

In the Total Approach we apply the following rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Total Revenue exceeds Total Variable Cost, the firm should operate.

Q2: If operates, the best quantity, q*, is that quantity which maximizes: Profit = (Total Revenue -Total Cost).

Q3: The best dollar profit is the total dollar profit (or loss) earned at q*.

 #9PůClick here to exit Figure 9

  wX `2(

Figure 9a: Shutdown at a Loss: Unit Approach: Numeric Example

  l  V w}2(

SHORT-RUN BEHAVIOUR

Shutdown at a Loss: Unit Approach

In Figure 9 we will illustrate the shutdown at a loss" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

 # 9 O_2((

In November the market price of pulp declined even further to a price of $30 per

tonne. Your chore is to answer the 3 SR questions for NorEast for the month

of November, given theTotal Fixed costs (TFC), the $30 price, and per unit

costs for NorEast.

    p_倭2((

Question 1: Should NorEast operate or shutdown in November? Answer: Compare

the price with AVC at each output level. Since there is NOT one quantity level

where Price exceeds AVC, NorEast should shutdown. Click here to continue.

 !; v _u?a[2((

q tonnes

   k Xc_`2((

AVC

  f Wf{ 2((

1

  ` f Wf{ 2((

2

 X f Wf{ 2((

3

  f Wf{ 2((

4

  f Wf{ 2((

5

   f Wf{ 2((

6

 8` f Wf{ 2((

7

 p f Wf{ 2((

8

  f Wf{ 2((

9

   k bH 2((

$50

 8` n a_ 2((

$67.14

 p n a_ 2((

$91.25

 ì o aŽ 2((

$122.22

   k bH 2((

$60

 X n a_ 2((

$43.33

!  n a_ 2((

$37.50

"  k bH 2((

$40

#   k Xb`2((

ATC

$ ! l b#7 2((

$170

%  ` k bH 2((

$95

& X n a_ 2((

$66.67

' 2 k bH 2((

$55

(  k bH 2((

$54

)   n a_ 2((

$61.67

* 38` n a_ 2((

$77.14

+ 3p l b#7 2((

$100

,  l b#7 2((

$130

-   b82((

Price

=MR

. )  j _H_`2((

$ 30

/ $ j _H_`2((

$ 30

0 $( j _H_`2((

$ 30

1 $ j _H_`2((

$ 30

2 $ j _H_`2((

$ 30

3 $ j _H_`2((

$ 30

4 $ j _H_`2((

$ 30

5 $( j _H_`2((

$ 30

6 $( j _H_`2((

$ 30

7 $H l b#7 2((

$100

8  ` j X\?`2((

MC

9 y l b#7 2((

$100

:  ` k bH 2((

$20

;  X k bH 2((

$10

<   k bH 2((

$20

=   k bH 2((

$50

>   l b#7 2((

$100

? 8` l b#7 2((

$170

@ p l b#7 2((

$260

A  l b#7 2((

$370

B  @ !"#$%&'()*+,-./0123456789:;<=>?@ABPd(`  oO2((

Click here to exit Figure 9

 9PůQuestion 2: What quantity level should NorEast produce in November? Answer:

If NorEast shutsdown, the best quantity =0 tonnes. Click here to continue.

 !;@PLhrt p wQuestion 3: What is the dollar amount of the maximum profit? Answer: If

Noreast shutsdown, the best quantity = q* = 0 tonnes. This means that

even though NorEast will still pay out its fixed costs of $70, it will have

no revenue coming in during the month of November. The minimum loss

will equal Noreast's Total Fixed Costs of $70. This can also be stated as

a best profit of $-70. Click here to continue.

 !;@  PKct  yPEcx((%,8*cXsFDQS!sC}3Dڜ_IËI8q_*\*Dd*rvbyϧgQ@`F\uћHhϧgQ@` on0`ڌ@#@ lv}:=-Gv3h j=h669 In3i14xR6sGgӳb0`ڌ@#@ lp.jvy<ZZ# ͤ4g]ۼϧg5b0`ڌ@#@ lp.gUv};F֣ցj3ig3s-Fm 6s;>gցh>};<Gfcg3snjF QHhϧg5`:};<Gfcg3s-Fm 6s;>F֣ցh9tfcg3h j=h6sngӳz10mFm 6s8>btfcg3h j=h6sg3h j=h66>&};<Gfcg3s/]Fm 6s;>F֣ցh+tfggӳz10m#[@#@ lv};<G.d5v}:=-gԣ ͤ4]Fvy< F @V볙4x F QHw-tfcg3h j=h6r-Fm 6s;>F֣ցh,jtfcg3yj=h6r֭g3yj=h66    wX `2(

Figure 9b: Shutdown at a Loss: Unit Approach: Graphic Example

   l   g"O2((

Price,

Costs

per tonne

   o2((

NorEast's demand curve

 X i _D_`2((

AVC

 X  W_ 0((9  L  W_ 0((7  (  W_ 0((6  ((  W_ 0((5    W_ 0((4    W_ 0((3    W_ 0((2  ϓ   W_ 0((1     W_ 0((8  ( { o2((

q = tonnes per month

 ]( R yB2((

Your chore is to answer the 3 SR questions for NorEast for the month of November,

given the price of $51 per tonne and given per unit cost curves, as shown below.

   Z w}2(

SHORT-RUN BEHAVIOUR

Operate at a Loss: Unit Approach

In Figure 7 we will illustrate the "operate at a loss" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

 # Y p_2((

Question 1: Should NorEast operate or shutdown in November? Answer: Compare

the demand (price) curve with the AVC curve. Since there is NO quantity where

the demand curve is above AVC (Price is always below AVC), NorEast

should shutdown. Click here to continue.

 !@  w 2((

You can see that no matter what quantity NorEast

produces, the demand or price curve is always below

the average variable cost curve. NorEast should shutdown.

 ` q g( 2((

Price = $30

 ` r g1w 2((

AVC = $37.50

  }c@   ?Px  wX `2(

Figure 9b: Shutdown at a Loss: Unit Approach: Graphic Example

   l  R yB2((

Your chore is to answer the 3 SR questions for NorEast for the month of November,

given the price of $51 per tonne and given per unit cost curves, as shown below.

    Z w}2(

SHORT-RUN BEHAVIOUR

Operate at a Loss: Unit Approach

In Figure 7 we will illustrate the "operate at a loss" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

 #  0Ѐ2((

Question 2: What is the best quantity to produce in November? Answer: Since

NorEast should shutdown, the best quantity = 0 tonnes.

Question 3: What is the best dollar profit? Answer: If it shutsdown, NorEast

will minimize losses at $70 which is its Total Fixed Cost.

Click here to continue.

 !@@   Z w}2(

SHORT-RUN BEHAVIOUR

Operate at a Loss: Unit Approach

In Figure 7 we will illustrate the "operate at a loss" situation by focusing on revenue and cost per unit (i.e per tonne) information.

In the Unit Approach we use these rules to answer the 3 SR questions:

Q1: Operate this period? If the firm can find one output level where Price exceeds Average Variable Cost, the firm should operate.

Q2: If operates, continue to expand quantity whenever marginal revenue exceeds marginal cost. In theory, the best quantity, q*, is that quantity where MR equals MC.

Q3: The best total dollar profit is: At q*, compute: (P* - ATC*) x q*

  # 0 om0((End of Figure 9   m@  ?@dP^`^$  oc2((

Click here to exit Figure 10

  y[cCOx(((%c n%YĴA7YZqfn*@ 5 Lג Qz=^,Η%nZ6I4lN%LL2FќF _/'2Yt8LT&fBhglף=V XhO6> έ4ӳz10mFm 6s8;8Ϥfggӳz10m@#@ lv}:=-G.rI,vy<ZZ# ͤ4g5@#@ lv};<G.{,vy<ZZ# ͤ4g@#@ lv};<G.~y9N#gցj3i23Ftz6ZZ# \@Y4x F QHh>3Fvy<ZZ# \>Hhϧg5` rh >F-Gfcg3s6Fm 6s;>F-G.o),vy< F QHh3Ftz6ZZ# \#>HhϧgQ@` =ϧg5b0`ڌ@#@ lp.џHͤ;ϧg5b0`[OgQHhϧg5b0`|3m 6s;>F֣ցh.ϴfcg3lz10m@#@ lv}:=-G.Zlv};<Gfc*ϧG``F\C>vy<ZZ# ͤ44N#GkQ@`gq}34x F QHh g3i1l< F @  ! 2(

Figure 10a: Deriving The Individual Firm's Short-Run Supply Curve

!  l  b" E?B2((

Given the individual firm's (NorEast's) marginal cost curve and average variable

cost curve, we ask "for a given price, how much will NorEast wish to supply?"

"   # w2(

SHORT-RUN SUPPLY CURVE

In Figure 10 we will apply concepts presented in previous figures to

derive the firm's and the industry's short-run supply curve in Pure Competition.

Recall from the demand and supply tutorial that the firm's supply curve describes the quantity that the firm wishes to supply at different possible prices.

As you will see, in Figure 10a, the portion of the firm's marginal cost curve lying above its average variable cost curve is the firm's short-run supply curve.

In Figure 10b, you will begin to view the industry supply curve as the horizontal sum of all of the firms' marginal cost curves.

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0

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MC

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q = tonnes per month

& ó p' g-/ 2((

AVC=$37.50

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AVC

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MC

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AVC

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exceeds AVC, the firm should operate. To maximize profits, the firm will

supply 8 tonnes, where MR (Price) = MC. Click here to continue

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P1 =MR1=$260

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8

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Click here to exit Figure 10

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At a price of $170 what quantity will the firm supply? Answer: Since this price

exceeds AVC, the firm should operate. To maximize profits, the firm will

supply 7 tonnes, where MR (Price) = MC. Click here to continue

2   r3 g7 2((

P1 =MR1=$260

3 v r4 g7 2((

P2 =MR2=$170

4 |` f5 W_ 2((

7

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8

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At a price of $100 what quantity will the firm supply? Answer: Since this price

exceeds AVC, the firm should operate. To maximize profits, the firm will

supply 6 tonnes, where MR (Price) = MC. Click here to continue

8   r9 g7 2((

P1 =MR1=$260

9 v r: g7 2((

P2 =MR2=$170

: |` r; g7 2((

P3 =MR3=$100

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7

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6

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At a price of $50 what quantity will the firm supply? Answer: Since this price

exceeds AVC, the firm should operate. To maximize profits, the firm will

supply 5 tonnes, where MR (Price) = MC. Click here to continue

@   rA g7 2((

P1 =MR1=$260

A v rB g7 2((

P2 =MR2=$170

B |` rC g7 2((

P3 =MR3=$100

C | fD W_ 2((

7

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8

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P4 =MR4=$50

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5

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At a price of $30 what quantity will the firm supply? Answer: Since this price

is below the minimum AVC=$37.50, the firm should shutdown.

Click here to continue.

J   rK g7 2((

P1 =MR1=$260

K v rL g7 2((

P2 =MR2=$170

L |` rM g7 2((

P3 =MR3=$100

M | fN W_ 2((

7

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8

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6

!P T qQ g3 2((

P4 =MR4=$50

"Q ` fR W_ 2((

5

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P5 =MR5=$30

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Figure 10a: Deriving The Individual Firm's Short-Run Supply Curve

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Given the individual firm's (NorEast's) marginal cost curve and average variable

cost curve, we ask "for a given price, how much will NorEast wish to supply"?

V   fW W_ 2((

0

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MC=Supply Curve

X <` {Y o2((

q = tonnes per month

Y ó iZ _D_`2((

AVC

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AVC=$37.50

[ / \ w2(

SHORT-RUN SUPPLY CURVE

In Figure 10 we will apply concepts presented in previous figures to

derive the firm's and the industry's short-run supply curve in Pure Competition.

Recall from the demand and supply tutorial, that the firm's supply curve describes the quantity that the firm wishes to supply at different possible prices.

As you will see, in Figure 10a, the portion of the firm's marginal cost curve lying above its average variable cost curve is the firm's short-run supply curve.

In Figure 10b, you will begin to view the industry supply curve as the horizontal sum of all of the firms' marginal cost curves.

\ #?  o] U?퀭2((

If we join all the positive quantity supplied points we will derive the firms supply curve which is that portion of the MC curve above minimum AVC.

Click here to continue.

]   r^ g7 2((

P1 =MR1=$260

^ v r_ g7 2((

P2 =MR2=$170

_ |` r` g7 2((

P3 =MR3=$100

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7

a t fb W_ 2((

8

b  fc W_ 2((

6

c T qd g3 2((

P4 =MR4=$50

d ` fe W_ 2((

5

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Figure 10b: Deriving The Industry's Short-Run Supply Curve

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Given NorEast's marginal cost curve and assuming that the pulp industry is

made up of 100 identical firms, derive the short-run market supply curve.

h   fi W_ 2((

0

i [ {j o2((

q = tonnes per month

j a9 k w2(

SHORT-RUN SUPPLY CURVE

In Figure 10 we will apply concepts presented in previous figures to

derive the firm's and the industry's short-run supply curve in Pure Competition.

Recall from the demand and supply tutorial, that the firm's supply curve describes the quantity that the firm wishes to supply at different possible prices.

As you will see, in Figure 10a, the portion of the firm's marginal cost curve lying above its average variable cost curve is the firm's short-run supply curve.

In Figure 10b, you will begin to view the industry supply curve as the horizontal sum of all of the firms' marginal cost curves.

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5

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NorEast's MC Curve

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$50

p ' q >퀭2((

At the price of $50 per tonne, Point a shows an individual quantity supplied of 5 tonnes. If you click on Point a below, the market quantity supplied of

(5 tonnes x 100 firms) = 500 tonnes per month will display at Point A.

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5

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NorEast's MC Curve

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$50

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Point A is one point on the industry or market supply curve for pulp.

Click again on Point a in the graph below to proceed.

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500

w x fx Wm 2((

A

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NorEast's MC Curve

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$100

| ` } >퀭2((

At the price of $100 per tonne, Point b shows an individual quantity supplied of 6 tonnes. If you click on Point b below, the market quantity supplied of

(6 tonnes x 100 firms) = 600 tonnes per month will display at Point B.

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NorEast's MC Curve

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6

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600

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Point B is another point on the industry or market supply curve for pulp.

Click again on Point b in the graph below to proceed.

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B

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A

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$100

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7

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NorEast's MC Curve

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$170

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At the price of $170 per tonne, Point c shows an individual quantity supplied of 7 tonnes. If you click on Point c below, the market quantity supplied of

(7 tonnes x 100 firms) = 700 tonnes per month will display at Point C.

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7

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NorEast's MC Curve

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$170

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B

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A

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C

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700

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Point C is another point on the industry or market supply curve for pulp.

Click again on Point c in the graph below to proceed.

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NorEast's MC Curve

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$260

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At the price of $260 per tonne, Point d shows an individual quantity supplied of 8 tonnes. If you click on Point d below, the market quantity supplied of

(8 tonnes x 100 firms) = 800 tonnes per month will display at Point D.

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8

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NorEast's MC Curve

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$260

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Point D is another point on the industry or market supply curve for pulp.

Click again on Point d in the graph below to display the market supply curve.

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B

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A

 ,8 f Wt 2((

C

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D

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800

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8

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NorEast's MC Curve

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$260

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The market supply curve is the horizontal sum of all the firms' marginal cost

curves. Click here to continue.

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B

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A

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D

 oX h W{ 2((

800

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C

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Market Supply Curve is

derived from firm MC Curves

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SHORT-RUN SUPPLY CURVE

In Figure 10 we will apply concepts presented in previous figures to

derive the firm's and the industry's short-run supply curve in Pure Competition.

Recall from the demand and supply tutorial, that the firm's supply curve describes the quantity that the firm wishes to supply at different possible prices.

As you will see, in Figure 10a, the portion of the firm's marginal cost curve lying above its average variable cost curve is the firm's short-run supply curve.

In Figure 10b, you will begin to view the industry supply curve as the horizontal sum of all of the firms' marginal cost curves.

 # 1 oa0((End of Figure 10  m@ ? @d @dPhf o?2((

Click here to exit Figure 11

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Figure 11a: Graph of Long-Run Equilibrium

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q = tonnes per month

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Q = tonnes per month

  oI2((

Typical Pulp Firm: NorEast

  o2((

Industry: All Pulp Firms

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Price = $53

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$53

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S

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MC

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D

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ATC

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e

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$ per

tonne

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$ per

tonne

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LONG-RUN BEHAVIOUR

Long-run Equilibrium

The long-run is a time period sufficient to allow new firms to enter the industry.

In the long-run, in Pure Competition, the typical firm will end up in "long-run equilibrium" where the price will just equals minimum average total cost (P=min ATC), which implies that

1. the firm earns zero economic profit or a "normal profit" as P=ATC.

2. the firm is productively efficient, as the quantity, q, is at min ATC.

3. the firm is allocatively efficient, as P=MC for the last unit of output produced. There is no shortage or surplus of the product.

Figure 11 explains how the typical firm ends up at long-run equilibrium.

 # f W_ 2((

5

 ` h W{ 2((

500

   jĀ2((

In the long-run, the typical pulp firm is at point e below, where zero economic profit

(normal profit) is earned as P = ATC = $53 per tonne. The firm is productively

efficient, as the quantity, q, is at 5 tonnes, where ATC is at a minimum. Finally, at

q = 5 tonnes, Price = MC = $53. This means that the consumer value of the last

tonne produced (P) just equals the extra cost of producing the last tonne (MC).

There is no shortage or surplus in this industry.

   w~ `2((

To see how the typical firm ends up in "long-run equilibrium" click here .

 !`@     PF_ o?2((

Click here to exit Figure 11

  9PůK]5!l.a=㵲zĸV?K%f. Pq = tonnes per month

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Q = tonnes per month

  oI2((

Typical Pulp Firm: NorEast

  o2((

Industry: All Pulp Firms

 ,x g W 2((

MC

 ł?` f Wt 2((

D

 |ޘ i _B`2((

ATC

 "N`  w 2(

LONG-RUN BEHAVIOUR

Long-run Equilibrium

The long-run is a time period sufficient to allow new firms to enter the industry.

In the long-run, in Pure Competition, the typical firm will end up in "long-run equilibrium" where the price will just equals minimum average total cost (P=min ATC), which implies that

1. the firm earns zero economic profit or a "normal profit" as P=ATC.

2. the firm is productively efficient, as the quantity, q, is at min ATC.

3. the firm is allocatively efficient, as P=MC for the last unit of output produced. There is no shortage or surplus of the product.

Figure 11 explains how the typical firm ends up at long-run equilibrium.

 # w  `2(

Figure 11b: Graph of Transition to Long-Run Equilibrium

  l ?< y%İĿfM((%ʪF֣ցj3i1h j=h669 ZV>F֣ցj3i1E3z10mFm 6s;> ZY>F֣ցj3i1̳h j=h669 T^<Gfcg3F3z10mFm 6s;> Ta<Gfcg3F43z10mFm 6s;> Td<Gfcg3Ff3z10mFm 6s;> Tg<Gfcg3F3z10mFm 6s;> Tk<Gfcg3h j=h669 Zm>F֣ցj3i1F3z10mFm 6s;> Zr>F֣ցj3i1h j=h669 Zu>F֣ցj3i1GG3z10mFm 6s;> :ggӳz10mFm 0/H_9N#GkQ@`F#نvy<ZZ# ͤ4gf1sh j=h669 :ggӳz10mFm 0/Hg0`ڌ@#@ lv};<G"j3i14x fc ͤ4ggӳz0 )U669N#GkQ@/Hl?9N#GkQ@`F#Suppose that we go back 50 years, when this pulp industry was an infant industry

where just a few firms were supplying pulp. In this case, the industry supply would

be very small, at S1, and the industry (market) price would be very high, at $170

per tonne. As the graph shows below, at $170 per tonne, the typical firm would be

earning short-run positive economic profit at q = 7 tonnes. To see what happens in

the long-run, click here to proceed.

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S1

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Price = $170

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$170

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7

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+ econ

profit

 B i _B`2((

ATC

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Q

" @ !"Pgc?4 y'DfM((%ʪF-G/Kc3i16yj=h6z^*HhϧgQ@` @#@ lv};F-G/KpN3i16yj=h6z^HhϧgQ@` ی@#@ lv};F-Gfc*ggӳb0`ڌ@#@ `   ud2((

In the long-run the price will not stay at $170. Attracted by positive economic profits

new firms will enter the pulp industry, causing the industry supply to increase, to

S2, as an example. At the higher industry supply, S2, the price that the firm can

charge decreases to $100. At the $100 price the typical existing firm earns a

lower positive economic profit, as shown below.

When will the new firms stop entering the pulp industry? Click here to proceed.

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6

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lower profit

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ATC

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' ( pr&@ !"%&'?PRgԿ y'-Ŀ(%ʪ"=II1}zW"b2%M1wb-þ(D8P^@e($(Q@9\ ԭPZ 3F-G/Kar3i16yj=h6z^1HhϧgQ@` $@#@ lv};0mggӳb0`ڌ@#@ `\SCћHhϧgQ@` Cj 9N#GkQ@`F&6yj=h660};The new firms will stop entering the pulp industry when each existing firm is just

earning a normal profit or zero economic profit. This means that once the price

drops to $53, the industry size should stabilize, with each firm's price just equal

to its minimum long-run average total cost-at point e, as shown below. Recall,

we call this situation "long-run equilibrium". At point e, with each firm earning zero

economic profit, there is no incentive for any more new firms to enter. Since each

firm is at its minimum long-run average total , there also is no incentive for existing

firms to change plant sizes. Click here to proceed.

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long-run q

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Price = $170

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$100

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$53

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Price = $53

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LONG-RUN BEHAVIOUR

Long-run Equilibrium

The long-run is a time period sufficient to allow new firms to enter the industry.

In the long-run, in Pure Competition, the typical firm will end up in "long-run equilibrium" where the price will just equals minimum average total cost (P=min ATC), which implies that

1. the firm earns zero economic profit or a "normal profit" as P=ATC.

2. the firm is productively efficient, as the quantity, q, is at min ATC.

3. the firm is allocatively efficient, as P=MC for the last unit of output produced. There is no shortage or surplus of the product.

Figure 11 explains how the typical firm ends up at long-run equilibrium.

 # 1 o0((End of Figure 11  m@