Is the difference between what the producer is paid , and the variable cost of production. Our variable costs are represented by our implicit and explicit costs. Suppose after meeting with the managers of Save-On-Foods, Thrifty Foods, etc. the manager of Alaythia Cakes has determined the best price they can get for the cupcakes is $2.3. By looking at where price intersects the supply curve, we can determine what quantity of cupcakes Alaythia Cakes will supply. Looking at Figure 3.4d, the MC of units 15 to 20 is $2.1, which is less than the price, but the MC of units 20 to 25 is $2.5, which is greater than price.
Unlike explicit costs, implicit costs aren’t money paid directly to others. Rather, an implicit cost is the opportunity cost of using an existing internal resource for producing one thing instead of another. Most typically, this is expressed as the forgone revenue that a business could have earned by using its resources for an alternative operation. For example, if a company owns the building where it operates, then it doesn’t pay any rent.
Calculate the economic profit of the company if the implicit costs are $30,000. Kate’s 24-Hour Breakfast Diner menu offers one item, a $5.00 breakfast special. Kate’s costs for servers, cooks, electricity, food, etc. average out to $3.95 per meal. Her costs for rent, insurance cleaning supplies and business license average out to $1.25 per meal. Raise her prices above the perfectly competitive level set by the market. Keep the business open in the short-run, but plan to go out of business in the long-run.
What happens if the price drops low enough so that the total revenue line is completely below the total cost curve; that is, at every level of output, total costs are higher than total revenues? In this instance, the best the firm can do is to suffer losses. However, a profit-maximizing firm will prefer the quantity of output where total revenues come closest to total costs and thus where the losses are smallest. The table below graphically shows total revenue and total costs for the raspberry farm, also appear in Figure 7.3. The horizontal axis shows the quantity of frozen raspberries produced in packs.
Less competition in a given market is likely to lead to higher prices and the possibility of higher super-normal profits. Another barrier to entry can occur when firms are able to own or control the necessary inputs or resources, and as a result, they may be able to control the market. In the 1940s the government accused Aluminum Co. of America of being a monopoly by controlling the mineral bauxite, an essential input for making aluminum. De Beers’ control of rough diamonds allowed it to control and set diamond prices. A natural monopoly is a firm that has a high level of costs that do not vary with output.
The next Chapter will explore how firms with market power determine optimal prices. Consumers are losers, and the benefits of monopoly depend on the magnitudes of areas A and C. Since a monopolist faces an inelastic supply curve , area A is likely to be larger than area C, making the net benefits of monopoly positive.
A computer company produces affordable, easy-to-use home computer systems and has fixed costs of $250. The marginal cost of producing computers is $700 for the first computer, $250 for the second, $300 for the third, $350 for the fourth, $400 for the fifth, $450 for the sixth, and $500 for the seventh. Create a table that shows the company’s output, total cost, marginal cost, average cost, variable cost, and average variable cost. Total revenue is going to increase as the firm sells more, depending on the price of the product and the number of units sold.
Whenever a shopkeeper sells a product, his motive is to gain some benefit from the buyer in the name of profit. Basically, when he sells the product more than its cost price, then he gets the profit on it but if he has to sell it for less than its cost price, then he has to suffer the loss. The purchase of a competitor’s stock and having interlocking directories, where the individuals are serving on both board of directors, are also illegal if they reduce competition. The Clayton Act also prohibits tie-in sales, where the purchase of one product is a condition of sale for another product. Later, the Celler-Kefauver Act of 1950 closed loopholes in the Clayton Act by restricting companies from the purchase of the physical assets of competitors.
If the firm were to continue producing, not only would it lose its fixed costs, but it would also face an additional loss by not covering its variable costs. The minimum level of average variable cost, which occurs at the intersection of the marginal cost curve and the average variable cost sarah skogland curve. Tony Gortari experiences a loss when price drops below ATC, as it does in Panel as a result of a reduction in demand. If price is above AVC, however, he can minimize his losses by producing where MC equals MR2. Here, that occurs at an output of 4,444 pounds of radishes per month.
