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Baldazo, Perfect Competition (Profit maximization (Find output level where…
Baldazo, Perfect Competition
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Profit maximization
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compare average revenue (price) and average total cost to determine the amount of profit (or loss) per unit of output
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Sunk Cost
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when sunk cost are high, then a market becomes less contestable
high sunk cost act as barrier to entry of new firms because they risk making significant losses if they decide to exit the sector
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The Shutdown Point
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As long as total revenue is more than total variable cost, temporarily producing at a loss is the firm’s best strategy since it is taking less of a loss than it would by shutting down.
Examples:
Owners of a chain of department stores decide to close over 100 stores after experiencing two years of losses
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Supernormal Profit
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Supernormal profit is also known as abnormal profit. Abnormal profit means there is an incentive for other firms to enter the industry. (if they can)
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