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Chapter Outline
9
Long-Run Costs and Output Decisions
Short-Run Conditions and Long- Run Directions
Maximizing Profits Minimizing Losses
The Short-Run Industry Supply Curve Long-Run Directions: A Review
Long-Run Costs: Economies and Diseconomies of Scale
Increasing Returns to Scale Constant Returns to Scale
Decreasing Returns to Scale
Long-Run Adjustments to Short-Run Conditions
Short-Run Profits: Expansion to Equilibrium Short-Run Losses: Contraction to Equilibrium
The Long-Run Adjustment Mechanism: Investment Flows toward Profit Opportunities
Output Markets: A Final Word Appendix: External Economies and
Diseconomies and the Long-Run Industry Supply Curve
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We begin our discussion of the long run by looking at firms in three short-run circumstances:
1 firms earning economic profits,
2 firms suffering economic losses but continuing to
operate to reduce or minimize those losses, and
3 firms that decide to shut down and bear losses just
equal to fixed costs.
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breaking even The situation in which a
firm is earning exactly a normal rate of return.
Example: The Blue Velvet Car Wash MAXIMIZING PROFITS
TABLE 9.1 Blue Velvet Car Wash Weekly Costs
TOTAL FIXED COSTS TFC TOTAL VARIABLE COSTS
TVC 800 WASHES TOTAL COSTS
TC = TFC + TVC 3,600
1. Normal return to investors 1,000
1. 2.
Labor Materials
1,000 600
Total revenue TR at P = 5 800 x 5
4,000
2. Other fixed costs maintenance contract,
insurance, etc. 1,000
1,600 Profit TR TC
400
2,000
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Graphic Presentation
FIGURE 9.1 Firm Earning Positive Profits in the Short Run
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