Quantity (Output of yo-yos)

Yo Yos in a purely competitive market $45 $40 $35 $30 Price MC $25 ATC $20 $15 AVC $10 $5 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity (Output of yo-yos)

Asking about “per-unit” is the same as asking about average

Remember! Price = Marginal Revenue • When the Price is $21.50 • The Marginal Cost of the 12th yo-yo is $21 • But the MC of the 13th yo-yo is $30 • So you stop output at the 12th yo-yo (MC=MR) • The ATC of the 12th yo-yo is $19.16 • Subtract ATC from MR to determine per unit profit • $21.50 - $19.16 = $2.34 per unit profit • $2.34 X 12 = approximately $28.00 total profit • Total Revenue (P x Q) = $21.50 X 12 = $258 • At 12 yo-yos, Total Cost is $230 • Profit is also equal to TR – TC (258-230=28)

Minimizing loss in the short-run:To consider operating with a loss, or shutting down Remember OPPORTUNITY COST and COST-BENEFIT ANALYSIS

Minimizing loss in the short-run: • When the price is $10.50 • MC of the 8th yo-yo is $9.50 • But the MC of the 9th yo-yo is $16.00 • So you stop output at the 8th yo-yo (MC=MR) • The ATC of the 12th yo-yo is $19.50 • Subtract ATC from MR to determine per unit loss • $10.50 - $ 19.50 = $9.00 per unit loss • $9.00 X 8 = approximately $72.00 total loss • Total Revenue (P x Q) = $10.50 X 8 = $84 • At 8 yo-yos, Total Cost is $156 • Loss is also equal to TR – TC (84-156=(-72))

So why stay open, in the short-run, if I’m losing economic profit? • Why make 8 yo-yo’s at a loss, rather than laying off my workers? • Because my fixed cost is $100.00 • The $100.00 I have to pay even if I don’t make any yo-yos • And $72 is less than $100 • The opportunity cost (losing $72) of hoping that demand will increase, is less than giving up (losing $100) and paying the expense out of pocket

Shutting down in the short-run: • When the price is $5.00 • MC of the 4th yo-yo is $5.00 • Even though the MC of the 5th yo-yo is $4.00 • Even at the minimum of MC, MR<AVC • Because I know that the distance between ATC and AVC is my FIXED COST • Whenever MR is less than the minimum of the Variable Cost curve • By definition: my loss will exceed my fixed cost

Shutting down in the short-run: • When the Price is $5.00 • The Marginal Cost of the 5th yo-yo is $4 • But the AVC of the 5th yo-yo is $6 • The ATC of the 5th yo-yo is $26 • Subtract ATC from MR to determine per unit loss • $5 - $26 = $21 per unit loss • $21 X 5 = $105.00 total loss • Total Revenue (P x Q) = $5 X 5 = $25 • At 5 yo-yos, Total Cost is $130 • Loss is also equal to TR – TC (25-130=(-105)) • And $105 is greater than $100, • give up and pay the $100

Quantity (Output of yo-yos)