HL Economics

Theory of Firm Diagrams

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The firm is making abnormal profit because the point where the MR and MC intersects is below the intersection between ATC and AR.

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The break even price is at the point of intersection between the marginal cost and average total cost. As for the shut down price, it is where the marginal cost and average variable cost is equalled to each other.

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The short run average total cost is shown in the orange curves and the long run average total cost is in blue.  The middle section shows the minimum efficient scale which has a bad factor. The left line (increasing returns to scale) is positive for the firm where as the right section (decreasing returns to scale) shows a negative effect.

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The top short section is elastic but the steep line on the right section is inelastic. The line in orange shows the stable price and quantity for the colluding firms, such as oligopolistic firms. The red line shows elasticity as a small change in price would cause a large change in the quantity demanded. The blue line shows a small change in quantity demanded shows a larger change in the price of the product.

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