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ECN 2020 Chapter 8-1 | Principles of Microeconomics w/Yan Shi | YouTubeToText
YouTube Transcript: ECN 2020 Chapter 8-1
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Video Summary
Summary
Core Theme
This lecture reviews cost functions and introduces the profit-maximizing rule for firms in a perfectly competitive market, which is to produce at the output level where price equals marginal cost (P=MC). It also explains how to determine economic and operating profits, and the conditions for a firm to operate in the short run or shut down.
I believe you
Okay, and so this quiz will be on consumer theory. That’s chapter
Chapter 6, okay? And we talked about chapter 7, and today we’re going to continue to
talk about chapter 8. And also Wednesday, we’re going to think about chapter 8. So,
this quiz will be on six, seven, eight. Okay?
So, I just announced that we’re going to have a quiz on Friday. And the quiz covers
chapter six, seven, eight, okay? I will not be here, so remember the last person who proctored
the first quiz. She’s going to be here to proctor the second quiz, okay?
“the lecture posted up?”
Yeah, I believe so. You know, usually they’re, you know they’re posted the same day.
“okay”
Any other questions? So make sure you be here okay on Friday, and she’s going to take
attendance as well. I believe we’re going to have an exam after, I think, chapter 9.
Okay, but we will see then. So, let’s continue on chapter 8. Okay, so last class, we started
talking about these optimal decisions on output.
And in order to derive the optimal decision on optimal output, I introduce to you a function.
It’s called cost function. And there we learned total cost is equal to total fixed cost plus total
variable cost. We learned average total cost is equal to total cost divided by total output.
Average fixed cost is equal to average total fixed cost divided by Q.
And average variable cost is equal to total variable cost divided by, okay?
And marginal cost equals to change of total cost divided by the change of the Q. Also
equal to change of total variable cost divided by change of Q.
So that’s what we learned last class from the cost function. Also, I showed you the
graph. This is average total cost. This is average variable cost. This is marginal cost.
This is dollar, and this is Q.
So that’s what we were at, okay, in the last class, okay. And then I did mention a
few profits like economic profit and operating profit. And we even mentioned the break-even
point, but I’m going to go over those things again. Okay?
So, I think the last time what I began with is, let’s suppose the price line was right
here and I asked you okay, is this firm making economic profit in two years you should answer
the question.
You say this firm is making positive or making negative economic profit if the price is here?
Negative or positive
“positive”
It’s negative economic profit but will be operating profit.
But I’m going to put those two terms here.
[student murmur]
Okay, let’s go over this. Alright. So, last class what we did with intuition was just look at price
to see where its located. If located between this point and this point, that means they’re
going to make a positive operating profit but not a positive economic profit.
Economic profit is equal to total revenue minus total cost. And operating profit is
equal to total revenue minus total variable cost. So, instead of using intuition today
we’re going to derive it in the graph.
Okay? So what we do is this. And so if we do it derive it on the graph, and we have
to calculate all these terms on the graph, okay?
Let me ask you what is total revenue equal to? What is the formula for total revenue?
“price times..”
P times Q, okay? Do we know the price here?
On the graph, on the graph do we know where the price is at?
“yes”
Yes we know the price. Okay yeah, I did not give you a number but you know where the price
is located. But do we know the output chosen by this firm?
[student murmur]
We do not know that yet. We do not know that one, actually that’s something the firm
needs to determine. Right? Okay. So, we’re going to talk about this first, okay? Once,
we know how to find this, then we go back to talking about this economic profit, operating
profit again.
Alright, so how do we derive this optimal output okay. We’re going to use a concept
we learned at the very beginning of this class, okay. In either the first class or the second
class. I introduced to you marginalism. Does anyone remember the concept of marginalism?
“a comparison between marginal benefits and marginal costs”
That’s right. It’s a comparison between the marginal benefit and the marginal cost.
And if a firm or an individual or country wants to make the optimal decision, then marginal
benefit or marginal cost, what kind of relationship they have to have?
In order to reach the optimal decision.
In order to reach the optimal decision, the marginal benefit of that decision has to be
equal to the marginal cost of that decision. And that is universal rule no matter what kind of decision
we’re talking about. If there is one rule, one principle you have to remember in this
class. Actually at the end of this class we’re going to have an evaluation of the the concepts
you learned. This is something different from the midterm and final exam. I just want to
know okay how well you have receive those economic concepts I have taught you.
So one of the things that will be on the exam is marginalism. This is the fundamental concept
in principle of microeconomics is that marginal benefit has to be equal to marginal cost in
order to reach the optimal decisions no matter what decision we’re talking about. No matter
what kind of decision we’re talking about. This is the fundamental principle in microeconomics.
I hope you all remember this, okay? Marginal benefit has to be equal to marginal cost of
the decision in order to reach the optimal decision making, okay?
So, look at this context here. What kind of decision are we talking about? A firm’s
decision, a firm’s decision output right? If we talk about firm’s decision output,
can you tell me how what is the marginal benefit?
So the firm determine should I produce here, should I produce here or should I produce
here? A firm’s decision where to produce to maximize the profit. Okay. And based on
marginalism, it says that marginal benefit of that decision has to equal to the marginal
cost. So if you say here this is optimal Q then the marginal benefit of that has to be
equal to the marginal cost of that. What is the marginal benefit? In this context?
“money”
Yes, it would be money.
“um, just additional benefits”
Every time you sell one more unit, you’re going to
gain some revenue, right? What is that additional revenue. iPhone costs $1,000 each. Every time
you sell one more iPhone, how much additional revenue they receive?
“1,000”
$1,000 so what is the
“more profit”
The price, that’s the price of that cell phone, right? Okay. So, in this context, marginal
benefit of a certain Q is just is just the price of that product. Because we’re talking
about perfect competitive market, each firm is a price taker so every time you sell
a good, you have to take the price determined by the market to sell the good at that price.
So, every time you sell one more unit, your additional gain is the price, okay? So, the
marginal benefit, we’re going to say is just the marginal revenue is just the price.
Do we know the price?
“yes”
We know it, okay? What about the marginal cost?
“additional cost it takes to make that product”
To make one more unit, right? Okay? Can we find it? Yes. Because we have the marginal
cost curve. If we know where is the output, then we can figure out marginal cost. So marginal
cost is right here and the price is right here. So, very good. Okay.
So, based on this, the optimal output has to be this equals to that. So, if this has
to be equal to that, then P has to be equal to M C.
So, this is the profit maximizing rule for finding Q star.
In a perfect competitive market. In a perfect competitive market, you have to remember it
is using the rule of marginal revenue equals to marginal cost.
So it is equivalent to that but thanks to marginal revenue equal to price, we just simplify
to this form. Okay?
Alright. So, very good. Are you guys following me on this? You guys questions, you guys have
questions on this?
So, I just told you P equal to MC is the profit maximizing rule. Which we’ll use marginalism
to derive, okay? Using marginalism, we can find the output based on this. Now, we have
the price here, we have the marginal cost curve. Can you tell me which output level
satisfies this condition?
Look at graph here. If you have the price, if you have the marginal cost, can you find
the point where marginal cost equal to price?
“yeah”
[student murmur]
Right?
So now we have answered question we need to answer with this. What is output firm
needs to produce, its right here. How do we find it? As long as you know the marginal
cost curve, as long as you know the market price of this good, you can find this.
Any questions on this?
Alright, so if we know Q star is right here, can you tell me the area that represents P
multiply Q star? The area that represents total revenue.
[student murmur]
Where is P multiply Q? Which area represents P multiple Q? That will be the total revenue.
“umm is it that rectangle”
Where is that? Is it right here?
“yeah”
This rectangle, right, is the total revenue because this is P, this distance is the value
of P and this distance is the value of Q star. And total revenue is this multiple this. So,
we know this whole area represents what? Total revenue
So we found total revenue. Now we’re going to find total cost and total variable cost.
Okay? I’m going to start with total variable cost. Could we find total variable cost on
the graph just like what we did for the total revenue?
“uh it’s the average variable cost times Q”
Very good, so now we’re going to use this formula. A V C multiply Q star, right? Okay.
So, do we know Q star right now? We know Q star, and we have A V C curve, yes we have
A V C curve so at Q star, what value of A V C.
“the point where they intersect”
So you draw this up to A V C then corresponding value here is A V C at Q star, okay? So now
do you see the area represents total variable cost. Do you see that? The area represents
total variable cost. So, question.
“There’s gonna be numbers in this right for the homework and test.”
Yeah, it should be. So they will ask you to calculate for the variable cost.
Alright if look like that area, is that smaller than the total revenue?
“yes”
Yes, so if it’s smaller than the total revenue, what operating profit going to be? Positive
or negative.
“negative”
“no that would be positive”
Positive right? Total revenue is bigger than total variable cost. So this one is going
to be positive, okay? You guys with me on this? Okay, now I want you to do the next
one. What’s next one? The total cost. I want you to derive the total cost just like
we did for the total variable cost. Then find the area that represent the total cost and
tell me whether total revenue is bigger or smaller than the total variable cost.
Some of you are not taking notes. When you’re not taking notes, you’re not processing
this information. Trust me, you’re just looking at it. You’re not writing down,
you’re not processing. The people who are writing down at least processed twice more
times than you have done. That’s why I’m asking even online course students to take
notes. Writing makes you think. So, that’s my opinion.
Okay, total cost, please write down how do you represent total cost.
Are you writing down. Are you writing it down?
[student murmur]
Think, you have the total variable cost here.
How do we derive the formula for total variable cost?
[student murmur]
You think the total cost formula is going be similar. So if it’s going to be similar,
what’s it going to be?
[student murmur]
A T C multiply Q star, right? It’s A T C multiply Q star, right? So write this down.
“A T C or A V C”
“A T C”
[student murmur]
“And where you have operating cost that is from T R minus T V C is greater than Q? Is
it Q star or just regular Q?”
“greater than 0, I’m sorry”
[student murmur]
So this is A T C multiply Q star, right? You see that? How about the area, which area represent
this? And where is A T C and Q star?
“so it’s bigger than the total revenue”
“total cost is higher than your total revenue”
So not we see the area that represent total cost, right? And it’s bigger or smaller
than total revenue?
“bigger”
Why only so few people answer the question? How about the rest of the class? If you don’t
ask questions, don’t let it go”
“I don’t know what kind of questions to ask”
You don’t know what question to ask, then think about it. Think about it. When you engage
your mind, then you can think of question. There is no silly question in this class.
The only silly thing to do is not ask questions.
[student murmur]
Yeah no silly questions. I want you to ask. I don’t want you to just sit there and just
watch this and let it go even though you don’t understand it. Not rocket science okay?
“so would it be uhh less than zero, I mean greater than zero or less than zero”
Okay, so the total revenue is this, right?
“yes”
How about total cost based on this?
“it's bigger than that”
It’s that right? So, if you use this area minus this big area what do you get?
“negative okay”
We’re going to get negative this. This adding a negative number and that’s our economic
profit. So, that’s why this is less than zero.
[student murmur]
“so when your um your average total cost is lower than umm than your price, then you’re
making profit right?”
That’s right, that’s right. So basically, you’re just comparing basically comparing
these three terms right? Okay. If the price is bigger than A T C, you’re making positive
profit. If it’s lower, you’re making a negative economic profit. Then when you determine
the operating profit, you compare price with A V C. So you’re basically comparing this
with that and that.
“so if the price was higher, they’d still be making positive profit.”
Yeah. If the price is higher than the A T C, you will be making positive economic profit.
Okay, so that’s why in the last class when we discussed okay whether economic profit
or operating profit is positive or not, we just look at the location of the price. Right?
We see okay if this location of the price is higher than lowest one of this, then eventually
this price will be higher than A T C, okay?
Okay, so but if talk about that. Just this graph question on this graph. If there’s
anything you don’t understand, ask me the question. There’s no silly questions. The
only silly thing is you don’t ask you don’t ask, yeah.
“so basically you’re saying if the price is higher than the average total cost and
average variable cost then you’re making economic and operating profit.”
That’s right. If the price is high enough, you’re going to make a positive profit on
both. That’s makes sense right? The market price is usually high and there is not so
much change in your production capacity or potential.
“and this is just in the short run, right?”
That’s good, that’s right, that’s right. We still in chapter 8 that’s short run.
In chapter 9 we’re going to talk about long run.
Have a question?
“this is about run”
Yes, she asked me whether this is still in short run, yes this is still in short run.
This chapter is still short run. The next chapter we’re going to talk about long run.
“long run is not going to be on the quiz correct?”
[student murmur]
On Friday
Yes
[student murmur]
Any other questions on this graph. Are you sure you understand this graph? I guarantee
you this kind of graph will be on the quiz. You’ll be given a graph, you’ll be given
numbers, you’ll be asking what is total cost, what is total variable cost, what is
total revenue. Is this firm making positive economic profit or not, is this firm making
positive output and profit or not.
And what is optimal output. Nothing different from this, but you do have to understand this.
“so we gotta remember all them little formulas”
Understand them then you don’t have to remember them. Understand them. Average average cost
is just total
divided by oput. If you think about it, this makes sense, right? Okay, and then the total
cost will be average multiply Q. Understand them. Make a friend with them, okay.
“so, on the quiz for economic and operating profit, um do you like, you just have to do
total revenue minus those and like you’ll get your like a number and then you go off that?”
So, I’m going to give you all the numbers, for example, okay. So, I gave you here is
a 20 of course, you know I’m going to give you multiple because I’m trying to confuse
you, right? I’m gonna give you this is 10, I’m going to give you this is 30 and maybe
another. You got to choose which one is optimal output first, right? Okay. And then, I’ll
give you let’s say this is 20, this is 30, this is 35, then I give you some other numbers.
You got to pick and choose which one you need to choose in order to calculate economic profit
or operating profit. So, you do need to understand the graph, okay? As long as you understand
the graph, you know which number to use.
“okay, so”
Good. Now you have a question.
“yeah. That is the, the Q is …”
Q star
“yeah”
Q star. How do
“alright, so if the price in that which is M C, that right there. That’s the answer
right?”
M C meets P. Find M C and P where they meet. And then the corresponding that’s the optimal.
Follow this formula here. So, the first step is use this formula.
“the stuff right there under the operating profit. All that is operating profit?”
No this is operating profit.
“then what’s the other stuff?”
This is economic profit.
“no, not that, the stuff under that”
This is total revenue. How do we calculate total revenue. This is how to calculate total
variable cost. This is how to calculate total cost.
“okay, is all that involved with operating profit?”
Yeah, you have to calculate the total revenue and the total variable cost in order to find
total operating profit, right?
“yeah”
There’s three terms you need to find: total revenue, total variable cost, and total cost.
Once you find those three terms, you’re able to find those two profits.
Work through this at home, work through this. We have some people who are very confident
that never take notes in this class.
Any other questions? I’m glad some of you are asking questions. Very good. Yeah, other
[student murmur]
Is everybody clear on those graphs? Because you’re going to see this on Friday, I guarantee
you will. And there is no difference from that.
“it’s all of this”
Yeah. Yeah, I’m not going to ask you to do everything. I’m probably just going to
ask you, okay please find the operating profit. I may not ask you to find economic profit.
But you do not know which one I’m going to ask, so you have to know all of them.
[student murmur] “so like in this scenario, you would still
operate that business even though it's not making
That’s right, okay, so that’s the next thing I’m going to talk about in terms of
short run and the long run running. Okay, but.
“okay, say if you ask operating profit, the actual operating profit would be if it’s
negative or positive?”
You can just give a negative or positive number.
“okay”
If it’s negative, it’s negative. If it’s positive, it’s positive.
“okay, and that would just be the operating, okay I got you”
That’s right, okay so the next question was after you find the economic profit operating
proft, I will ask this question here: Are we going to run in long run or short run?
“short run”
Okay, so that’s the next question to ask. Okay, long run, short run. Okay long run,
short run. So, how do we determine whether you’re going to you’re going to do the
long run, you take a look at
Economic profit. If you economic profit is positive, that means you cover all the fixed
costs, everything. Then you’re going to run like into the sixth year, seventh year,
even longer, ten years, okay. That’s long run.
How do we determine whether they going to run a short run the first year or second year,
you’re going to take a look at short run.
Operating profit, okay? You guys got it?
“so if it’s negative, it would be a short run”
Yeah
“okay”
If it’s positive, you’re going to run the short run in operating profit.
So, when you determine the long run, you look at economic profit. When you determine the
short run, you look at operating profit.
It’s this clear, clear.
“what did she say, she said its positive then”
She just asked you know, if. If let’s say I give you a price level that makes operating
profit negative and do we write down the negative number, yes you do, okay?
So if it’s negative profit, then you write down it’s negative profit.
“if it’s negative then you don’t run”
That’s right.
“wait if it’s negative, it’s not short run”
Yeah, if operating profit is negative, then you’re not going to run the short run.
[student murmur]
Or the long run, that’s true, yeah.
[student murmur]
Alright so in this, in this example, I only give you the scenario that the price is right
here, okay?
In the exam, I may give you a price that’s right here. Or the price is right here. Okay?
You know what I’m saying?
“you said something about price”
The price may be located differently maybe higher or lower.
[student murmur]
“can, can you explain. In our last class you put uh P zero equals operating profits
greater than zero run a short run”
Let me write down this like a framework
“it’s that right there but basically you gave three different prices.”
Yeah, I gave three different prices. I’m going to give another price right now.
“okay”
[student murmur]
What am I going to do between this?
P is right there.
“is P meeting with A V C..marginal cost. Is it running through or do they meet?”
That means you’re getting back what you’re putting in.
“I’m asking is the price meeting where”
The low is the point of A V C right here.
“so it’s at, it’s actually on A V C?”
The lowest point A V C
“okay”
Alright, so what would be the first question I ask you? The first thing you need to answer
in this graph.
“the uh Q star”
Very good. Great. You see asking questions makes you understand better. Q star. How do
we find Q star here?
“it’s where the marginal cost, it’s where marginal cost meets with price”
Where is that?
[murmur]
How about you? Where is that Q star?
“uh Q star it would meet with the ATC and go straight down”
So what’s the formula to use? What’s the formula to use. How do we find Q star?
“P equals M C”
Where is the P? Where is M C? Where do they meet?
“right there”
Where is the total revenue? Total revenue. Somebody here. How about you?
“total revenue”
Mhm, which are represents total revenue?
What’s the formula for total revenue?
“P times Q star”
Okay, do we know Q star?
“yeah”
Do we know where is the P?
“mhm”
Which area represents P multiply Q star?
This is the P, this is Q star.
“right there”
Right there. Total revenue is right here, right? Okay good.
So, you find the total revenue. Okay, somebody else tell me where is total
variable cost. How do we find the total variable cost. And the formula we’re going to use
A V C multiply Q, right? Okay, where is A V C at Q star?
Where is A V C, where is A V C multiply Q star, where is A V C at Q star?
“in uh, right there like the first point” Huh?
“the first point”
First one where?
“like, yeah”
Here?
“no”
Where is A V C curve?
“like the first point, yeah right”
This is A V C curve, right?
“yeah”
Okay, this is the A V C curve at Q star. Where is it?
“it’s right there, like where your marker is, right there. Stop moving, yeah”
What’s the value of A V C at Q star?
[student mumur]
“oh, its at the price, yeah”
“it’s zero, right?”
What is A V C’s value at Q star?
“we don’t know”
This is the point, this is the point right? How do you find the value on the graph?
“uh”
You draw the horizontal line to the vertical axis.
[student murmur]
So this is A V C value at Q star. Okay? That’s why how, just look at this. Q star go to the
A V C, horizontal value. That’s how you find the A V C A T C value, got it?
“is that how you get the T V C?”
So what is A V C value, here? Is it different from P star? It’s just the P, right?
“so it’s equal to P”
So what is total variable cost, then?
“P star”
[student mumur]
It’s just this square right?
“yes”
Because A V C multiply Q star, that’s total variable cost. It’s just the square, okay.
If the total revenue and the total variable cost is exactly the same, what does it mean?
“they’re getting back they’re putting out, right?”
Look at those terms. Would T, would total revenue equal to total variable cost,
what does it mean?
[student murmur]
“yeah”
Total variable cost equal to total revenue, which profit equal to zero?
“operating”
Operating profit is equal to zero. Okay, operating profit is equal to zero.
Alright, so.
[student mumur]
So when these two are equal, operating profit equal to zero. Alright so can somebody do
the total cost and make my life easier? Don't have to kind of dig dig deep to get this thing
out of you. Total cost, how do we find total cost?
[student murmur]
A T C. Where is A T C? I’m going to ask somebody here.
[student murmur]
“top curve”
Top curve, then what?
[student murmur]
Top curve is whole thing. You just use top curve?
[student murmur]
Hmm?
“half of the top curve”
Half of the top curve what?
[student murmur]
Of course. Where what meet. Q star, you see that Q star?
“yeah I see it”
Draw the Q star straight up to the A T C.
[student murmur]
Try.
“A T C”
The reason I’m doing that
is I don’t want to see a low grade anymore, okay?
We draw the Q star straight up A T C, right? This is your A T C add Q star. Did everyone see it
[student murmur]
Yes? Everybody see that? That’s A T C. Okay? Add Q star. At that A T C, what is total cost
area? What is total cost area?
The bigger.
[student mumur]
The bigger triangle, rectangle. The bigger rectangle, okay? So, if this is a total cost,
this is total revenue. What happens to our economic profit? It’s negative, right? Its
negative what? It’s negative this area. So, economic profit, we know in this one.
Is negative. What about operating profit?
“zero”
It’s equal to zero. Okay, so how are you going to answer the question about the long
run and the short run? Are you going to run the long run?
“no”
No in the long run. Okay, how about in a short run?
“yes”
How about in a short run. This time I’m going to ask you. I have to come back to you, right?
What’s going to happen how about in the short run?
[student murmur]
Okay, I don’t have to work this hard. To go after one after doing this. I don’t have
to. Okay most of the teachers here would not do this but I’m doing this. Because if I
do this, your grade may be two points higher, maybe three points higher. Please appreciate
this. This is not picking on any one of you. Just trying to make your grade higher. I don’t
get more money by how high your grade is, no. I still have the same salary. You know
it’s not affecting me that if you keep getting the, you know, I’m saying it’s really
going to lower.
“umm. How did you get economic profit?”
How do we what?
“how did you get economic profit”
Economic profit, economic profit is total revenue minus total cost. Where is total revenue?
“the bottom square”
Bottom square. Where is total cost, the bigger square, right?
“is it both of them combined?”
No, it’s one minus the other. One minus the other. So, it’s this small one minus
the bigger one. If the smaller minus bigger one, what are we going to get?
“a negative”
A negative. It’s negative above square.
…Square. Okay, so how about operating profit?
“wait, okay, never mind”
So, it’s this. But it’s negative. The economic profit is negative, right?
“it’s negative cause its about the average variable cost”
Yeah Yeah. It is negative because this is above the P star. That’s true, right? Yeah
but she was asking you okay how do we represent this negative profit. Negative profit is this
area. Negative value of this area. So if I gave you this is ten, this is five, this is
two. Now I’m asking you to find economic profit, what would it be?
[student murmur]
“ten”
Negative ten, right. So, this is five multiply two is ten, right? So, its negative ten. Or
you don’t have to borrow this, you just to follow this formula just write down
these three values and just subtract yourself later.
Okay, so if operating profit is equal to zero, what are we going to do?
Are we going to run or are we going to not run?
“short run”
We’re indifferent.
[student murmur]
Not run and running. So we have a name for this price level. There’s a name for this
price level called the shut down point. So, this one I want you to remember because I
will ask you what’s the meaning of shut down point.
The shut point means the price level that anytime is lower than that you’re not going
to run at all. You’re going to just close down this business. So, this is called the
shut down point.
“which one is that”
This is the price level. Every time you see the price is anywhere below that, you’re
going to shut down this business. So, this is
“so it can be equal to or below?”
Yes.
“okay”
So, that’s what we call a shut down price. Shut down point, okay.
[student murmur]
Okay, any question on this? We’re going to change the price now. We’re going to
change the price again.
[student murmur]
Any question there? So now we’re going to change the price again.
This time, I’m going to ask you to do everything yourself. This time I’m telling you the
prices right here.
And you calculate everything tell me what’s happening right now in the short run and the
long run.
[student murmur]
Okay, and then later on, I’m going to give you another name for that price level. So
this time, it’s not at the lowest of the A V C. It is at the lowest of the A T C. What’s
the first question to answer?
“q star”
Q star, now you are getting familiar. So, where is Q star first? Where the Q star?
“p equals M C”
Q star. Follow that formula P equal to M C, right? Do we know P? Okay, M C, right? Okay
so where is the, where is the Q star? This is the P, this is the M C, this is the point
where they meet, right? Q star right here.
So once you find Q star, you can find total revenue, total variable cost, and total cost.
All of this.
[student murmur]
I may covered this last class. I may have.
So where is the total revenue. Which area represents total revenue? It’s this big rectangle?
Okay, it’s this big one. Let’s just mark it. Okay, so if this is total revenue. I want
you to find the total cost this time. Total cost. Where is the total cost?
You sure? Absolutely?
Yes
“okay”
Yes, okay. It is the same area as the total revenue, right? It’s the same area as total
revenue. Because when you draw the Q star up to where?
“A T C”
A T C and this is A T C.
[student murmur]
"So, T R equal to"
T C. So what is economic profit?
“zero” If the economic profit equal to zero, what
about the long run. Are we going to run the long run?
“yeah, cause you’re still making profit.”
“you’re indifferent”
You’re indifferent! You’re indifferent, good! Good answer you’re indifferent.
So, we gave a name to this price that we called what? Somebody’s phone?
[student mumur]
What is this point. Somebody told me this name last class.
“break even point”
[student murmur]
Okay, so whenever the economic profit is equal to zero, that is breakeven point. That’s
“okay, so that means that an operating point is equal to…”
Yeah, when operating profit is equal to zero, that’s shut down. Economic profit equal
to zero that’s break even, yeah. Okay, so now we know economic profit, now we have to find
operating profit in this case. Where is the A, T V C? How do we find T V C? Now, you know
how to find it. You want to come here.
“yeah sure”
Why not?
[student murmur]
Okay, so we know Q star, we have the curve A V C, right? Okay, go ahead.
Very good, go ahead and draw that. Let’s make it a little bit prettier. Okay, let’s
make it prettier. Okay, so I’m going to connect this with you. Okay, so go ahead,
draw it straight up to the A V C right? Okay, that’s where they meet, then you draw the
horizontal line.
That’s good. So, this A, go ahead, right out A V C. Yeah A V C. A V C, let me write.
Okay, so this A V C value right? Okay, then here which area represents T V C.
“this area” Very good. Okay, so thank you. So, he got
it. So, this area represents the T V C, then do we make positive operating profit?
“yes”
Yes, which area is operating profit? The rest of it. The rest of it, right?
The operating profit is greater than zero. So how about the short run, do we run the
short run?
“yes”
Alright, so. So are you guys ready for this kind of question.
“no”
[student murmur]
They’re indifferent. They can run or not run. Yeah, break even point.
[student murmur]
I’m going to post the homework on, okay. Probably some time Tuesday.
[student chatter]
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