Short run equilibrium of the firm, Managerial Economics

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SHORT RUN EQUILIBRIUM OF THE FIRM

A firm is in equilibrium when it is maximizing its profits, and can't make bigger profits by altering the price and output level for its product or service.

In Short-run the firm may make super-normal profits as shown below:

2320_short run equilibrium.png

The firm will produce output q where Marginal Revenue is equal Marginal Cost.  At this level of output, the average cost is C.  Hence the firm will make super-normal profits shown by the shaded area.

In the Short-Run however the firm does not necessarily need to make profits or cover all its cost.  It may only need to cover Total Variable Cost.

437_short run equilibrium1.png

The firm's short-run supply curve will be represented by the part of the Marginal Cost curve that lie above the AVC.  The firm shall not produce unless the price is equal to P1.  Below the price P1 the firm minimizes its cost by shutting down.


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