00:01
So here we're talking about competition.
00:04
The goal of the firm is to maximize profit, and profit is equal to revenue minus costs.
00:14
That's not controversial.
00:17
The idea here is to max, you keep producing as long as revenue is going up faster than costs.
00:35
If your revenue is going up faster than costs, it means the difference between them is getting larger.
00:43
In mathematics, that's what we call setting the marginal revenue equals to the marginal cost.
00:51
The marginal revenue is the change in revenue, and the marginal cost is the change in cost with respect to more production.
01:03
So we're looking at producing another unit, or another 10 units, or another 100 units, and we're looking at, is the revenue going to more than cover the costs, and so increase profit.
01:13
And so that is, when you're thinking about the change in revenue and the change in cost, what we're effectively doing is saying, if we produce one more unit, does it give more to revenue and then costs? keep doing it until you've eliminated all those gains, at which point you should have the trade -off being equal.
01:29
Now, the other part of this is the shutdown.
01:33
You shut down if your price is less than your average variable cost.
01:41
The idea here is that your fixed costs are sunk.
01:47
You have to pay either way, or already paid.
01:52
So they don't factor into your economic decision...
