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Economics Grade 11 : Dynamics of markets

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Economics Grade 11 : Dynamics of markets

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- [Instructor] We are now going to discuss price elasticity of demand, which sounds like a very fancy concept, but really, it's a way for economists to sense how sensitive is quantity to change in prices. And in this video, we're gonna denote it as a capital E, so E, price elasticity of demand. And the easy way to think about it is it is your percent change in, I'll use the Greek letter delta as shorthand for change in here, percent change in quantity over your percent change in price. And so, you might say, wait, how does this relate to the everyday idea of elasticity? Well, imagine two bands. So, let's imagine an inelastic band, inelastic, right over here, and let's imagine an elastic band right over here. So, in an inelastic band, if we apply some amount of force, you're not going to be able to stretch it much, it might stretch a little bit, while an elastic band, if you apply that same amount of force, you might be able to stretch it a lot more. And so, the analogy here is we're not using force, but we're saying how much does quantity stretch for a given amount of price change? And so, something where the quantity changes a lot for a given price change would be very elastic. So, this, the magnitude of this will be larger. And if the percent change in quantity doesn't change a lot for a our given percent change in price, well, then we're dealing with an inelastic price elasticity of demand. And we'll be able to internalize these more as we work through the numbers. And actually, let's do that for this demand schedule that we have right over here, and it's visualized as our demand curve. In the vertical axis, we have price of burgers; and then in our horizontal axis, we have quantity, in terms of burgers per hour. And so, let's just use this definition of price elasticity of demand to calculate it across different points on our demand curve. So, I'm gonna make a new column here, so price elasticity of demand. And the way I'm gonna do it is really the simplest method for calculating this. In other videos, we can go into more in-depth methods, like the midpoint method. And I'll show you the weakness in what we're doing right here. But for the sake of, say, an AP economics, microeconomics course, this would be sufficient. So, let's think about our price elasticity of demand as we go from point A to point B. Well, remember, that's just going to be our percent change in quantity over our percent change in price. So, what is our percent change in quantity? Well, we're starting at a quantity of two, so I'll put that in our denominator. And we're going from two to four, so we are adding two. So, we have two over two, we could multiply that times 100% if we like. So, this would give us, we have 100% change in quantity over, now what was the corresponding change in price, percent change in price? So, our corresponding percent change in price, our initial price is nine, and we go from nine to eight, so we're going down by one. And then we multiply that times 100%. So, this is going to be about a negative 11% change in price. And this math is reasonably straightforward because the 100%s cancel out, this is just a one. One over negative 1/9 is just going to be equal to negative nine. So, you have a negative nine price elasticity of demand. So, before I interpret that more, let's look at the price elasticity of demand at other points, or starting from other points to other points on this curve. So, let's think about it going from, actually let's think about it going from E to F. So, as we go from E to F, we're going to do the same exact exercise. What is our percent change in quantity? Well, our initial quantity is 16. And we're going from 16 to 18, so we have a change of two. So, two over 16 times 100%, that is our percent change in quantity. And what is our percent change in price? Well, our initial price is two. And we're going from two to one, so we have a price change of negative one times 100%. And so, what you see here is this is 1/8 times 100%, this would be 12.5% up here. So, this is 12.5% up there, and then this, over here, is going to be negative 50%. So, when price went down by 50%, you had a 12.5% increase in quantity. 12.5% is 1/4 of 50%, so this is going to give us a price elasticity of demand of negative 0.25. So, there's a couple of interesting things that you might already be realizing. One is even though our demand curve right over here is a line, it actually has a constant slope, you see that the price elasticity of demand changes, depending on different parts of the curve. Now, the reason why this is, is really just boils down to math. When we're going from A to B, our initial prices were relatively high. So, even though you had a price decrease of one, it was from an initial price of nine. So, your percentage change in price looked fairly low, while your percentage change in quantity was high 'cause you're going from a low quantity of two, and you're adding two to it, so you had 100% change in quantity. When you go to the other end our curve, and you go from E to F, it's the other way around. Your price starting point is low, so your percent change in price, when you decrease price by one, it looks like a fairly large magnitude; while your percent change in quantity when you go from E to F because you are already at a quantity of 16, adding two to that is not that large of a percentage. Now, another thing you might be appreciating is if we tried to calculate the price elasticity of demand up here on the curve, and instead of going from A to B, if we went from B to A, we would've gotten a different value because our initial prices and quantities would have been different. Our initial price, we would've put an eight right over here, and our initial quantity, we would've put a four over here, and we would've gotten a different value. And that's one of the negatives of the technique, which is arguably the simplest technique, that I just used. There's other techniques, like the midpoint technique, that can give you a more consistent result, whether you're going from A to B or B to A, but I won't cover it just yet. But let's think, now, about how to interpret this. And the best way to interpret it is to think about the absolute value of the price elasticity of demand. So, over here, the absolute value of our price elasticity of demand is equal to nine, and then, over here, the absolute value of our price elasticity of demand is equal to 0.25. And a general rule of thumb is if your absolute value of your price elasticity of demand is less than one, you are dealing with an inelastic, inelastic, elastic situation; and if your price elasticity of demand, the absolute value of it, is greater than one, you're dealing with an elastic situation. Why does that make sense? Well, in this first scenario, it's saying for a given percentage change in price, you have a smaller percent change in quantity; while here, for a given percent in price, you're going to have a larger than that percentage change in your quantity. So, once again, it goes back to these rubber band analogies. So, when we're going from A to B, the absolute value of our price elasticity of demand is definitely larger than one. So, economists would consider this to be an elastic situation; while when we go from point E to point F, our price elasticity of demand, or the absolute value of it, is definitely less than one, so this going to be an inelastic situation.

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Introduction to price elasticity of demand (video) | Khan Academy

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Economists use the concept of price elasticity of demand to describe how the quantity demanded changes in response to a price change. In this video, explore a simple way to calculate the price elasticity of demand, how to interpret that calculation, and how price elasticity of demand varies along a demand curve.

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Price elasticity of demand is an economic measure of the change in the quantity demanded or purchased of a product in relation to its price change. Expressed mathematically, it is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
Price elasticity is used by economists to understand how supply or demand changes given changes in price to understand the workings of the real economy. For instance, some goods are very inelastic, that is, their prices do not change very much given changes in supply or demand, for example people need to buy gasoline to get to work or travel around the world, and so if oil prices rise, people will likely still buy just the same amount of gas. On the other hand, certain goods are very elastic, their price moves cause substantial changes in its demand or its supply. Here, we will look just at how the demand side of the equation is impacted by fluctuations in price by considering the price elasticity of demand - which you can contrast with price elasticity of supply.

If the quantity demanded of a product exhibits a large change in response to changes in its price, it is termed "elastic," that is, quantity stretched far from its prior point. If the quantity purchased has a small change in response to its price, it is termed "inelastic"; or quantity didn't stretch much from its prior point.

The more easily a shopper can substitute one product with a rising price for another, the more the price will fall - be "elastic." In other words, in a world where people equally like coffee and tea, if the price of coffee goes up, people will have no problem switching to tea, and so the demand for coffee will fall. This is because coffee and tea are considered good substitutes to each other.

The more discretionary a purchase is, the more its quantity will fall in response to price rises, that is, the higher the elasticity. So, if you are considering buying a new washing machine but the current one still works (it's just old and outdated), and if the prices of new washing machines goes up, you're likely to forgo that immediate purchase and wait either until prices go down or until the current machine breaks down.

On the other hand, the less discretionary a good is, the less its quantity demanded will fall. Inelastic examples include luxury items where shoppers "pay for the privilege" of buying a brand name, addictive products, and required add-on products. Addictive products may include tobacco and alcohol. Sin taxes on these types of products are possible to introduce because the lost tax revenue from fewer units sold is exceeded by the higher taxes on units still sold. Examples of add-on products are ink-jet printer cartridges or college textbooks. These items are usually more necessary (as opposed to discretionary) and lack good substitutes (only HP ink will work in HP printers).

Time also matters. Demand response to price fluctuations is different for a one-day sale than for a price change over a season or year. Clarity in time sensitivity is vital to understanding the price elasticity of demand and for comparing it across different products.

Generally as rules of thumb, if the quantity of a good demanded or purchased changes more than the price change, the product is termed elastic. (The price changes by +5%, but the demand falls by -10%). If the change in quantity purchased is the same as the price change (say, 10%/10% = 1), the product is said to have unit (or unitary) price elasticity. Finally, if the quantity purchased changes less than the price (say, -5% demanded for a +10% change in price), then the product is termed inelastic.

To calculate the elasticity of demand, let's take a very simple example: Suppose that the price of apples falls by 6% from $1.99 a bushel to $1.87 a bushel. In response, grocery shoppers increase their apple purchases by 20%. The elasticity of apples would thus be: 0.20/0.06 = 3.33 - indicating that apples are quite elastic in terms of their demand.

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Price elasticity of demand is an economic measure of the change in the quantity demanded or purchased of a product in relation to its price change. Expressed mathematically, it is: Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price Price elasticity is used by economists to understand how supply or demand changes given changes in price to understand the workings of the real economy.

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Economic growth means an increase in real GDP - an increase in the value of national output, income and expenditure. Essentially the benefit of economic growth is higher living standards - higher real incomes and the ability to devote more resources to areas like health care and education.

The benefits of economic growth include

Higher average incomes. Economic growth enables consumers to consume more goods and services and enjoy better standards of living. Economic growth during the Twentieth Century was a major factor in reducing absolute levels of poverty and enabling a rise in life expectancy.

Lower unemployment. With higher output and positive economic growth, firms tend to employ more workers creating more employment.

UK unemployment rises during a recession - falls during periods of economic growth.

Lower government borrowing. Economic growth creates higher tax revenues, and there is less need to spend money on benefits such as unemployment benefit. Therefore economic growth helps to reduce government borrowing. Economic growth also plays a role in reducing debt to GDP ratios.

A long period of economic growth in the post-war period helped reduce the UK debt to GDP ratio.

1. Improved public services. Higher economic growth leads to higher tax revenues and this enables the government can spend more on public services, such as health care and education e.t.c. This can enable higher living standards, such as increased life expectancy, higher rates of literacy and a greater understanding of civic and political issues.

2. Money can be spent on protecting the environment. With higher economic growth a society can devote more resources to promoting recycling and the use of renewable resources

3. Investment. Economic growth encourages firms to invest, in order to meet future demand. Higher investment increases the scope for future economic growth - creating a virtuous cycle of economic growth/investment.

4. Increased research and development. High economic growth leads to increased profitability for firms, enabling more spending on research and development. Also, sustained economic growth increases confidence and encourages firms to take risks and innovate.

5. Economic development. The biggest factor for promoting economic development is sustained economic growth. Economic growth in south-east Asia over the past few decades has played a major role in reducing absolute levels of poverty - increasing life expectancy.

6. More choice. In less developed economies, a large proportion of the population work in agriculture/subsistence farming, economic growth enables a more diverse economy with people able to work in service sector, manufacturing and having a greater choice of lifestyles.

Evaluation of economic growth

For developing economies in Sub-Saharan Africa, economic growth enables countries to escape the worst levels of poverty. Even a small level of economic growth can facilitate higher living standards and an improvement in life expectancy. In the developed world, economic growth is less essential.

It depends on the nature of economic growth. For example, if economic growth leads to more pollution and congestion, then living standards may not seem to hit. It also depends on the distribution of economic growth - who benefits from economic growth. If growth benefits primarily the richest in society, growth may do little to overcome poverty.

Related

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Benefits of economic growth - Economics Help

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Economic growth means an increase in real GDP - an increase in the value of national output, income and expenditure. Essentially the benefit of economic growth is higher living standards - higher real incomes and the ability to devote more resources to areas like health care and education. Higher average incomes.

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: USE THIS PADLET AS AN EXTRA EDUCATION TOOL THAT WILL HELP YOU MASTER THE CONTENT SHARED ABOVE.

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Economists and statisticians use several methods to track economic growth. The most well-known and frequently tracked is the gross domestic product (GDP). Over time, however, some economists have highlighted limitations and biases in the GDP calculation. Organizations such as the Bureau of Labor Statistics (BLS) and the Organization for Economic Co-operation and Development (OECD) also keep relative productivity metrics to gauge economic potential. Some suggest measuring economic growth through increases in the standard of living, although this can be tricky to quantify.

Gross Domestic Product

The gross domestic product is the logical extension of measuring economic growth in terms of monetary expenditures. If a statistician wants to understand the productive output of the steel industry, for example, he needs only to track the dollar value of all of the steel that entered the market during a specific period.

Combine the outputs of all industries, measured in terms of dollars spent or invested, and you get total production. At least that was the theory. Unfortunately, the tautology that expenditures equal sold-production does not actually measure relative productivity. The productive capacity of an economy does not grow because more dollars move around, an economy becomes more productive because resources are used more efficiently. In other words, economic growth needs to somehow measure the relationship between total resource inputs and total economic outputs.

The OECD described GDP as suffering from a number of statistical problems. Its solution was to use GDP to measure aggregate expenditures, which theoretically approximates the contributions of labor and output, and to use multi-factor productivity (MFP) to show the contribution of technical and organizational innovation.

Gross National Product

Those of a certain age may remember learning about the gross national product (GNP) as an economic indicator. Economists use GNP mainly to learn about the total income of a country's residents within a given period and how the residents use their income. GNP measures the total income accruing to the population over a specified amount of time. Unlike gross domestic product, it does not take into account income accruing to non-residents within that country's territory; like GDP, it is only a measure of productivity, and it is not intended to be used as a measure of the welfare or happiness of a country.

The Bureau of Economic Analysis (BEA) used GNP as the primary indicator of US economic health until 1991. In 1991, the BEA began using GDP, which was already being used by the majority of other countries. The BEA cited an easier comparison of the United States with other economies as a primary reason for the change. Although the BEA no longer relies on GNP to monitor the performance of the US economy, it still provides GNP figures, which it finds useful for analyzing the income of US residents.

There is little difference between GDP and GNP for the US, but the two measures can differ significantly for some economies. For example, an economy that contained a high proportion of foreign-owned factories would have a higher GDP than GNP. The income of the factories would be included in GDP as it is produced within domestic borders. However, it would not be included in GNP since it accrues to non-residents. Comparing GDP and GNP is a useful way of comparing income produced in the country and income flowing to its residents.

Productivity vs. Spending

The relationship between production and spending is a quintessential chicken-and-egg debate in economics. Most economists agree that total spending, adjusted for inflation, is a byproduct of productive output. They disagree, however, if increased spending is an indication of growth.

Consider the following scenario: In 2017, the average American works 44 hours a week being productive. Suppose there is no change in the number of workers or average productivity through 2019. In the same year, Congress passes a law requiring all workers to work 50 hours a week. The GDP in 2019 will almost certainly be larger than the GDP in 2017 and 2018. Does this constitute real economic growth?

Some would certainly say yes. After all, total output is what matters to those who focus on expenditures. For those who care about productive efficiency and the standard of living, this question does not have a clear answer. On the other hand, the law to increase hours worked requires the average worker to give up six hours per week of leisure-was that worth it? To bring it back to the OECD model, GDP would be higher, MFP would be unchanged but if the loss in leisure was not worth the incremental six hours of wages then the standard of living may have declined even though GDP is increasing.

Reduced Unemployment in Wartime Is Controversial

Suppose the world becomes mired in a third world war in the future. Most of the nation's resources are dedicated toward the war effort, such as producing tanks, ships, ammunition, and transportation; and all of the unemployed are drafted into war service. With an unlimited demand for war supplies and government financing, the standard metrics of economic health would show progress. GDP would soar, and unemployment would plummet.

Would society be better off? This is not an easy question to answer. Many of the produced goods might be destroyed and there could be high mortality rates. On the other hand, many would say that increasing U.S. defense spending in World War II-which resulted in destroyed production and many casualties was worth it. At the end of the conflict, the U.S. victoriously emerged as one of the strongest nations after defeating the Nazis and the militaristic Japanese Empire.

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What Are the Best Measurements of Economic Growth?

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Economists and statisticians use several methods to track economic growth. The most well-known and frequently tracked is the gross domestic product (GDP). Over time, however, some economists have highlighted limitations and biases in the GDP calculation. Organizations such as the Bureau of Labor Statistics (BLS) and the Organization for Economic Co-operation and Development (OECD) also keep relative productivity metrics to gauge economic potential.

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What Is Economic Growth and How Is It Measured?

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Economic growth is an increase in an economy’s production of goods and services.

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Grade 11 Economics Market Relationships 20200429

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The Shutdown Point

The possibility that a firm may earn losses raises a question: Why can the firm not avoid losses by shutting down and not producing at all? The answer is that shutting down can reduce variable costs to zero, but in the short run, the firm has already paid for fixed costs. As a result, if the firm produces a quantity of zero, it would still make losses because it would still need to pay for its fixed costs. So, when a firm is experiencing losses, it must face a question: should it continue producing or should it shut down?

As an example, consider the situation of the Yoga Center, which has signed a contract to rent space that costs $10,000 per month. If the firm decides to operate, its marginal costs for hiring yoga teachers is $15,000 for the month. If the firm shuts down, it must still pay the rent, but it would not need to hire labor. Let's take a look at three possible scenarios. In the first scenario, the Yoga Center does not have any clients, and therefore does not make any revenues, in which case it faces losses of $10,000 equal to the fixed costs. In the second scenario, the Yoga Center has clients that earn the center revenues of $10,000 for the month, but ultimately experiences losses of $15,000 due to having to hire yoga instructors to cover the classes. In the third scenario, the Yoga Center earns revenues of $20,000 for the month, but experiences losses of $5,000.

In all three cases, the Yoga Center loses money. In all three cases, when the rental contract expires in the long run, assuming revenues do not improve, the firm should exit this business. In the short run, though, the decision varies depending on the level of losses and whether the firm can cover its variable costs. In scenario 1, the center does not have any revenues, so hiring yoga teachers would increase variable costs and losses, so it should shut down and only incur its fixed costs. In scenario 2, the center's losses are greater because it does not make enough revenue to offset the increased variable costs plus fixed costs, so it should shut down immediately. If price is below the minimum average variable cost, the firm must shut down. In contrast, in scenario 3 the revenue that the center can earn is high enough that the losses diminish when it remains open, so the center should remain open in the short run.

Should the Yoga Center Shut Down Now or Later?

Scenario 1

If the center shuts down now, revenues are zero but it will not incur any variable costs and would only need to pay fixed costs of $10,000.

profit = total revenue - (fixed costs + variable cost)

profit = 0 - $10,000 = -$10,000

Scenario 2

The center earns revenues of $10,000, and variable costs are $15,000. The center should shut down now.

profit = total revenue - (fixed costs + variable cost)

profit = $10,000 - ($10,000 + $15,000) = -$15,000

Scenario 3

The center earns revenues of $20,000, and variable costs are $15,000. The center should continue in business.

profit = total revenue - (fixed costs + variable cost)

profit = $20,000 - ($10,000 + $15,000) = -$5,000

This example suggests that the key factor is whether a firm can earn enough revenues to cover at least its variable costs by remaining open. Let's return now to our raspberry farm. Figure 8.6 illustrates this lesson by adding the average variable cost curve to the marginal cost and average cost curves. At a price of $2.20 per pack, as shown in Figure 8.6 (a), the farm produces at a level of 50. It is making losses of $56 (as explained earlier), but price is above average variable cost and so the firm continues to operate. However, if the price declined to $1.80 per pack, as shown in Figure 8.6 (b), and if the firm applied its rule of producing where P = MR = MC, it would produce a quantity of 40. This price is below average variable cost for this level of output. If the farmer cannot pay workers (the variable costs), then it has to shut down. At this price and output, total revenues would be $72 (quantity of 40 times price of $1.80) and total cost would be $144, for overall losses of $72. If the farm shuts down, it must pay only its fixed costs of $62, so shutting down is preferable to selling at a price of $1.80 per pack.

Looking at Table 8.6, if the price falls below $2.05, the minimum average variable cost, the firm must shut down.

Table 8.6. Cost of Production for the Raspberry Farm

The intersection of the average variable cost curve and the marginal cost curve, which shows the price where the firm would lack enough revenue to cover its variable costs, is called the shutdown point. If the perfectly competitive firm can charge a price above the shutdown point, then the firm is at least covering its average variable costs. It is also making enough revenue to cover at least a portion of fixed costs, so it should limp ahead even if it is making losses in the short run, since at least those losses will be smaller than if the firm shuts down immediately and incurs a loss equal to total fixed costs. However, if the firm is receiving a price below the price at the shutdown point, then the firm is not even covering its variable costs. In this case, staying open is making the firm's losses larger, and it should shut down immediately. To summarize, if:

price < minimum average variable cost, then firm shuts down

price = minimum average variable cost, then firm stays in business

SHORT-RUN OUTCOMES FOR PERFECTLY COMPETITIVE FIRMS

The average cost and average variable cost curves divide the marginal cost curve into three segments, as shown in Figure 8.7. At the market price, which the perfectly competitive firm accepts as given, the profit-maximizing firm chooses the output level where price or marginal revenue, which are the same thing for a perfectly competitive firm, is equal to marginal cost: P = MR = MC.

First consider the upper zone, where prices are above the level where marginal cost (MC) crosses average cost (AC) at the zero profit point. At any price above that level, the firm will earn profits in the short run. If the price falls exactly on the zero profit point where the MC and AC curves cross, then the firm earns zero profits. If a price falls into the zone between the zero profit point, where MC crosses AC, and the shutdown point, where MC crosses AVC, the firm will be making losses in the short run-but since the firm is more than covering its variable costs, the losses are smaller than if the firm shut down immediately. Finally, consider a price at or below the shutdown point where MC crosses AVC. At any price like this one, the firm will shut down immediately, because it cannot even cover its variable costs.

Watch this video to see an illustrated example of zero profit, or the normal profit, point:

MARGINAL COST AND THE FIRM'S SUPPLY CURVE

For a perfectly competitive firm, the marginal cost curve is identical to the firm's supply curve starting from the minimum point on the average variable cost curve. To understand why this perhaps surprising insight holds true, first think about what the supply curve means. A firm checks the market price and then looks at its supply curve to decide what quantity to produce. Now, think about what it means to say that a firm will maximize its profits by producing at the quantity where P = MC. This rule means that the firm checks the market price, and then looks at its marginal cost to determine the quantity to produce-and makes sure that the price is greater than the minimum average variable cost. In other words, the marginal cost curve above the minimum point on the average variable cost curve becomes the firm's supply curve.

AT WHAT PRICE SHOULD THE FIRM CONTINUE PRODUCING IN THE SHORT RUN?

To determine the short-run economic condition of a firm in perfect competition, follow the steps outlined below. Use the data shown in Table 8.7 below:

Table 8.7 Calculating Short-Run Economic Condition

Step 1. Determine the cost structure for the firm. For a given total fixed costs and variable costs, calculate total cost, average variable cost, average total cost, and marginal cost. Follow the formulas given in the Cost and Industry Structure module. These calculations are shown in Table 8.8 below:

Table 8.8

Step 2. Determine the market price that the firm receives for its product. This should be given information, as the firm in perfect competition is a price taker. With the given price, calculate total revenue as equal to price multiplied by quantity for all output levels produced. In this example, the given price is $30. You can see that in the second column of Table 8.9.

Table 8.9

Step 3. Calculate profits as total cost subtracted from total revenue, as shown in Table 8.10 below:

Table 8.10

Step 4. To find the profit-maximizing output level, look at the Marginal Cost column (at every output level produced), as shown in Table 8.11, and determine where it is equal to the market price. The output level where price equals the marginal cost is the output level that maximizes profits.

Table 8.11

Step 5. Once you have determined the profit-maximizing output level (in this case, output quantity 5), you can look at the amount of profits made (in this case, $50).

Step 6. If the firm is making economic losses, the firm needs to determine whether it produces the output level where price equals marginal revenue and equals marginal cost or it shuts down and only incurs its fixed costs.

Step 7. For the output level where marginal revenue is equal to marginal cost, check if the market price is greater than the average variable cost of producing that output level.

If P > AVC but P < ATC, then the firm continues to produce in the short-run, making economic losses.

If P < AVC, then the firm stops producing and only incurs its fixed costs.

In this example, the price of $30 is greater than the AVC ($16.40) of producing 5 units of output, so the firm continues producing.

Watch this video to see an illustrated example of a firm who is facing loses:

Self Check: The Shutdown Point

Answer the question(s) below to see how well you understand the topics covered in the previous section. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times.

You'll have more success on the Self Check if you've completed the Reading in this section.

Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.

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The possibility that a firm may earn losses raises a question: Why can the firm not avoid losses by shutting down and not producing at all? The answer is that shutting down can reduce variable costs to zero, but in the short run, the firm has already paid for fixed costs.

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Given the cost of producing a good, wha is the best quantity to produce? In this video we explore one of the most fundamental rules in microeconomics: a rational producer produces the quantity where marginal revenue equals marginal costs.