9.3 Short-Run Decisions

We learned in Chapter 7 how each firm’s costs vary with its output in
the short run. Recall that in the short run, the firm has one or more fixed
factors, and the only way it can change its output is by changing the
amount of its variable factor inputs. In this chapter, we have seen how the
firm’s total, average, and marginal revenues vary as the firm changes its
level of output. The next step is to put the cost and revenue information
together to determine the level of output that will maximize the firm’s
economic profits. Recall also from Chapter 7 that economic profit is the
difference between total revenue and total cost,

where all costs are measured as economic (as opposed to accounting)
costs. If total revenues are not enough to cover total costs, economic
profits will be negative—in this case we say that the firm is making losses

We need to ask and answer two questions for a competitive firm. First,
should the firm produce any output at all, or would it be better to shut
down and produce nothing? Second, if it makes economic sense for the
firm to produce some output, what level of output should it produce? To
answer both questions, we assume the firm’s objective is to maximize its
profits.

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π=TR−TC