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SHORT-RUN PRODUCTION ALTERNATIVES: A firm faces three production options in the short run based on a comparison between price, average total cost, and average variable cost. If price is greater than average total cost, a firm earns an economic profit by producing the quantity that equates marginal revenue with marginal cost. If price is less than average total cost but greater than average variable cost, a firm incurs an economic loss, but produces the quantity that equates marginal revenue with marginal cost. If price is less than average variable cost, a firm shuts down production in the short run, incurring an economic loss equal to total fixed cost.

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Lesson 2: Economic Science | Unit 5: Cause and Effect Page: 19 of 20

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Advertising is unlikely to be the DIRECT cause of greater sales and production.
  • First link: Advertising increases buyers' preferences.
  • Second link: Buyers' preferences increase market demand and market price.
  • Third link: Higher price induces suppliers to increase production.
Scientific answer:
  • The increase in sales and production are caused by higher prices, which is caused by greater demand, which is caused by a change in buyers' preferences, which is caused by advertising.
  • The goal of the scientific study of economics is to identify these distinct, but interrelated cause-and-effect principles.

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KINKED-DEMAND CURVE ANALYSIS

An analysis using the kinked-demand curve to explain rigid prices often found with oligopoly. The kinked-demand curve contains two distinct segments--one for higher prices that is more elastic and one for lower prices that is less elastic. Key to this analysis is that the corresponding marginal revenue curve contains three segments--one associated with the more elastic segment, one associated with the less elastic segment, and one associated with the kink. A profit-maximizing firm can then equate marginal cost to a wide range of marginal revenue values along the vertical segment of the marginal revenue curve. This suggests that marginal cost must change significantly before an oligopolistic firm is inclined to change price.

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Today, you are likely to spend a great deal of time browsing through a long list of dot com websites trying to buy either a birthday gift for your grandmother or a T-shirt commemorating yesterday. Be on the lookout for defective microphones.
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Ragnar Frisch and Jan Tinbergen were the 1st Nobel Prize winners in Economics in 1969.
"Do what you feel in your heart to be right for you'll be criticized anyway. You'll be damned if you do and damned if you don't. "

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