Alright, cool. Now let's check out this graph where we've got our marginal cost curve, we've got an average total cost curve, and then now we've added the average variable cost curve, right? So now we're talking about average variable cost as well when we're talking about shutdown. And I want to make a quick point here, this bullet. We're only going to talk about average variable cost, in this section and in perfect competition, average variable cost, the only time it comes up is in the short run shutdown decisions. Okay? So this is the only time you have to think about average variable cost is when we're dealing with short run shutdown. Okay? Other than that, average variable cost isn't going to come up. So that should help you kind of zone in when we're going to use this. Okay? So I've got these cost curves on the graph. Let's go ahead and set some different prices, right? If we put a high price, a low price, let's see what happens, okay?

So first price I'm going to set here. I'm going to put a price up here. I'm going to call it the high price. Price high, right? And at that high price, remember in perfect competition that price is our marginal revenue, always our average revenue, right? But that marginal revenue because we want to see where the marginal revenue and marginal cost curve cross, right? That's where we're going to produce. So let's go ahead and draw in our demand curve right there, right? We've got the horizontal demand for a firm in perfect competition. So at this high price, what's going on here? We're going to have this marginal cost and marginal revenue, right? The price is our marginal revenue curve crossing right there. That is going to be the quantity we want to produce and now what's going on in this case? There are two things we want to know. First, are we going to shut down? So in this case, notice that our price is above our average variable cost, right? And that's what we see over here. Price and average variable cost, what's the relationship? Well, if the price is less than the average variable cost, we would shut down, but that's not what we see here, right? The price is higher. We're able to cover those variable costs, so we are going to produce in this case. So the first question, are we going to produce? Yes. The second question, are we going to make a profit? Right? So we know we're going to produce right there and when we want to check if we're going to make a profit, we got to see if we're covering our average total cost. So that goes to this curve right here and we see that the price is greater than the average total cost, so the money we're bringing in is more than the money we're spending, we are making a profit there, right? So at that high price, we do make a profit and we do produce, alright?

So now let's try some sort of medium price here. Okay. I'm going to erase this stuff. Whoops, I'll leave the price in there. Okay. And I'll erase this stuff so that we can do another example here. Alright. Let's go ahead and pick a medium price. So I'm going to pick something around here. Price medium and again this is also our marginal revenue in this case, right? So we've got our flat demand curve, supposed to be flat, mine's a little not so flat, but take it as flat and we're going to say that this is where we would produce, right? This is going to be that profit maximizing quantity or loss minimizing quantity, right? So what about in this case? What's going on? First, we want to discuss should we produce? And we produce, right? If we can cover our variable costs and that's what's happening here, right? The price is greater than the average variable cost here, so we should produce, right? We should produce but notice our average total cost. We're not making a profit though, right? Notice in this case, we've got our price right there, but our average total cost is above, right? Our average total costs are higher than our price. So that means that we have a loss in this case, right? We're going to have a loss, but we are going to produce, right? So this is the key point here is that we still produce, but we're losing money, right. So we're above that average variable cost curve but below the average total cost.

Alright, last one I want to talk about right here. Let's pick this real low price down here. Price low, right. So something way down there and remember that is our marginal revenue curve again. So here, this actually brings up a kind of an interesting point, right? We're crossing our marginal cost curve twice, right? And whenever this happens, you want to pick the point where the marginal cost is increasing, okay? You never pick this point right here where the marginal cost is still decreasing over here, that's not where we want to pick because we're still lowering our cost if we produce more, so there are still benefits to producing more and more, so the point where we actually want to produce would be here if we produce, right? This would be the point where we would want to produce if we're producing. Okay? So now let's think about shall we produce? Well what's happening in this case? The price is less than the average variable cost, right? It's below the average variable cost curve right here. This being average variable cost at that quantity. Well, we're not going to produce, right? And are we going to make a profit or loss? We're going to lose money equal to our fixed cost, right? Our fixed cost since we're not producing, we still have our fixed cost to cover and that is going to be our loss, alright? So in this case, we don't produce when we are below that average variable cost curve and I just want to make one more I guess quick note right here. I'm going to erase this. If we had a price right here, that is our shutdown point right there, right? The minimum of the AVC. Okay, so let me just erase that and go back. I just wanted to point out that shutdown point, alright, but let's leave it like that. Alright, cool. Let's go ahead and move on. Well before we move on, I just want to note that all this information is summarized right here, everything we went over, right? So should we produce? These are kind of the questions we've been asking so far. Should we produce? Well that has to do with average variable cost and then if we are producing, where do we produce? Well it's always going to be at that marginal revenue equals marginal cost, right? And then the last thing, are we making profit? Well that's when we look at our average total cost, right? If we're covering our average total cost, we make a profit. If not, we have a loss. Alright, let's go ahead and move on to the next video now.