Excess Capacity
Excess Capacity
The condition that short-run average total cost exceeds short-run marginal cost equals (ATC > MC) means that a firm is NOT operating at the minimum point of its short-run average total cost curve. In fact, this condition means that the firm is producing a smaller quantity than that achieved at this minimum point. Moreover, this means that a firm is NOT producing output at the lowest possible per unit cost and that the capital(or factory) is NOT being used in the most technically efficient manner possible.
ATC > MC
Because the average cost of Manny's sandwich production is greater than marginal cost, Manny is operating to the left of the minimum point on his short-run average total cost curve. Manny can actually produce sandwiches at a lower per unit cost, given his existing capital (the current size of his restaurant and his array of kitchen tools), by increasing production. And in so doing, the average cost of production would decline.
Long-run equilibrium for a monopolistically competitive industry achieves the condition that ATC > MC. This means that each firm produces less output than could be achieved by fully using the available capacity of the plant si
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