many firms standardized product firms freely enter or leave the market each firm is a price taker...
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many firms
standardized product
firms freely enter or leave the market
each firm is a price taker
Perfectly competitive market
9 Perfect Competitionand the Supply Curve
6
7
8
9
10
Q
25
25
25
25
25
Price
150
175
200
225
250
TotalRev
72
84
101
126
166
TotalCost
78
91
99
99
84
ProfitMargCost
MargRev
Perfect competition: price unaffected by quantity
Production and Profits
Output
Cost
or
Reven
ue (
$)
2 4 6 8 10
20
40
60
80
100
120
140
160
180
200
220
Total cost
Total revenue
MaximizeTotalProfit99
99
Note:Maximum profit
where slopes of thetwo curves are equal.
Output
Cost
or
reven
ue (
$)
2 4 6 8 10
5
10
15
20
25
30
35
40
Marginal cost
Marginal revenue
Marginal Rev = Marginal Cost
Note:Maximum profitwhere MR=MC.
Output
Cost
or
Reven
ue (
$)
2 4 6 8 10
20
40
60
80
100
120
140
160
180
200 Total cost
Total revenue
Variable cost
The Shut-Down Decision
Net loss at every level of output.
But if fixed costs are unavoidable, ignore them
in the shut-down decision.
Maximizerevenue overvariable cost
Output
Cost
or
reven
ue (
$)
2 4 6 8 10
5
10
15
20
25
30
35
40
Marginal cost
Marginal revenue
Marginal Rev = Marginal Cost
Marginal revenue
If price (MR) is constant,MC curve shows how much
output will be supplied.
Output
Cost
($)
2 4 6 8 10
5
10
15
20
25
30
35
40
The Short-Run Supply Curve
Marginal cost
Average variable cost
Short-run Supply
Pri
ce (
$)
No supply when price < $5
Output
Cost
or
Pri
ce (
$)
2 4 6 8 10
5
10
15
20
25
30
35
40
Short-Run Profit or Loss
Short-run SupplyAverage
short-runtotal cost
$9$36 loss4 units
Price = Quantity =
Average Cost =
Long-run:
firms will exit the market
Output
Cost
or
Pri
ce (
$)
2 4 6 8 10
5
10
15
20
25
30
35
40
Short-Run Profit or Loss
Short-run Supply
9 units$11 $99 profit
Price = Quantity =
Average Cost =
Averageshort-runtotal cost
Long-run:
firms will enter the market
Output
Cost
or
Pri
ce (
$)
2 4 6 8 10
5
10
15
20
25
30
35
40
Long-Run Equilibrium: Price = Minimum Cost
Short-run Supply
Price = Quantity = Average Cost =
Averageshort-runtotal cost
Output
Pri
ce (
$)
200 400 600 800 1000
5
10
15
20
25
30
35
40
Supply & Demand for Entire Market
Short-run Supply
Price = $12
Quantity = 100 x 7 = 700
Market Demand
Output
Pri
ce (
$)
200 400 600 800 1000
5
10
15
20
25
30
35
40
Shift in Demand: Constant Cost Industry
Increase in demand• each firm increases
output• temporary profits
Output
Pri
ce (
$)
200 400 600 800 1000
5
10
15
20
25
30
35
40
Shift in Demand: Constant Cost Industry
Price = $12
Quantity = 135 x 7 = 945
New firms enter• short-run supply
shifts• profits back to $0
Output
Pri
ce (
$)
200 400 600 800 1000
5
10
15
20
25
30
35
40
Constant Cost Industry
Long-run Supply
Market Demand
firms enter or exit until price returns to minimum cost
Output
Cost
($)
2 4 6 8 10
5
10
15
20
25
30
35
40
Increasing Cost Industry
Averageshort-run cost:
100 firms
Averageshort-run cost:
200 firms
average costs increase as more firms enter
Output
Pri
ce (
$)
200 400 600 800 1000
5
10
15
20
25
30
35
40
Increasing-Cost Industry
Long-run Supply
Market Demand
long-run supply curve slopes upward
Price = $25
Firms 1, 2 … 45
# units = ____
total # units = ____
Profit =
Firms 46 … 100
enter the market
Higher Quantity,
Price = $
Firms 1, 2 … 100
# units = ____
total # units = ____
Profit = $0
Shift in
Supply
Profit = $0
Shift in demandFirms 1, 2 … 135
# units = ____
total # units = ____
Profit = $0
Price = $
Firms 1, 2 … 100
# units = ____
total # units = ____
Profit =Firms 101 … 135
enter the market
Price =
Shift in
Supply
Output
Pri
ce (
$)
200 400 600 800 1000
5
10
15
20
25
30
35
40
Surplus: Increasing-Cost Industry
Long-run Supply
Market Demand
Output
Pri
ce (
$)
200 400 600 800 1000
5
10
15
20
25
30
35
40
Surplus: Constant-Cost Industry
Long-run Supply
Market Demand