economics 111.3 winter 14 march 24 th, 2014 lecture 26 ch. 12: perfect competition
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Economics 111.3 Winter 14
March 24th, 2014Lecture 26
Ch. 12: Perfect competition
FINAL EXAM is based on chapters 3, 4, 5 (up to p. 116), 6 (up to p. 138), 8, 9, 10 (up to p. 230, 11, 12, 13, and 14Its format: 100 Multiple-Choice Questions When and Where: April 21, from 7:00 p.m. to 10:00 p.m; STM 140Extra Office Hours: April 19, from1:00 p.m. to 3:00 p.m.
Final Exam:
© 2010 Pearson Education Canada
In part (c) price is less than average total cost and the firm incurs an economic loss—economic profit is negative.
Output, Price, and Profit in the Short Run
P = 131
Loss-Minimizing Case
• Suppose price falls from $131 to $81…
Q TFC TVC TC
0 $100 $ 0 $ 100
1 100 90 190
2 100 170 270
3 100 240 340
4 100 300 400
5 100 370 470
6 100 450 550
7 100 540 640
8 100 650 750
9 100 780 880
10 100 930 1030
MC MR
$ 90 $81
80 81
70 81
60 81
80 81
90 81
110 81
130 81
150 81
]]]]]]]]]
550/6
Shutdown ConditionMR =MC = min AVC
• A competitive firm will maximize profit or minimize losses in the short-run by producing that output at which MR=P=MC, provided that market price (P) exceeds minimum AVC
Short-run supply curve
• Short-run supply curve is the portion of the firm’s marginal cost curve lying above its average variable cost curve
© 2010 Pearson Education Canada
Short-run supply curve is the portion of the firm’s marginal cost curve lying above its average variable cost curve
Short-Run Supply Curve
Q Q
P PTotal
IndustryDemand
IndustryFirm(price taker)
Firm & Industry
D
8000
D
IndustryFirm(price taker)
$111
MC
Q Q
P P S=MCs
MC
AVC
8000
D
S=MCs
IndustryFirm(price taker)
The firm “takes”the industry price
The firm “takes”the industry price
$111
Q Q
P P
MC
AVC
8
D
8000
D
$111$111
1000 firmsIndustryFirm
(price taker)
Q Q
P P S=MCs
Q Q
P P
MC
AVC
ATC
8
D
8000
D
$111$111
IndustryFirm(price taker)
EconomicProfit
EconomicProfit
S=MCs
Profit Maximization in the Long Run
• Assumptions:–entry and exit only–identical costs–constant-cost industry
© 2010 Pearson Education Canada
© 2010 Pearson Education Canada
Long-run Equilibrium• if price > min ATC
– profits attract new firms– as S increases, price drops to min ATC
• if price < min ATC– losses cause firms to exit– as S decreases, price rises to min ATC
• so, in the long run, p=min ATC
Long-Run Equilibrium
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