Individual Firm

Quantity (firm)0

Price

Entire Market

Quantity (market)

Price

0

DDemand, 1

SShort-run supply, 1

P1

ATC

P1

1Q

A

MC

AVC

In a Competitive Market:

LONG RUN:Firms Enter market if: P > ATCFirms Exit market if: P < ATC

SHORT RUN:Firms Shutdown if: P < AVCFirms remain open if: P > AVC

YOU must draw 2 graphs for competitive markets

MARKET DEMAND: Markets finds equilibrium through Supply & Demand

Long Run Equilibrium

Individual Firm

Quantity (firm)0

Price

Market

Quantity (market)

Price

0

DDemand, 1

SShort-run supply, 1

P1

ATC

P1

1Q

A

MC

AVC

Must produce at Efficient ScaleEconomic profit = ZEROP = MC = ATC = MR

Short Run Increase in Demand

Market Firm

Quantity (firm)0

Price

P1

Quantity (market)

Long-runsupply

Price

0

D1

D2

P1

S1

P2

Q1

A

Q2

P2

BATCMC

This can not be a long term equilibrium!

AVC

Long Run Impact

P1

Firm

Quantity (firm)0

Price

MCATC

Market

Quantity (market)

Price

0

P1

P2

Q1 Q2

Long-runsupply

B

D1

D2

S1

AS2

Q3

C

Profits induce entry and market supply increases

The increase in supply lowers market price. In the long run market price is restored, but market supply is greater.

Entry/Exit is a Long run concept!

AVC

Last Details….

• Market long run supply curve is perfectly elastic because of unlimited entry/exit into the marketplace at minimum of ATC

• Short Run supply curve is upward sloping– Above AVC curve