#1 MC MR=D=AR= P ATC AVC Q $20 15 10 14 5 6 Should the firm produce? What output should the firm produce? What is TR at that output? What is TC? How much profit or loss? Yes 10 TR=$140 TC=$100 Profit=$40 $20 15 10 5 MC MR=D=AR= P 14 ATC Cost and Revenue AVC 6 Q 6 7 10

#2 MC ATC AVC MR=D=AR=P Q $20 15 10 11 5 9 What output should the firm produce? What is TR at MR=MC point? What is TC at MR=MC point? How much profit or loss? Zero Shutdown (Price below AVC) $45 $55 Loss=Only Fixed Cost $5 $20 15 10 5 MC ATC AVC 11 Cost and Revenue 9 MR=D=AR=P Q 5 7

#3 MC ATC AVC MR=D=AR=P Q $40 30 20 10 19 15 What output should the firm produce? What is TR at that output? What is TC? How much profit or loss? 6 $90 $120 Loss= $30 $40 30 20 10 MC ATC Cost and Revenue AVC 19 15 MR=D=AR=P Q 6 8

Perfect Competition in the Long Run

Side-By-Side for Industry and Firm Is the firm making a profit or a loss?

Where is the profit maximization point? How do you know? What output should be produced? What is TR? What is TC? How much is the profit or loss? Where is the Shutdown Point? $25 20 15 10 MC MR=P Profit ATC Cost and Revenue AVC Total Revenue Total Cost 1 2 3 4 5 6 7 8 9 10

Supply (Again)

Marginal Cost and Supply As price increases, the quantity increases

Marginal cost above average variable cost is the supply curve

Marginal Cost and Supply What if variable costs increase (ex: tax)? MC2=Supply2 $50 45 40 35 30 25 20 15 10 5 MC1=Supply1 AVC Cost and Revenue AVC When MC increases, SUPPLY decrease Q 1 2 3 4 5 6 7 9 10

Marginal Cost and Supply What if variable costs decrease (ex: subsidy)? MC1=Supply1 $50 45 40 35 30 25 20 15 10 5 MC2=Supply2 AVC Cost and Revenue AVC When MC decreases, SUPPLY increases Q 1 2 3 4 5 6 7 9 11

Perfect Competition in the Long Run

In the Long Run Firms will enter if there is a profit Firms will leave if there is a loss Therefore, all firms break even… they make NO economic profit No economic profit = normal profit A perfectly competitive firm in long run equilibrium is EXTREMELY efficient

Is the firm making a profit or a loss? Why? Side-by-side graph for perfectly completive industry and firm in the LONG RUN Is the firm making a profit or a loss? Why? P S P MC ATC MR=D $15 $15 D Q 5000 8 Q Firm (price taker) Industry 14

Firm in Long-Run Equilibrium Price = MC = Minimum ATC Firm making a normal profit P MC ATC $15 MR=D There is no incentive to enter or leave the industry TC = TR 8 Q 15

Long Run  Short Run

Is this the short run or the long run? Why? What will firms do in the long run? What happens to P and Q in the industry? What happens to P and Q in the firm?

Price decreases and quantity increases Firms enter to earn profit so supply increases in the industry Price decreases and quantity increases P S P MC S1 ATC $15 $15 MR=D $10 D Q 5000 6000 8 Q Industry Firm 18

Price falls for the firm because they are price takers. Price decreases and quantity decreases P S P MC S1 ATC $15 $15 MR=D $10 $10 MR1=D1 D Q 5000 6000 5 8 Q Industry Firm 19

New Long Run Equilibrium at $10 Price Zero Economic Profit P P MC S1 ATC $10 $10 MR1=D1 D Q 5000 6000 5 Q Industry Firm 20

Is this the short or long run? Why? What will firms do in the long run? What happens to P and Q in the industry? What happens to P and Q in the firm?

Firms leave to avoid losses so supply decreases in the industry Price increases and quantity decreases S1 P S P MC ATC $20 $15 $15 MR=D D Q 4000 5000 8 Q Industry Firm 22

Price increase for the firm because they are price takers. Price increases and quantity increases S1 P S P MC ATC $20 $20 MR1=D1 $15 $15 MR=D D Q 4000 5000 8 9 Q Industry Firm 23

New Long Run Equilibrium at $20 Price Zero Economic Profit S1 P P MC ATC $20 $20 MR1=D1 D Q 9 4000 Q Industry Firm 24

Going from Long Run  Long Run

Currently in Long-Run Equilibrium If demand increases, what happens in the short-run and how does it return to the long run? P S P MC ATC MR1=D1 $15 $15 MR=D D Q 5000 8 Q Industry Firm 26

The price increases and quantity increases Demand Increases The price increases and quantity increases Profit is made in the short-run P S P MC ATC $20 $20 MR1=D1 $15 $15 MR=D D1 D Q 5000 8 9 Q Industry Firm 27

Firms enter to earn profit so supply increases in the industry Price Returns to $15 P S S1 P MC ATC $20 $20 MR1=D1 $15 $15 MR=D D1 D Q 5000 7000 8 9 Q Industry Firm 28

Back to Long-Run Equilibrium The only thing that changed from long-run to long-run is quantity in the industry P S1 P MC ATC $15 $15 MR=D D1 D Q 7000 8 Q Industry Firm 29