Market Price Discovery #1 Perfect Competition

Remember the firm’s supply curve? P=MR=AR

P=MR=AR Firm’s supply curve starts at shut down level of output

Profit maximizing firm will desire to produce where MC=MR P=MR=AR

Economic losses will occur beyond output OMAX, where MC > MR P=MR=AR

Forecasting Future Commodity Price Trends $7 S D = a – bP + cYD + eX $4 Own price Disposable income Other factors $1 10

Forecasting Future Commodity Price Trends $7 S Own price Input costs Other factors $4 S = n + mP – rC + sZ $1 10

Projecting Commodity Price $7 S D = 10 – 6P + .3YD + 1.2X $4 D = S S = 2 + 4P – .2C + 1.02Z $1 10 Substitute the demand and supply equations into the the equilibrium condition and solve for price

Firm is a “Price Taker” Under Perfect Competition The Market The Firm Price Price D S AVC MC PE QE OMAX Quantity

If Demand Increases…… The Market The Firm Price Price S AVC MC PE QE 10 11 Quantity

If Demand Decreases…… The Market The Firm Price Price D S D2 AVC MC PE QE 9 10 Quantity

Firm is a “Price Taker” in the Input Market Labor Market The Firm Price Price D S MVP MIC PE QE LMAX Quantity

If Demand Increases…… Labor Market The Firm Price Price D S MVP PE MIC QE LMAX Quantity