Principles of Microeconomics - Chapter 1 4/17/2017 9 Perfect Competition and the Supply Curve Perfectly competitive market many firms standardized product firms freely enter or leave the market each firm is a price taker

Perfect competition: price unaffected by quantity Production and Profits 6 7 8 9 10 Q 25 Price 150 175 200 225 250 Total Rev 72 84 101 126 166 Cost 78 91 99 Profit Marg Perfect competition: price unaffected by quantity

Total revenue Maximize 99 Total Profit 99 Cost or Revenue ($) Note: Output Cost or Revenue ($) 2 4 6 8 10 20 40 60 80 100 120 140 160 180 200 220 Total revenue 99 99 Maximize Total Profit Note: Maximum profit where slopes of the two curves are equal. Total cost

Marginal Rev = Marginal Cost Output Cost or revenue ($) 2 4 6 8 10 5 15 20 25 30 35 40 Marginal revenue Note: Maximum profit where MR=MC.

Net loss at every level of output. The Shut-Down Decision Total cost Output Cost or Revenue ($) 2 4 6 8 10 20 40 60 80 100 120 140 160 180 200 Net loss at every level of output. But if fixed costs are unavoidable, ignore them in the shut-down decision. Variable cost Total revenue Maximize revenue over variable cost

Marginal Rev = Marginal Cost If price (MR) is constant, MC curve shows how much output will be supplied. Output Cost or revenue ($) 2 4 6 8 10 5 15 20 25 30 35 40 Marginal revenue Marginal revenue

No supply when price < $5 The Short-Run Supply Curve Marginal cost Output Cost ($) 2 4 6 8 10 5 15 20 25 30 35 40 Short-run Supply Price ($) Average variable cost No supply when price < $5

firms will exit the market Short-Run Profit or Loss Short-run Supply Output Cost or Price ($) 2 4 6 8 10 5 15 20 25 30 35 40 Average short-run total cost Long-run: firms will exit the market $9 $36 loss 4 units Price = Quantity = Average Cost =

firms will enter the market Short-Run Profit or Loss Short-run Supply Output Cost or Price ($) 2 4 6 8 10 5 15 20 25 30 35 40 Average short-run total cost $11 $99 profit Long-run: firms will enter the market 9 units Price = Quantity = Average Cost =

Long-Run Equilibrium: Price = Minimum Cost Short-run Supply Output Cost or Price ($) 2 4 6 8 10 5 15 20 25 30 35 40 Average short-run total cost Price = Quantity = Average Cost =

Supply & Demand for Entire Market Short-run Supply Output Price ($) 200 400 600 800 1000 5 10 15 20 25 30 35 40 Market Demand Price = $12 Quantity = 100 x 7 = 700

each firm increases output Shift in Demand: Constant Cost Industry Increase in demand each firm increases output temporary profits Output Price ($) 200 400 600 800 1000 5 10 15 20 25 30 35 40

short-run supply shifts Shift in Demand: Constant Cost Industry Output Price ($) 200 400 600 800 1000 5 10 15 20 25 30 35 40 New firms enter short-run supply shifts profits back to $0 Price = $12 Quantity = 135 x 7 = 945

Constant Cost Industry firms enter or exit until price returns to minimum cost Market Demand Output Price ($) 200 400 600 800 1000 5 10 15 20 25 30 35 40 Long-run Supply

Increasing Cost Industry average costs increase as more firms enter Output Cost ($) 2 4 6 8 10 5 15 20 25 30 35 40 Average short-run cost: 200 firms Average short-run cost: 100 firms

Increasing-Cost Industry long-run supply curve slopes upward Market Demand Output Price ($) 200 400 600 800 1000 5 10 15 20 25 30 35 40 Long-run Supply

Price = $25 Firms 1, 2 … 45 Firms 1, 2 … 100 Firms 46 … 100 Price = $ Profit = $0 Firms 1, 2 … 45 # units = ____ total # units = ____ Firms 1, 2 … 100 # units = ____ total # units = ____ Profit = Shift in Supply Firms 46 … 100 enter the market Higher Quantity, Price = $

Firms 1, 2 … 135 Firms 1, 2 … 100 Price = Firms 101 … 135 Profit = $0 Profit = $0 Shift in demand Firms 1, 2 … 135 # units = ____ total # units = ____ Price = $ Firms 1, 2 … 100 # units = ____ total # units = ____ Price = Shift in Supply Firms 101 … 135 enter the market Profit =

Surplus: Increasing-Cost Industry Market Demand Output Price ($) 200 400 600 800 1000 5 10 15 20 25 30 35 40 Long-run Supply

Surplus: Constant-Cost Industry Market Demand Output Price ($) 200 400 600 800 1000 5 10 15 20 25 30 35 40 Long-run Supply