Copyright © 2011 Cengage Learning 14 Firms in Competitive Markets

Table 1 Total, Average and Marginal Revenue for a Competitive Firm Copyright © 2011 Cengage Learning

Table 2 Profit Maximization: A Numerical Example Copyright © 2011 Cengage Learning

Figure 1 Profit Maximization for a Competitive Firm Quantity 0 Costs and revenue MC ATC AVC MC 1 Q 1 2 Q 2 The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue. Q MAX P = MR 1 = 2 P = AR = MR Copyright © 2011 Cengage Learning

Figure 2 Marginal Cost as the Competitive Firm’s Supply Curve Quantity 0 Price MC ATC AVC P 1 Q 1 P 2 Q 2 This section of the firm’s MC curve is also the firm’s supply curve. Copyright © 2011 Cengage Learning

Figure 3 The Competitive Firm’s Short-Run Supply Curve MC Quantity ATC AVC 0 Costs Firm shuts down if P < AVC Firm’s short-run supply curve If P > AVC, firm will continue to produce in the short run. If P > ATC, the firm will continue to produce at a profit. Copyright © 2011 Cengage Learning

Figure 4 The Competitive Firm’s Long-Run Supply Curve MC Quantity ATC 0 Costs Firm’s long-run supply curve Copyright © 2011 Cengage Learning

Figure 4 The Competitive Firm’s Long-Run Supply Curve MC = long-run S Firm exits if P < ATC Quantity ATC 0 Costs Firm’s long-run supply curve Firm enters if P > ATC Copyright © 2011 Cengage Learning

Figure 5 Profit as the Area Between Price and Average Total Cost (1) (a) A firm with profits Quantity 0 Price P=AR= MR ATCMC P ATC Q (profit-maximizing quantity) Profit Copyright © 2011 Cengage Learning

Figure 5 Profit as the Area Between Price and Average Total Cost (2) (b) A firm with losses Quantity 0 Price ATCMC (loss-minimizing quantity) P=AR= MR P ATC Q Loss Copyright © 2011 Cengage Learning

Figure 6 Market Supply With a Fixed Number of Firms (a) Individual firm supply Quantity (firm) 0 Price MC € (b) Market supply Quantity (market) 0 Price Supply ,000 € ,000 Copyright © 2011 Cengage Learning

Figure 7 Market Supply with Entry and Exit (a) Firm’s zero-profit condition Quantity (firm) 0 Price (b) Market supply Quantity (market) Price 0 P = minimum ATC Supply MC ATC Copyright © 2011 Cengage Learning

Figure 8 An Increase in Demand in the Short Run and Long Run (1) Firm (a) Initial condition Quantity (firm) 0 Price Market Quantity (market) Price 0 DDemand, 1 SShort-run supply, 1 P 1 ATC Long-run supply P 1 1 Q A MC Copyright © 2011 Cengage Learning

Figure 8 An Increase in Demand in the Short Run and Long Run (2) Market Firm (b) Short-run response Quantity (firm) 0 Price MC ATC Profit P 1 Quantity (market) Long-run supply Price 0 D 1 D 2 P 1 S 1 P 2 Q 1 A Q 2 P 2 B Copyright © 2011 Cengage Learning

Figure 8 An Increase in Demand in the Short Run and Long Run (3) P 1 Firm (c) Long-run response Quantity (firm) 0 Price MC ATC Market Quantity (market) Price 0 P 1 P 2 Q 1 Q 2 Long-run supply B D 1 D 2 S 1 A S 2 Q 3 C Copyright © 2011 Cengage Learning