Individual Firm Quantity (firm) 0 Price Entire Market Quantity (market) Price 0 DDemand, 1 SShort-run supply, 1 P 1 ATC P 1 1 Q A MC AVC In a Competitive.

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Presentation transcript:

Individual Firm Quantity (firm) 0 Price Entire Market Quantity (market) Price 0 DDemand, 1 SShort-run supply, 1 P 1 ATC P 1 1 Q A MC AVC In a Competitive Market: LONG RUN: Firms Enter market if: P > ATC Firms Exit market if: P < ATC SHORT RUN: Firms Shutdown if: P < AVC Firms 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 P 1 ATC P 1 1 Q A MC AVC Must produce at Efficient Scale Economic profit = ZERO P = MC = ATC = MR

Short Run Increase in Demand Market Firm Quantity (firm) 0 Price P 1 Quantity (market) Long-run supply Price 0 D 1 D 2 P1P1 S 1 P 2 Q 1 A Q 2 P 2 B ATC MC This can not be a long term equilibrium! AVC

Long Run Impact P 1 Firm Quantity (firm) 0 Price MC ATC Market Quantity (market) Price 0 P 1 P2P2 Q1Q1 Q2Q2 Long-run supply B D1 D 2 S1S1 A S 2 Q 3 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

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