1. Cost Curves & Competitive Markets Test
UNIT TEST # Block 3/1st or 2nd
MULTIPLE CHOICE & FREE RESPONSE
DUE: STUDY GUIDE #2
One Individual Firm
Price
ATC MC E1
AVC P 1
D = MR Q1
Quantity (firm)

2. Entire Market 1-Individual Firm
All Firms maximize profit by setting MR = MC (they are “price takers”)
SHORT RUN FIRM Supply Curve:
Shutdown if P < AVC
Stay open if P ≥ AVC
LONG RUN FIRM Supply Curve:
Exit market if: P < ATC
Stay open if: P ≥ ATC
Entire Market
1-Individual Firm
Price
Price MC
ATC S 1 D1 A
AVC 1 Q A
D = MR
$20
$20
Quantity (market) Q
Quantity (firm)

3. Efficient Scale Production
Efficient scale- the quantity of output that minimizes ATC
Production point in long run for all competitive firms
Where MC = ATC
Economic profit = 0 [Profit = (P – ATC) * Qty]

4. Long Run Equilibrium Entire Market One Individual Firm
Price
Price
ATC MC S
Short-run supply, 1 D
Demand, 1
AVC 1 Q A
Long-run supply,
D = MR P 1 P 1
Quantity (market)
Quantity (firm)
Must produce at Efficient Scale Production = (min of ATC)
Economic profit = ZERO
P = MC = ATC = MR

5. Short Run Increase in Demand
Increase in market demand =>
↑ price & quantity
Firms produce more &
earn a short run profit
Entire Market
1- Individual Firm
Price
Price D 2 MC S 1
ATC Q2 B Q 2 P B D 1
D2 = MR2 P 2
profit Q 1 A Q 1 A P1 P 1
D1 = MR1
Quantity (market)
Quantity (firm)
This is not a long run equilibrium!

6. Long Run Equilibrium
Economic Profit induces new firms to enter market => supply increases
Entire Market
1 Firm
Price
Price D 2 MC S1
ATC B B Q2 P2 S 2
D2 = MR2 A P 2 Q 1 A Q3 P3
Long-run
Market supply Q 3 C
D3=MR3 C P
D1=MR1 1 P 1
Market long run supply curve is perfectly elastic because of unlimited entry/exit
into the marketplace at minimum of ATC
In the long run market price is restored to min. of ATC!
But total market supply is greater Q3 as more firms are in market D1 Q1 Q2
Quantity (market)
Quantity (firm)

7. Practice Test

8. Short Run vs. Long Run Costs
Costs depends on time horizon considered
In the short run, some costs are fixed
In the long run, all fixed costs become variable costs
Why: Firms have time to change both plant size & labor force
long-run cost curves differ from short-run cost curves
LRATC is always below or on short run ATC curve
you can be more efficient in long run!