1. Market Price Discovery #1 Perfect Competition

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

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

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

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

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

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

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

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

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

11. If Demand Decreases…… The Market The Firm Price Price D S D2 AVC MC PEQE
9 10
Quantity

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

13. If Demand Increases…… Labor Market The Firm Price Price D S MVP PE MICQE
LMAX
Quantity