1. 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

2. 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

3. 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

4. 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.

5. 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

6. 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

7. 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

8. 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 =

9. 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 =

10. 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 =

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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 = $

18. 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 =

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

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