1. Unit 3: Costs of Production and Perfect Competition
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2. Perfect Competition
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3. Review Identify the 4 Market Structures
Identify the characteristics of perfect competition
Why is a perfectly competitive firm a “price taker”?
Explain why perfectly competitive firms make little profit
How do ALL firms determine what output to produce?
Draw a perfectly competitive firm producing 10 units at a price of $10 making a profit of $30
Draw and label a perfectly competitive firm making a loss.
On your graph, identify the shut down point
List 10 words that rhyme with the word “great”
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4. Drawing side-by-side graph for perfectly completive industry and firm
Is the firm making a profit or a loss? Why? P S P MC
ATC
MR=D
$15
$15 D Q
5000 8 Q
Firm
(price taker)
Industry 4
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5. Which of the following is a correctly labeled graph for firm making economic profit?5
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6. #1 #3 #2 #4 ATC MC MC ATC PF MR=D MR=D Q Q QF QF MC ATC ATC MC MR=D
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7. They are all wrong for different reasons
ATC
They are all wrong
for different reasons P #1 MC P #3 MC
ATC PF
MR=D
MR=D Q Q QF QF #2 #4 P MC P
ATC
ATC MC
MR=D
MR=D Q Q QF QF
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8. #1 #3 #2 #4 Profit too big ATC>P MR > MC ATC MC MC ATC PF MR=DQ Q QF QF #2 #4 P MC P
ATC
ATC MC
MR=D
MR=D
MC&ATC
Wrong
MR > MC Q Q QF QF
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9. Where is the profit maximization point? How do you know?
What output should be produced?
What is TR?
What is TC?
How much is the profit or loss?
Where is the Shutdown Point?
$25 20 15 10 MC
MR=P
Profit
ATC
Cost and Revenue
AVC
Total Revenue
Total Cost
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10. Perfect Competition in the Long-Run
You are a wheat farmer. You learn that there is a more profit in making corn. What do you do in the long run?
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11. (No Economic Profit = Normal Profit)
In the Long-run…
Firms will enter if there is profit
Firms will leave if there is loss
So, ALL firms break even, they make NO economic profit
(No Economic Profit = Normal Profit)
In long run equilibrium a perfectly competitive firm is EXTREMELY efficient.
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12. Is the firm making a profit or a loss? Why?
Side-by-side graph for perfectly completive industry and firm in the LONG RUN
Is the firm making a profit or a loss? Why? P S P MC
ATC
MR=D
$15
$15 D Q
5000 8 Q
Firm
(price taker)
Industry 12
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13. Firm in Long-Run Equilibrium
Price = MC = Minimum ATC
Firm is making NO economic profit
Firm is making positive accounting profit P MC
ATC
$15
MR=D
There is no incentive to enter or leave the industry
TC = TR 8 Q 13
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14. Going from Short-Run to Long-Run14
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15. Is this the short or the long run? Why?
What will firms do in the long run?
What happens to P and Q in the industry?
What happens to P and Q in the firm? P S P MC
ATC
$15
$15
MR=D D Q
5000
6000 8 Q
Industry
Firm 15
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16. Firms enter to earn profit so supply increases in the industry
Price decreases and quantity increases P S P MC S1
ATC
$15
$15
MR=D
$10 D Q
5000
6000 8 Q
Industry
Firm 16
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17. Price falls for the firm because they are price takers.
Price decreases and quantity decreases P S P MC S1
ATC
$15
$15
MR=D
$10
$10
MR1=D1 D Q
5000
6000 5 8 Q
Industry
Firm 17
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18. New Long Run Equilibrium at $10 Price
Zero Economic Profit P P MC S1
ATC
$10
$10
MR1=D1 D Q
5000
6000 5 Q
Industry
Firm 18
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19. Is this the short or the long run? Why?
What will firms do in the long run?
What happens to P and Q in the industry?
What happens to P and Q in the firm? P S P MC
ATC
$15
$15
MR=D D Q
4000
5000 8 Q
Industry
Firm 19
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20. Firms leave to avoid losses so supply decreases in the industry
Price increases and quantity decreases S1 P S P MC
ATC
$20
$15
$15
MR=D D Q
4000
5000 8 Q
Industry
Firm 20
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21. Price increase for the firm because they are price takers.
Price increases and quantity increases S1 P S P MC
ATC
$20
$20
MR1=D1
$15
$15
MR=D D Q
4000
5000 8 9 Q
Industry
Firm 21
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22. New Long Run Equilibrium at $20 Price
Zero Economic Profit S1 P P MC
ATC
$20
$20
MR1=D1 D Q 9
4000 Q
Industry
Firm 22
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23. Going from Long-Run to Long-Run Constant Cost Industry- New firms entering the market does not increase the costs for the firms already in the market. 23
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24. Currently in Long-Run Equilibrium
If demand increases, what happens in the short-run and how does it return to the long run? P S P MC
ATC
$15
$15
MR=D D Q
5000 8 Q
Industry
Firm 24
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25. Demand Increases The price increases and quantity increases
Profit is made in the short-run P S P MC
ATC
$20
$20
MR1=D1
$15
$15
MR=D D1 D Q
5000 8 9 Q
Industry
Firm 25
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26. Firms enter to earn profit so supply increases in the industry
Price Returns to $15 P S S1 P MC
ATC
$20
$20
MR1=D1
$15
$15
MR=D D1 D Q
5000 8 9
7000 Q
Industry
Firm 26
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27. Back to Long-Run Equilibrium
The only thing that changed from long-run to long-run is quantity in the industry P S1 P MC
ATC
$15
$15
MR=D D1 D Q
7000 8 Q
Industry
Firm 27
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28. What if demand falls?
If demand decreases, what happens in the short-run and how does it return to the long run? P S P MC
ATC
$15
$15
MR=D D Q
5000 8 Q
Industry
Firm 28
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29. Demand Decreases The price increases and quantity increases
Profit is made in the short-run P S P MC
ATC
$15
$15
MR=D
$10
$10
MR1=D1 D D1 Q
5000 7 8 Q
Industry
Firm 29
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30. Demand Decreases The price increases and quantity increases
Profit is made in the short-run S1 P S P MC
ATC
$15
$15
MR=D
$10
$10
MR1=D1 D D1 Q
3000
5000 7 8 Q
Industry
Firm 30
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31. Demand Decreases The price increases and quantity increases
Profit is made in the short-run S1 P P MC
ATC
$15
$15
MR=D D1 Q
3000 8 Q
Industry
Firm 31
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32. Practice 32

33. 2012 Multiple Choice #23
Answer: D 33

34. 2012 Multiple Choice #38
Answer: C 34

35. C

36. 2010 FRQ #1 36

37. 37

38. Going from Long-Run to Long-Run Increasing Cost Industry- New firms entering the market increase the costs for the firms already in the market. (Only asked once on a FRQ Form B) 38
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39. Currently in Long-Run Equilibrium
If demand increases, what happens in the short-run and how does it return to the long run? P S P MC
ATC
$15
$15
MR=D D Q Q
Industry
Firm 39
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40. INCREASING COST Industry
The price increases and quantity increases
Profit is made in the short-run P S P MC
$25
ATC
$25
$15
$15
MR=D D1 D Q Q
Industry
Firm 40
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41. Firms enter to earn profit but fight for resources causing costs to increase
Price Falls to $20 P S P
MC1 S1 MC
ATC1
$25
ATC
$25
$20
$15
$15
MR=D D1 D Q Q
Industry
Firm 41
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42. Firms enter to earn profit but fight for resources causing costs to increase
Price Falls to $20 P P
MC1 S1
ATC1
$20
MR1 D1 Q Q
Industry
Firm 42
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43. 2008 Audit Exam
26. C