1. ECONOMICS: Principles and Applications 3e HALL & LIEBERMAN © 2005 Thomson Business and Professional Publishing Perfect Competition

2. Figure 1 The Competitive Industry and Firm Ounces of Gold per Day Price per Ounce D $400 S (a) Market Demand Curve Facing the Firm $400 (b) Firm 1.The intersection of the market supply and the market demand curve… 3.The typical firm can sell all it wants at the market price… Ounces of Gold per Day Price per Ounce 2.determine the equilibrium market price 4.so it faces a horizontal demand curve

3. Table 1 Cost and Revenue Data for Small Time Gold Mines

4. Figure 2 Profit Maximization in Perfect Competition TR 550 $2,800 2,100 TC Slope = 400 Ounces of Gold per Day Dollars 12345678910 Maximum Profit per Day = $700 (a)

5. Figure 2 Profit Maximization in Perfect Competition MC $400 D = MR Ounces of Gold per Day Dollars 12345678910 (b)

6. Figure 3 Measuring Profit or Loss $400 300 Profit per Ounce ($100) d = MR MC ATC (a) Economic Profit Ounces of Gold per Day Dollars 12345678

7. Figure 3 Measuring Profit or Loss MC ATC d = MR $300 200 Loss per Ounce ($100) (b) Economic Loss Ounces of Gold per Day Dollars 12345678

8. Figure 4 Short-Run Supply Under Perfect Competition 0.50 1,000 2,000 4,000 5,000 7,000 1.00 2.00 $3.50 2.50 MC ATC d 1 =MR 1 AVC (a) Firm's Supply Curve 0.50 2,0004,000 5,000 7,000 1.00 2.00 $3.50 2.50 (b) d 2 =MR 2 d 3 =MR 3 d 4 =MR 4 d 5 =MR 5 Bushels per Year Dollars Price per Bushel Bushels per Year

9. Figure 5 Deriving the Market Supply Curve 0.50 1.00 2.00 $3.50 2.50 Market Supply Curve 200,000 400,000 500,000 700,000 Firm's Supply Curve 0.50 2,0004,000 5,000 7,000 1.00 2.00 $3.50 2.50 1.At each price... 3.The total supplied by all firms at different prices is the market supply curve. (a) Firm (b) Market Bushels per Year Price per Bushel Bushels per Year 2.the typical firm supplies the profit-maximizing quantity.

10. Figure 6 Perfect Competition

11. Figure 7 Short-Run Equilibrium in Perfect Competition 400,000700,000 2.00 $3.50 S D1D1 D2D2 MC d1d1 d2d2 ATC 7,0004,000 2.00 $3.50 3.If the demand curve shifts to D 2 and the market equilibrium moves here... 4.the typical firm operates here and suffers a short-run loss. 2.the typical firm operates here, earning economic profit in the short run. 1.When the demand curve is D 1 and market equilibrium is here... Profit per Bushel at p = $3.50 Price per Bushel (a) Market Bushels per Year Dollars (b) Firm Bushels per Year Loss per Bushel at p = $2

12. Figure 8 From Short-Run Profit to Long-Run Equilibrium S1S1 d1d1 ATC MC $4.50 With initial supply curve S 1, market price is $4.50… $4.50 900,0009,000 So each firm earns an economic profit. A A Price per Bushel (a) Market Bushels per Year Dollars (b) Firm Bushels per Year D 5,000

13. Figure 8 From Short-Run Profit to Long-Run Equilibrium S1S1 d1d1 ATC MC $4.50 Profit attracts entry, shifting the supply curve rightward… $4.50 900,000 9,0005,000 until market price falls to $2.50 and each firm earns zero economic profit. S2S2 d1d1 A A 2.50 E E (c) Market(d) Firm Price per Bushel Bushels per Year Dollars Bushels per Year D 1,200,000

14. Figure 9 Perfect Competition and Plant Size P1P1 q1q1 d 1 = MR 1 LRATC MC 1 ATC 1 E d 2 = MR 2 LRATC MC 2 ATC 2 P* q* 4.and all firms earn zero economic profit and produce at minimum LRATC.. Dollars Output per Period 3.As all firms increase plant size and output, market price falls to its lowest possible level... 1.With its current plant and ATC curve, this firm earns zero economic profit. 2.The firm could earn positive profit with a larger plant, producing here. (a)(b)

15. Figure 10 An Increasing-Cost Industry INITIAL EQUILIBRIUM D1D1 S1S1 A P1P1 Q1Q1 P1P1 q1q1 MC A ATC 1 d 1 = MR 1 Output per Period (a) Market Dollars (b) Firm Output per Period Price per Unit

16. Figure 10 An Increasing-Cost Industry NEW EQUILIBRIUM MC ATC 1 Dollars (d) Firm P1P1 q1q1 A d 1 = MR 1 Output per Period (c) Market S1S1 Output per Period Price per Unit D1D1 A P1P1 Q1Q1 d SR = MR SR d 2 = MR 2 P2P2 P SR P2P2 ATC 2 C B B C Q SR Q2Q2 q2q2 q SR S2S2 S LR D2D2

17. Figure 11 Technological Change in Perfect Competition $3 Q1Q1 S1S1 2 Q2Q2 A B D S2S2 1000 ATC 1 ATC 2 d 1 = MR 1 d 2 = MR $3 2 Bushels per Day Price per Bushel (a) Market Dollars per Bushel (b) Firm Bushels per Day