8 Supply in A Competitive Market

& / Market Structures

. and Perfect Competition in the Short Run-

•
Market Structure : The Competitive Environment in which firms operate

We categorize Market or Industry Using Three Primary Characteristics :

① Number of firms ,
more : More competitive the Market is
② Whether the Consumer care Which Company made the good ,
more they don't : more Competitive
③ Barriers to Entry .
Easier : more competitive

8. la Perfect Competition
Market Characteristics :
① Number of firms Many .
,
no one firm has substantia Power to Manipulate Market Equilibrium
② Types of Product Sold .
Identical! Perfect Substitutes for each other
③ Barriers of Entry .
no Barriers
conclusion : firms don't have choice about What prices to charge
a .

'

Prices are determined Solely by the Powers of Supply & Demand in the market
Price takers :
Perfectly Competitive firms

8. lb Why Perfectly Competitive Markets Are Important to Study Even If rare

.
in real life
① Some do exist & some are Almost Perfect
② Is a benchmark against Which Economist measure the Efficiency of other market Structure
'

goods sold at Marginal Cost

.
CS & Ps
largest
-
Production @ lowest cost

8. k The Demand Curve as seen by the Price Taker

Ty : Price taker

!!!
 § 2 Profit ,
Maximization in a Perfect Competitive Market

Profit : TR - TC

Aza

t
"with

Mr:of.aoma"8f
↳ In a Perfectly competitive market

Mr

8. 2b How a Perfectly Competitive firms maximizer Profit

Why MR ML :

÷÷÷÷
MR MC

: :: :c : in ::::::÷:÷÷
: '

If MR :P = MC Max Profit
Ml
p , MR ,
Aa

L .
Q

8. Lc Measuring a firm, Profit

±trn÷H*ah;fA¥ Ato
tae
:

p
- firms leave& then
each
remaining firm
has to Produce more Q

Qtthfcf
8. Ld tf Profit is Negative .
Should a firm Shutdown

f}
Perfect Competition in the Short -
Run
.

8.3 a A firm; short Run -

Supply Curve in a
Perfectly Competitive Market
We now know that a Perfectly Competitive will Operate in the short -
Run as long as P > Avc
and P: MR : me at the optimal output .

The Short -
Run Supply Curve is the M@oveAVl.be cause Underneath it will shut down

Because MC is the Supply ,

changes in VC Will influence Supply ,

but FC Won't Influence supply in the Short

Changes
, in - Run .

Only in the long - Run no costs are fixed .

8.3b The Short Run -

Supply Curve for a Perfectly Competitive Industry

How does Price get determined If noSingle firm can Influence it by changing output ? By the Industry S curve .

Industry S The Combined Output Decision

curve : of All firms .

'

Supplyfirm = Firm Ml
↳ all firm have the Same Supply Because ,

they the output Where

Choose
MC MR :P they all have the Same
-
-

(Ost Curves ( this is an A sumption we make)

-
The Industry S curve
↳ horizontal Sum of its Individual firms
supply Curve
8.3C Producer Surplus & Profit for a Competitive firm PS:TR
When Short -
Run Industy Supply Curve
Intersect the Market demand Curve
FC ?
.

We get the Equilibrium

At all but the lowest market price levels ,

firm , will Sell Some of their output

P.Q at a price where MCLMR :P

Producer Surplus f- Profit

Producer TR VC
-

-
-

Profit : TR VC FC
-
-

In the Short Run firms operate with a

-

,
negative Profit , but never with a negative
Producer Surplus If there's a PS , a firm covers its Average costs
.

8. 3d Producer Surplus for a

Competitive Industry

Lecture Quiz
&} .
TC :
Avc :
393-1844304+50
3Q ? 18 Q 1-30 Ml : AVC -0 Shutdown Point
' '
ML :
GQ -

36 Q t 30 3Q -
18 Q t 30 : got -
369730

Whatis the Shutdown Q KP ? O : 692 189 -

MC : AVC O : Q ( GQ 181 -

Q : O Q :3

AVL ( 3) = 3191 -
181311-30=-271-30--31,
F- 3 to Shutdown price
 § 4 .
Perfectly Competitive Industries
Long Run : O economic Profit
in the
long - Run

Remember ! firms '

supply output where its short -

Run MlR .

If it will Still Supply

-

-
Short Run supply is the portion of a firm 's Short run MC curve above its AVL

In the long run There is no FL So AVC -

ATL
ATC.MU/yr..P-.df
.
-

: .

,
firms may enter 1 Exit a market

B
-

LAT L L P MR So firms make profit

:
,
a

New firms will thus enter .

As long as there is

free Entry
↳ The ability of a firm to enter an Industry

-
firms will continue to enter Until ,

long - run
Competitive equilibrium : P ATC min & firms won't
:

gain Profits by entering

In this case, The Industry is

perfectly Competitive

:÷i:÷
In The long Run
'
Capital can Also Be Adjusted
-

Possibility of Setting up A new

firm
'

firms can Enter & Exit

:÷÷:÷÷÷÷÷÷÷÷:÷:÷÷÷÷
New firms will enter .

.
When they do, The Supply lone centre industry,
shift out

① Demand th ( Shift Out I

② firms would make Economic Profit
③ New firms will Enter Qs shifts out ,
→ PH ro
-
MRI -B EP to

⑧ E. P to 0 again , Pa B Pi again .
-

,
but now there are more

firms

Assuming ,
Price of Inputs Stay the same

Exits are the same as Entries

8. da long - Ron Equilibria adsustments
Demand Increase Cost Decrease

8. Ab long Run
Supply in Constant Increasing and Decreasing Cost Industries -
- -
-

, ,

We know that , long -

Run Supply Curve of a Perfectly com petite Industry is horizontal ,

at a Price equal to Minimum ATL

ATC.MU/YR=P--df
.

This all true in a constant -

cost Industry
↳ An Industry whose firm 's total Costs do not change with total Industry Output
①In a Increasing -
lost Industry ② In a Decreasing cost Industry -

Production)
L R ATL to
Tsb Industry outputted leg
-

.
.
.
Oil

L R ATL
.
.

Fragoso Industry outputted leg .

Oil Production)

QUIZ

t.is#Iooooo'
•
Results in Upward Sloped long - Run Supply Curve
ML 992-6091-200
Example 393-300,2+2000,
TL -
-
:

Q; 10,000 -
doop AUT: 392-3091-200
)
P C. M .
-
B TL : Q -
20 Q't 1809 Old : 10, ooo .
go (125) 942-6001 -

- 39
'
-
309

Human . .si?n:::::n ?
-
MC :3 Q '
-
too, t Iso Q = 5
-

ATC : Q2 - 20 Q t 190 P : 75-1501-200=125

ATL : ML A
-

long - Run

39
'
-
too, t Ho -
. Q
'
-
209 two Plot : 100
Q 190) : 2750 22180) -

292.209 :O Pool : 300 -

doo t 100
-
-

40 : 1870

Q (29-20)--0
4=18701 ,
187
Q :O Q -
- 10 10
§5 ,
Produce .
Surplus ,
Economic Rents , and Economic Profit

-
In L R -
: 0 Economic Profit
However firms differ
,
in their Individual lost Curves .

The more efficient Producer earn Economic Rent

LB
Returns to Specialized In pots above what firms
Paid for them
This is why MC Market Price is high
Slopes Higher firm, don't start
supplying Until enough
-

cost
curve up : -

The long Run Market Price equals

-
the Minimum ATL of the highest -
Cost firm remaining
in the Industry .
This firm makes 0 Profit & 0 Surplus .

Other firm's minimum ATL are lower than that and they make on every sale
, a
profit .

This Difference is The Economic Rent

to cost difference relative to other firms In the Industry

firms can Make E. R but not E. P in the long - Run

fixed cost are Sunk in the short

-

Run