Short run equilibrium of the firm ( Profit is

the area between Price and AC)

Short run equilibrium of the firm(losses)
Shut down point(If P< AVC)
• When market price is OP1, firm in equilibrium at point R at output OQ.

• Here AC is = QS which is >P(QR). Losses =P1RST.BUT QR (P) is > AVC(QB)

• At price OP1 firm is covering the entire TVC (OQBA)and a part of the fixed costs(ABST).Thus losses will be smaller in case of firm working than if it stops producing.

• If Price in the market falls to OP2 , firm is in equilibrium at point D. Here P= AVC. At Point D , the firm is covering the entire AVC but not the Fixed costs. Loss = FC (P2DUV).

• IF Price falls below OP2(say OP3), the firm will simply shutdown as it will not cover even its variable costs. .
Long run equilibrium condition of a
competitive firm
• Price = Marginal cost = Average cost
Long run equilibrium adjustment of a
competitive firm
Competitive firm’s long run equilibrium with
Normal Profits
Marginal Cost and the Competitive Firm’s
Supply Curve
• At price P1, firm produces Q1, at which MC = P
• If Price increases due to change in global market conditions such as shortage ,then Price rises to OP2 , where MR is now higher than MC at the previous level of output , so
farmers look to increase production.
• The new qty is Q2,at which MC=P.
• The MC curve of the firm determines the qty of the good it is willing to supply at any price and hence MC is the firm’s supply curve
The Competitive Firm’s Short-Run Supply
Curve
• In the short run the competitive firm’s supply curve is its MC Curve above AVC. If the price falls below AVC, the firm is
better shutting down.
Market Supply with a Fixed Number of Firms
• If a market has 1000 identical firms, for any given price ,each firm supplies a qty at which MC= P. That is as long as the P is above AVC , each firm’s MC curve is its
supply curve.( panel A)
• The qty of output supplied to the market equals the sum of the qts supplied by each of the 1000 firms.
• To arrive at the market supply curve we add the qty supplied by each firm.
Figure 6.10 The Competitive Firm’s Long-
Run Supply Curve

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 ©
CENGAGE EMEA 2017
Figure 6.13 Market Supply with Entry and
Exit

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 ©
CENGAGE EMEA 2017
Figure 6.14 An Increase in Demand in the
Short Run and Long Run

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 ©
CENGAGE EMEA 2017