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Chapter 3 - 14-Perfect Competition
Chapter 3 - 14-Perfect Competition
P ric e Q u a n tity
Q u a n tity
P ric e
© 2008 Cengage Learning
The Revenue of a Competitive Firm
0 Q1 QMAX Q2 Quantity
© 2008 Cengage Learning
Figure 2 Marginal Cost as the Competitive Firm’s Supply
Curve As P increases, the firm will
Price select its level of output
So, this section of the along the MC curve.
firm’s MC curve is MC
also the firm’s supply
curve.
P2
ATC
P1
AVC
0 Q1 Q2 Quantity
© 2008 Cengage Learning
The Firm’s Short-Run Decision to Shut
Down
• A shutdown refers to a short-run decision not to
produce anything during a specific period of
time because of current market conditions.
• Exit refers to a long-run decision to leave the
market.
ATC
Firm
shuts
down if
P < AVC
0 Quantity
Costs
Firm’s long-run
supply curve MC = long-run S
Firm
enters if
P > ATC ATC
Firm
exits if
P < ATC
0 Quantity
Price
MC ATC
Profit
ATC P = AR = MR
0 Q Quantity
(profit-maximizing quantity)
© 2008 Cengage Learning
Figure 5 Profit as the Area between Price and Average Total
Cost
(b) A Firm with Losses
Price
MC ATC
ATC
P P = AR = MR
Loss
0 Q Quantity
(loss-minimizing quantity)
© 2008 Cengage Learning
THE SUPPLY CURVE IN A
COMPETITIVE MARKET
• The competitive firm’s long-run supply curve
is the portion of its marginal-cost curve that
lies above average total cost.
MC Supply
$2.00 $2.00
1.00 1.00
If the industry has 1000 identical firms, then at each market price, industry
output will be 1000 times larger than the representative firm’s output.
© 2008 Cengage Learning
The Long Run: Market Supply with Entry
and Exit
• Firms will enter or exit the market until profit is
driven to zero.
• In the long run, price equals the minimum of
average total cost.
• The long-run market supply curve is horizontal
at this price.
MC
ATC
P = minimum Supply
ATC
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a
certain product or service or otherwise on a password-protected website for classroom use. © 2008 Cengage Learning
36
IS PERFECT COMPETITION MARKET
STRUCTURE GOOD FOR THE WELFARE OF
SOCIETY?
• Is PC RAE?
• Is PC PE?