Professional Documents
Culture Documents
There are many buyers and sellers in the market. The goods offered by the various sellers are largely the same. Firms can freely enter or exit the market.
The actions of any single buyer or seller in the market have a negligible impact on the market price. Each buyer and seller takes the market price as given.
Buyers and sellers must accept the price determined by the market.
Copyright2004 South-Western
Qc 0
TC 55000
MC 0
AC 0
P 40
TR 0
PROFIT -55000
MR 0
1000
2000 3000
85000
110000 130000
30
25
85
55
40
40 40 40 40 40
40000
80000 120000 159960 160000 160040
-45000
-30000 -10000 -0.01 0 -0.01
40
40 40 40 40 40
4001 160040.01
5000
210000
50.01
42
40
200000
-10000
40
Copyright2004 South-Western
MC
ATC
AVC
P= D
0 QMAX
Quantity
Copyright 2004 South-Western
MC
P2
ATC
P1
AVC
Q1
Q2
Quantity
Copyright 2004 South-Western
Sunk costs are costs that have already been committed and cannot be recovered.
Shut down if TR < VC Shut down if TR/Q < VC/Q Shut down if P < AVC
Costs If P > ATC, the firm will continue to produce at a profit. Firms short-run supply curve MC
ATC If P > AVC, firm will continue to produce in the short run.
AVC
Quantity
Quantity
The portion of its marginal cost curve that lies above average variable cost.
The marginal cost curve above the minimum point of its average total cost curve.
MC
Supply
$2.00
$2.00
1.00
1.00
100
200
Quantity (firm)
100,000
Quantity (firm)
Quantity (market)
MC
ATC A P1
P1
Quantity (firm)
Q1
Quantity (market)
Price
Price
Profit P2 P1
MC
ATC P2 A P1
S1
D2 D1 0 Quantity (firm) 0 Q1 Q2
Long-run supply
Quantity (market)
MC P1
ATC P2 A P1
S1 S2 C D2 D1 Long-run supply
Quantity (firm)
Q1
Q2
Q3 Quantity (market)
The marginal firm is the firm that would exit the market if the price were any lower.
Summary
Because a competitive firm is a price taker, its revenue is proportional to the amount of output it produces. The price of the good equals both the firms average revenue and its marginal revenue.
Summary
To maximize profit, a firm chooses the quantity of output such that marginal revenue equals marginal cost. This is also the quantity at which price equals marginal cost. Therefore, the firms marginal cost curve is its supply curve.
Summary
In the short run, when a firm cannot recover its fixed costs, the firm will choose to shut down temporarily if the price of the good is less than average variable cost. In the long run, when the firm can recover both fixed and variable costs, it will choose to exit if the price is less than average total cost.
Summary
In a market with free entry and exit, profits are driven to zero in the long run and all firms produce at the efficient scale. Changes in demand have different effects over different time horizons. In the long run, the number of firms adjusts to drive the market back to the zero-profit equilibrium.