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Market structures (Types) 2 Perfect Competition (Ideal) 3. Short run vs. Long run 4. Law of diminishing productivity in the short run One firms output supply rule: Produce each unit for which P MC 5. The firms family of short-run cost curves 6. The short-run shut-down point for a firmPerfect
P
MC
P
D S
P
d P=2 S D 30 Competitive market (millions) d = MU
P=2
MR
P=2
P =2 =MR
1 2 3
If , P > MC Produce each unit for which P > MC P = MC Stop here (last unit).
MC =
Step 2: Determine Costs of output Use the market prices of inputs to determine the firms total costs of
production . Suppose, PL = $16 and PK = $10
T F C = PK K = 100
(2)
AFC =
TFC 100 = Q Q
(3)
TVC = PL L = 16 L
(4)
AVC =
TVC 16 L 16 = = Q Q APL
(5)
MC =
PL 16 = MPL MPL
(6)
AFC
AFC Q
AVC
AVC = 16 APL
AVC Q
Shape of MC Curve
MC
MC = 16 MPL
Step 3: Find the best output at each price (Supply curve) The Family of Short-run Cost Curves
Costs $
MC
ATC
6.55 4.60 AVCmin = 3.50 3.00
AVC
c b a
P2 P1
P3
60 75
90
Q Quantity
Step 3: A firms Short-run output Supply Curve Price 6.55 4.60 3.00 Price Supply curve Quantity Supplied 90 75 60
ATC AVC
6.55 4.67 3.50 AVC
c a
= 3.00 min
60 75
90
Q Quantity