Professional Documents
Culture Documents
MARKET?
A competitive market has many buyers and
sellers trading identical products so that each
buyer and seller is a price taker.
Buyers and sellers must accept the price
determined by the market.
Average Revenue =
Total revenue
Quantity
Price Quantity
Quantity
= Price
2007 Thomson South-Western
Price
MC
If the firm produces
Q2, marginal cost is
MC2.
ATC
MC2
P = MR1 = MR2
AVC
P = AR = MR
MC
ATC
P1
AVC
If the firm
produces Q1,
marginal cost is
MC1.
MC1
Q1
QMAX
Q2
Quantity
Q1
Q2
Quantity
2007 Thomson South-Western
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
Firm
shuts
down if
P < AVC
0
Quantity
2007 Thomson South-Western
2007 Thomson South-Western
MC = long-run S
Firm
enters if
P > ATC
Enter if TR > TC
Enter if TR/Q > TC/Q
Enter if P > ATC
ATC
Firm
exits if
P < ATC
Quantity
Profit = TR TC
Profit = (TR/Q TC/Q) x Q
Profit = (P ATC) x Q
Price
MC
ATC
Profit
P
ATC
P = AR = MR
Quantity
Q
(profit-maximizing quantity)
MC
ATC
ATC
P
P = AR = MR
Loss
Q
(loss-minimizing quantity)
Quantity
2007 Thomson South-Western
2007 Thomson South-Western
Price
MC
Supply
$2.00
$2.00
1.00
1.00
100
200
Quantity (firm)
100,000
200,000
Quantity (market)
If the industry has 1000 identical firms, then at each market price, industry
output will be 1000 times larger than the representative firms output.
2007 Thomson South-Western
2007 Thomson South-Western
Price
MC
ATC
P = minimum
ATC
Supply
Quantity (firm)
Quantity (market)
Firm
Price
Price
MC
Short-run supply, S1
A
P1
Long-run
supply
ATC
P1
Demand, D1
0
Q1
Quantity (market)
Quantity (firm)
P2
P1
Firm
Price
Price
MC
S1
ATC
S1
P2
Long-run
supply
Market
Firm
Price
Price
P2
P1
P1
D2
MC
S2
Long-run
supply
ATC
P1
D2
D1
D1
0
Q1
Q2
Quantity (market)
Quantity (firm)
Q1
Q2
Q3
Quantity (firm)
Quantity (market)
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.
10
Summary
Summary
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.
11