9
Perfect Competition
and the Supply Curve
Perfectly competitive market
 many firms
 standardized product
 firms freely enter or leave the market
 each firm is a price taker
Production and Profits
Q
Price
Total
Rev
Total
Cost
Profit
6
25
150
72
78
7
25
175
84
91
8
25
200
101
99
9
25
225
126
99
10
25
250
166
84
Marg
Rev
Marg
Cost
Perfect competition: price unaffected by quantity
220
Total revenue
Cost or Revenue ($)
200
180
Maximize
Total
Profit
99
160
99
140
120
100
80
Note:
Maximum profit
where slopes of the
two curves are equal.
60
Total cost
40
20
2
4
6
8
10
Output
Marginal Rev = Marginal Cost
Marginal
cost
Cost or revenue ($)
40
35
30
Marginal
revenue
25
20
15
10
5
2
4
6
8
Note:
Maximum profit
where
10 MR=MC.
Output
The Shut-Down Decision
200
Total cost
Cost or Revenue ($)
Net loss at every level of output.
180
160
140 But if fixed costs are
Variable cost
unavoidable, ignore them in
120
the shut-down decision.
100
Total revenue
80
60
40
Maximize
revenue over
variable cost
20
2
4
6
8
10
Output
Marginal Rev = Marginal Cost
Marginal
cost
Cost or revenue ($)
If40price (MR) is constant,
MC curve shows how much
35
output
will be supplied.
30
Marginal
revenue
25
20
15
Marginal
revenue
10
5
2
4
6
8
10
Output
The Short-Run Supply Curve
Marginal
cost
40
Cost ($)
Price ($)
35
30
Short-run
Supply
25
20
15
10
Average
variable cost
5
2
4
6
No supply when price < $5
8
10
Output
Short-Run Profit or Loss
Cost or Price ($)
40
Average
short-run
total cost
35
30
25
20
Long-run:
firms will
exit the
market
15
10
5
$9 $36 loss
4 units
2
Price =
Short-run
Supply
4
Quantity =
6
8
10
Output
Average Cost =
Short-Run Profit or Loss
Cost or Price ($)
40
Short-run
Supply
Average
short-run
total cost
35
30
25
20
$99 profit
$11
9 units
15
Long-run:
firms will
enter the
market
10
5
2
Price =
4
Quantity =
6
8
10
Output
Average Cost =
Long-Run Equilibrium: Price = Minimum Cost
Cost or Price ($)
40
Short-run
Supply
Average
short-run
total cost
35
30
25
20
15
10
5
2
Price =
4
Quantity =
6
8
10
Output
Average Cost =
Supply & Demand for Entire Market
Short-run
Supply
Price ($)
40
Market
Demand
35
30
25
20
15
10
5
200
400
Price = $12
Quantity = 100 x 7 = 700
600
800 1000
Output
Shift in Demand: Constant Cost Industry
Price ($)
40
Increase
in demand
35 increases output
• each firm
30
• temporary
profits
25
20
15
10
5
200
400
600
800 1000
Output
Shift in Demand: Constant Cost Industry
Price ($)
40
35
30
25
20
New
15 firms enter
• short-run
supply shifts
10
• profits
back to $0
5
200
400
Price = $12
Quantity = 135 x 7 = 945
600
800 1000
Output
Constant Cost Industry
 firms enter or exit until price returns to minimum cost
Market
Demand
Price ($)
40
35
30
25
20
Long-run
Supply
15
10
5
200
400
600
800 1000
Output
Increasing Cost Industry
 average costs increase as more firms enter
Cost ($)
40
35
30
Average
short-run cost:
200
firms
Average
short-run cost:
100 firms
25
20
15
10
5
2
4
6
8
10
Output
Increasing-Cost Industry
 long-run supply curve slopes upward
Market
Demand
Price ($)
40
35
30
25
Long-run
Supply
20
15
10
5
200
400
600
800 1000
Output
Price = $25
Firms 1, 2 … 45
Profit = $0
# units = ____
total # units = ____
Firms 1, 2 … 100
# units = ____
Profit =
Shift in
Supply Firms 46 … 100
enter the market
total # units = ____
Higher Quantity,
Price = $
Profit = $0
Shift in demand
Profit = $0
Firms 1, 2 … 135
# units = ____
Price = $
Firms 1, 2 … 100
total # units = ____
Price =
# units = ____
total # units = ____
Profit =
Shift in
Firms 101 … 135 Supply
enter the market
Surplus: Increasing-Cost Industry
Market
Demand
Price ($)
40
35
30
25
20
Long-run
Supply
15
10
5
200
400
600
800 1000
Output
Surplus: Constant-Cost Industry
Market
Demand
Price ($)
40
35
30
25
20
Long-run
Supply
15
10
5
200
400
600
800 1000
Output