Class 7 Summary
ECON 1001: An Introduction to Economics
Microeconomics
CHAPTER 13: THE COSTS OF PRODUCTION
Nov 14, 2022
T. Joseph
Carleton University
THE COSTS OF PRODUCTION
 This chapter, and the four that follow, examine firm
behaviour in greater detail.
‒ explores the decisions lie behind the Supply Curve in a
market.
‒ Introduces a part of Economics called Industrial
Organization: the study of how firms’ decisions regarding
prices and quantities depend on the market conditions
they face.
© T. Joseph / Nelson Education Ltd. 2022
13-2
WHAT ARE COSTS?
 We begin our discussion of costs the example of a
Cookie Factory.
 The owner of the firm, Caroline, buys flour, sugar,
chocolate chips, and other cookie ingredients.
 She also buys the mixers and ovens and hires workers
to run this equipment.
 She then sells the resulting cookies to consumers.
© T. Joseph / Nelson Education Ltd. 2022
13-3
WHAT ARE COSTS?
TOTAL REVENUE, TOTAL COST, AND PROFIT
 Total Revenue (for a firm): The amount a firm receives
for the sale of its output.
 Total Cost: The market value of the inputs a firm uses
in production.
 Profit: Total revenue minus total cost.
© T. Joseph / Nelson Education Ltd. 2022
13-4
WHAT ARE COSTS?
COSTS AS OPPORTUNITY COSTS
 The cost of something is what you give up to get it.
Recall that the opportunity cost of an item refers to
all those things that must be forgone to acquire that
item.
 When economists speak of a firm’s cost of
production, they include all the opportunity costs of
making its output of goods and services.
© T. Joseph / Nelson Education Ltd. 2022
13-5
WHAT ARE COSTS?
COSTS AS OPPORTUNITY COSTS (CONTINUED)
 Explicit Costs: Input costs that require an outlay of
money by the firm.
 Implicit Costs: Input costs that do not require an
outlay of money by the firm.
© T. Joseph / Nelson Education Ltd. 2022
13-6
WHAT ARE COSTS?
THE COST OF CAPITAL AS AN OPPORTUNITY COST
 An important implicit cost of almost every business is the
opportunity cost of the financial capital that has been
invested in the business.
 Caroline used $300 000 of her savings to buy her factory.
 If Caroline had instead left this money in a savings
account that pays an interest rate of 5 percent, she
would have earned $15 000 per year.
 This forgone $15 000 is one of the implicit opportunity
costs of Caroline’s business.
© T. Joseph / Nelson Education Ltd. 2022
13-7
WHAT ARE COSTS?
ECONOMIC PROFIT VERSUS ACCOUNTING PROFIT
 Because economists and accountants measure
costs differently, they also measure profit
differently.
 An economist measures a firm’s economic
profit as the firm’s total revenue minus all the
opportunity costs (explicit and implicit) of
producing the goods and services sold.
 An accountant measures the firm’s accounting
profit as the firm’s total revenue minus only the
firm’s explicit costs. © T. Joseph / Nelson Education Ltd. 2022
13-8
Economic vs. Accounting Profit
© T. Joseph / Nelson Education Ltd. 2022
13-9
Example
 Farmer McDonald gives banjo lessons for $20
an hour. One day, he spends 10 hours planting
$100 worth of seeds on his farm.
 What opportunity cost has he incurred? What
cost would his accountant measure?
 If these seeds will yield $200 worth of crops,
does McDonald earn an accounting profit?
 Does he earn an economic profit?
© T. Joseph / Nelson Education Ltd. 2022
13-10
PRODUCTION AND COSTS
 In the analysis that follows, we make an important
simplifying assumption: We assume that the size of
Caroline’s factory is fixed and that Caroline can
vary the quantity of cookies produced only by
changing the number of workers.
 This assumption is realistic in the short run but not in
the long run.
© T. Joseph / Nelson Education Ltd. 2022
13-11
PRODUCTION AND COSTS
THE PRODUCTION FUNCTION
 Production Function: The relationship between the
quantity of inputs used to make a good and the quantity
of output of that good.
© T. Joseph / Nelson Education Ltd. 2022
13-12
A Production Function and Total Cost: Caroline’s Cookie Factory
© T. Joseph / Nelson Education Ltd. 2022
13-13
Caroline’s Cookie Factory
© T. Joseph / Nelson Education Ltd. 2022
13-14
PRODUCTION AND COSTS
THE PRODUCTION FUNCTION (CONTINUED)
 Marginal Product: The increase in output that arises
from an additional unit of input.
 Diminishing Marginal Product: The property whereby
the Marginal Product of an input declines as the
quantity of the input increases.
© T. Joseph / Nelson Education Ltd. 2022
13-15
PRODUCTION AND COSTS
FROM THE PRODUCTION FUNCTION TO THE TOTAL-COST CURVE
 The last three columns of the table show Caroline’s cost of
producing cookies.
 The cost of Caroline’s factory is $30 per hour, and the cost
of a worker is $10 per hour.
 If she hires one worker, her total cost is $40. If she hires two
workers, her total cost is $50, and so on.
 With this information, the table now shows how the number
of workers Caroline hires is related to the quantity of
cookies she produces and to her total cost of production.
© T. Joseph / Nelson Education Ltd. 2022
13-16
THE VARIOUS MEASURES OF COST
 From data on a firm’s total cost, we can derive
several related measures of cost, which will
turn out to be useful when we analyze
production and pricing decisions in future
chapters.
© T. Joseph / Nelson Education Ltd. 2022
13-17
The Various Measures of Cost: Conrad’s Coffee Shop
© T. Joseph / Nelson Education Ltd. 2022
13-18
THE VARIOUS MEASURES OF COST
FIXED AND VARIABLE COSTS
 Fixed Costs: Costs that do not vary with the quantity
of output produced.
 Variable Costs: Costs that do vary with the quantity of
output produced.
© T. Joseph / Nelson Education Ltd. 2022
13-19
Conrad’s Total-Cost Curve
© T. Joseph / Nelson Education Ltd. 2022
13-20
THE VARIOUS MEASURES OF COST
FIXED AND VARIABLE COSTS (CONTINUED)
 Fixed Costs: Costs that do not vary with the quantity of
output produced.
 Variable Costs: Costs that do vary with the quantity of
output produced.
 A firm’s total cost is the sum of fixed and variable costs.
© T. Joseph / Nelson Education Ltd. 2022
13-21
THE VARIOUS MEASURES OF COST
AVERAGE AND MARGINAL COSTS
 As the owner of his firm, Conrad has to decide how
much to produce.
 Conrad might ask his production supervisor the
following two questions about the cost of producing
coffee:
1. How much does it cost to make the typical
cup of coffee?
2. How much does it cost to increase
production of coffee by one cup?
© T. Joseph / Nelson Education Ltd. 2022
13-22
THE VARIOUS MEASURES OF COST
AVERAGE AND MARGINAL COSTS (CONTINUED)
 Average Total Cost (ATC): Total cost divided by the
quantity of output.
 Average Fixed Cost (AFC): Fixed costs divided by the
quantity of output.
 Average Variable Cost (AVC): Variable costs divided
by the quantity of output.
 Marginal Cost (MC): The increase in total cost that
arises from an extra unit of production.
© T. Joseph / Nelson Education Ltd. 2022
13-23
AVERAGE AND MARGINAL COSTS (CONTINUED)
© T. Joseph / Nelson Education Ltd. 2022
13-24
Example:
Calculating Costs
Fill in the blank spaces of this table.
Q
VC
0
1
10
2
30
TC
AFC
AVC
ATC
$50
n/a
n/a
n/a
$10
$60.00
80
3
16.67
4
100
5
150
6
210
150
20
12.50
36.67
8.33
$10
30
37.50
30
260
MC
35
© T. Joseph / Nelson Education Ltd. 2022
43.33
60
13-25
Answers
Example
First,
deduce
FCbetween
= $50 andMC
useand
FC +TCVC = TC.
Use
relationship
AFC
== FC/Q
VC/Q
Use AVC
ATC
TC/Q
Q
VC
TC
AFC
AVC
ATC
0
$0
$50
n/a
n/a
n/a
1
10
60
$50.00
$10
$60.00
2
30
80
25.00
15
40.00
3
60
110
16.67
20
36.67
4
100
150
12.50
25
37.50
5
150
200
10.00
30
40.00
6
210
260
8.33
35
43.33
© T. Joseph / Nelson Education Ltd. 2022
MC
$10
20
30
40
50
60
13-26
THE VARIOUS MEASURES OF COST
COST CURVES AND THEIR SHAPES
 Graphs of average and Marginal Cost are
useful when analyzing the behaviour of
firms.
© T. Joseph / Nelson Education Ltd. 2022
13-27
Conrad’s Average-Cost and Marginal Cost Curves
© T. Joseph / Nelson Education Ltd. 2022
13-28
THE VARIOUS MEASURES OF COST
COST CURVES AND THEIR SHAPES (CONTINUED)
Rising Marginal Cost
 Conrad’s Marginal Cost rises with the quantity of
output produced.
 This reflects the property of diminishing Marginal
Product.
© T. Joseph / Nelson Education Ltd. 2022
13-29
THE VARIOUS MEASURES OF COST
COST CURVES AND THEIR SHAPES (CONTINUED)
U-Shaped Average Total Cost
 To understand why this is so, remember that average
total cost is the sum of average fixed cost and average
variable cost.
 Average fixed cost always declines as output rises
because the fixed cost is spread over a larger number
of units.
 Average variable cost typically rises as output increases
because of diminishing Marginal Product.
© T. Joseph / Nelson Education Ltd. 2022
13-30
THE VARIOUS MEASURES OF COST
COST CURVES AND THEIR SHAPES (CONTINUED)
Efficient scale: The quantity of output that
minimizes average total cost.
© T. Joseph / Nelson Education Ltd. 2022
13-31
THE VARIOUS MEASURES OF COST
COST CURVES AND THEIR SHAPES (CONTINUED)
The Relationship between Marginal Cost and Average
Total Cost
 Whenever Marginal Cost is less than average total
cost, average total cost is falling.
 Whenever Marginal Cost is greater than average
total cost, average total cost is rising.
© T. Joseph / Nelson Education Ltd. 2022
13-32
Cost Curves for a Typical Firm
© T. Joseph / Nelson Education Ltd. 2022
13-33
THE VARIOUS MEASURES OF COST
TYPICAL COST CURVES
 The cost curves shown here share the three
properties that are most important to remember:
1. Marginal Cost eventually rises with the quantity
of output.
2. The Average Total Cost curve is U-shaped.
3. The Marginal Cost curve crosses the
Average Total Cost curve at the minimum
of Average Total Cost.
© T. Joseph / Nelson Education Ltd. 2022
13-34
COSTS IN THE SHORT RUN
AND IN THE LONG RUN
 We noted earlier in this chapter that a firm’s costs
might depend on the time horizon being examined.
© T. Joseph / Nelson Education Ltd. 2022
13-35
Average Total Cost in the Short and Long Runs
© T. Joseph / Nelson Education Ltd. 2022
13-36
COSTS IN THE SHORT RUN
AND IN THE LONG RUN
THE RELATIONSHIP BETWEEN SHORT-RUN
AND LONG-RUN AVERAGE TOTAL COST
 For many firms, the division of total costs between
fixed and variable costs depends on the time
horizon.
 Because many decisions are fixed in the short run
but variable in the long run, a firm’s long-run cost
curves differ from its short-run cost curves.
© T. Joseph / Nelson Education Ltd. 2022
13-37
COSTS IN THE SHORT RUN
AND IN THE LONG RUN
ECONOMIES AND DISECONOMIES OF SCALE
 Economies of scale: The property whereby long-run
average total cost falls as the quantity of output
increases.
 Diseconomies of scale: The property whereby longrun average total cost rises as the quantity of output
increases.
 Constant returns to scale: The property whereby
long-run average total cost stays the same as the
quantity of output changes.
© T. Joseph / Nelson Education Ltd. 2022
13-38
Summary: Types of Cost
© T. Joseph / Nelson Education Ltd. 2022
13-39
Class 8 Summary
ECON 1001: An Introduction to Economics
Microeconomics
CHAPTER 14: FIRMS IN COMPETITIVE MARKETS
T. Joseph
Carleton University
FIRMS IN COMPETITIVE MARKETS
 In this chapter we examine the behaviour of
competitive firms.
 A market is competitive if each buyer and
seller is small compared to the size of the
market and, therefore, has little ability to
influence market prices.
© T. Joseph / Nelson Education Ltd. 2022
14-41
WHAT IS A COMPETITIVE MARKET?
 The goal of this chapter is to examine how firms
make production decisions in competitive
markets.
 As a background for this analysis, we begin by
considering what a competitive market is.
© T. Joseph / Nelson Education Ltd. 2022
14-42
WHAT IS A COMPETITIVE MARKET?
THE MEANING OF COMPETITION
 Competitive Market: A market in which there are
many buyers and many sellers so that each has a
negligible impact on the market price (price takers).
 Three characteristics:
1. There are many buyers and many sellers in the
market.
2. The goods offered by the various sellers are
largely the same.
3. Firms can freely enter or exit the market.
© T. Joseph / Nelson Education Ltd. 2022
14-43
WHAT IS A COMPETITIVE MARKET?
THE REVENUE OF A COMPETITIVE FIRM
 A firm in a Competitive Market tries to maximize
profit, which equals total revenue minus total cost.
© T. Joseph / Nelson Education Ltd. 2022
14-44
WHAT IS A COMPETITIVE MARKET?
THE REVENUE OF A COMPETITIVE FIRM (CONTINUED)
P
: Price
 Q : Quantity
 TR : Total revenue
© T. Joseph / Nelson Education Ltd. 2022
14-45
Total, Average, and Marginal Revenue for a Competitive Firm
© T. Joseph / Nelson Education Ltd. 2022
14-46
WHAT IS A COMPETITIVE MARKET?
THE REVENUE OF A COMPETITIVE FIRM (CONTINUED)
 The fourth column in the table shows average
revenue.
 Average revenue tells us how much revenue a firm
receives for the typical unit sold.
 Average Revenue (AR): Total revenue divided by
the quantity sold.
© T. Joseph / Nelson Education Ltd. 2022
14-47
WHAT IS A COMPETITIVE MARKET?
THE REVENUE OF A COMPETITIVE FIRM (CONTINUED)
 The fifth column in the table shows Marginal
Revenue.
 Marginal Revenue (MR): The change in total revenue
from an additional unit sold.
 For competitive firms, Marginal Revenue equals the
price of the good.
© T. Joseph / Nelson Education Ltd. 2022
14-48
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
 We next examine how the firm maximizes
profit and how that decision leads to its
supply curve.
 The analysis of the firm’s supply decision starts
with an example.
© T. Joseph / Nelson Education Ltd. 2022
14-49
Profit Maximization: A Numerical Example
© T. Joseph / Nelson Education Ltd. 2022
14-50
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
A SIMPLE EXAMPLE OF PROFIT MAXIMIZATION (CONTINUED)
 One of the ten principles of economics in Chapter 1 is
that rational people think at the margin.
 If
, then increase milk production.
 If
, then decrease milk production.
 If
, now the firm is maximizing profits.
© T. Joseph / Nelson Education Ltd. 2022
14-51
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
THE MARGINAL-COST CURVE AND
THE FIRM’S SUPPLY DECISION
 To extend this analysis of profit maximization,
consider the cost curves in Figure 14.1.
 The Marginal Cost curve (MC) is upward sloping.
 The Average Total Cost curve (ATC) is U-shaped.
 The MC crosses the ATC at the minimum of
Average Total Cost.
© T. Joseph / Nelson Education Ltd. 2022
14-52
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
THE MARGINAL-COST CURVE AND
THE FIRM’S SUPPLY DECISION (CONTINUED)
 The figure also shows a horizontal line at the market
price (P).
 The price line is horizontal because the firm is a
price taker.
 For a competitive firm, the firm’s price equals both
its average revenue (AR) and its Marginal Revenue
(MR).
© T. Joseph / Nelson Education Ltd. 2022
14-53
Profit Maximization for a Competitive Firm
© T. Joseph / Nelson Education Ltd. 2022
14-54
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
THE MARGINAL-COST CURVE AND
THE FIRM’S SUPPLY DECISION (CONTINUED)
 Three rules are key to rational decision making for profit
maximization:
1. If Marginal Revenue is greater than Marginal Cost,
the firm should increase its output.
2. If Marginal Cost is greater than Marginal Revenue,
the firm should decrease its output.
3. At the profit-maximizing level of output, Marginal
Revenue and Marginal Cost are exactly equal.
© T. Joseph / Nelson Education Ltd. 2022
14-55
Marginal Cost as the Competitive Firm’s Supply Curve
© T. Joseph / Nelson Education Ltd. 2022
14-56
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
THE FIRM’S SHORT-RUN DECISION TO SHUT DOWN
 Under some circumstances, a firm will decide
to shut down and not produce anything at all.
© T. Joseph / Nelson Education Ltd. 2022
14-57
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
THE FIRM’S SHORT-RUN DECISION TO SHUT DOWN (CONTINUED)
 Shutdown versus exit:
 A shutdown refers to a short-run decision not to
produce anything during a specific period of time
because of current market conditions.
 An exit refers to a long-run decision to leave the
market.
 The short-run and long-run decisions differ because
most firms cannot avoid their fixed costs in the short run
but can do so in the long run.
© T. Joseph / Nelson Education Ltd. 2022
14-58
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
THE FIRM’S SHORT-RUN DECISION TO SHUT DOWN (CONTINUED)
 What determines a firm’s shutdown decision?
 If the firm shuts down, it loses
all revenue from the sale of its product.
 At the same time, it saves the variable costs of making its
product (but must still pay the fixed costs).
 Thus, the firm shuts down if the revenue that it would earn
from producing is less than its variable costs of production.
© T. Joseph / Nelson Education Ltd. 2022
14-59
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
THE FIRM’S SHORT-RUN DECISION TO SHUT DOWN (CONTINUED)
© T. Joseph / Nelson Education Ltd. 2022
14-60
The Competitive Firm’s Short-Run Supply Curve
© T. Joseph / Nelson Education Ltd. 2022
14-61
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
SUNK COSTS
 Sunk Cost: A cost that has already been committed
and cannot be recovered.
 Because nothing can be done about sunk costs,
they can be ignored when making decisions about
various aspects of life, including business strategy.
© T. Joseph / Nelson Education Ltd. 2022
14-62
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
THE FIRM’S LONG-RUN DECISION
TO EXIT OR ENTER A MARKET
 If the firm exits, it again will lose all
revenue from the sale of its product, but
now it saves on both fixed and variable
costs of production.
 The firm exits the market if the revenue it
would get from producing is less than its
total costs.
© T. Joseph / Nelson Education Ltd. 2022
14-63
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
THE FIRM’S LONG-RUN DECISION
TO EXIT OR ENTER A MARKET (CONTINUED)
© T. Joseph / Nelson Education Ltd. 2022
14-64
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
THE FIRM’S LONG-RUN DECISION
TO EXIT OR ENTER A MARKET (CONTINUED)
 The exit price coincides with the minimum point on
the Average Total Cost curve.
 The shutdown price coincides with the minimum
point on the Average Variable Cost curve.
© T. Joseph / Nelson Education Ltd. 2022
14-65
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
THE FIRM’S LONG-RUN DECISION
TO EXIT OR ENTER A MARKET (CONTINUED)
 The firm will enter the market if it is profitable, which
occurs if the price of the good exceeds the
Average Total Cost of production.
 The entry criterion is:
© T. Joseph / Nelson Education Ltd. 2022
14-66
The Competitive Firm’s Long-Run Supply Curve
© T. Joseph / Nelson Education Ltd. 2022
14-67
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
MEASURING PROFIT IN OUR GRAPH
FOR THE COMPETITIVE FIRM
 It is useful to analyze the firm’s profit in more detail.
 This way of expressing the firm’s profit allows us to
measure profit in our graphs.
© T. Joseph / Nelson Education Ltd. 2022
14-68
Profit as the Area between Price and Average Total Cost
© T. Joseph / Nelson Education Ltd. 2022
14-69
Example
Identifying a Firm’s Profit
A competitive firm
Determine this firm’s
total profit.
Costs, P
Identify the area on the
graph that represents
the firm’s profit.
P = $10
MC
MR
ATC
$6
50
© T. Joseph / Nelson Education Ltd. 2022
Q
14-70
Example
Answers
Costs, P
Profit per unit
= P – ATC
= $10 – 6
= $4
A competitive firm
MC
MR
P = $10
ATC
profit
$6
Total profit
= (P – ATC)×Q
= $4×50
= $200
© T. Joseph / Nelson Education Ltd. 2022
Q
50
14-71
Example
Identifying a Firm’s Profit
Determine
this firm’s total loss,
assuming AVC < $3.
Identify the area on
the graph that
represents
the firm’s loss.
A competitive firm
Costs, P
MC
ATC
$5
MR
P = $3
30
© T. Joseph / Nelson Education Ltd. 2022
Q
14-72
Example
Answers
A competitive firm
Costs, P
MC
Total loss
= (ATC – P)×Q
= $2×30
= $60
ATC
$5
P = $3
loss
loss per unit = $2
MR
30
© T. Joseph / Nelson Education Ltd. 2022
Q
14-73
THE SUPPLY CURVE IN A
COMPETITIVE MARKET
 Next, we explore the supply curve for a market.
 There are two cases to consider:
1. A market with a fixed number of firms
2. A market in which the number of firms
can change as old firms exit the market
and new firms enter
© T. Joseph / Nelson Education Ltd. 2022
14-74
THE SUPPLY CURVE IN A
COMPETITIVE MARKET
THE SHORT RUN: MARKET SUPPLY
WITH A FIXED NUMBER OF FIRMS
 Consider first a market with 1000 identical firms.
 For any given price, each firm supplies a quantity
of output so that its Marginal Cost equals the
price.
© T. Joseph / Nelson Education Ltd. 2022
14-75
Market Supply with a Fixed Number of Firms
© T. Joseph / Nelson Education Ltd. 2022
14-76
THE SUPPLY CURVE IN A
COMPETITIVE MARKET
THE LONG RUN: MARKET SUPPLY
WITH ENTRY AND EXIT
 If firms already in the market are profitable, then
new firms will have an incentive to enter the market.
 This entry will expand the number of firms, increase
the quantity of the good supplied, and drive down
prices and profits. (Vice versa.)
 At the end of this process of entry and exit, firms
that remain in the market must be making zero
economic profit.
© T. Joseph / Nelson Education Ltd. 2022
14-77
Market Supply with Entry and Exit
© T. Joseph / Nelson Education Ltd. 2022
14-78
THE SUPPLY CURVE IN A
COMPETITIVE MARKET
THE LONG RUN: MARKET SUPPLY
WITH ENTRY AND EXIT (CONTINUED)
 The long-run equilibrium of a competitive
market with free entry and exit must have
firms operating at their efficient scale.
© T. Joseph / Nelson Education Ltd. 2022
14-79
THE SUPPLY CURVE IN A
COMPETITIVE MARKET
WHY DO COMPETITIVE FIRMS STAY
IN BUSINESS IF THEY MAKE ZERO PROFIT?
 In the zero-profit equilibrium, economic profit
is zero, but accounting profit is positive.
© T. Joseph / Nelson Education Ltd. 2022
14-80
THE SUPPLY CURVE IN A
COMPETITIVE MARKET
A SHIFT IN DEMAND IN THE
SHORT RUN AND LONG RUN
 Because firms can enter and exit a market in the
long run but not in the short run, the response of a
market to a change in demand depends on the
time horizon.
© T. Joseph / Nelson Education Ltd. 2022
14-81
An Increase in Demand in the Short Run and Long Run
© T. Joseph / Nelson Education Ltd. 2022
14-82
An Increase in Demand in the Short Run and Long Run (Continued)
© T. Joseph / Nelson Education Ltd. 2022
14-83
An Increase in Demand in the Short Run and Long Run (Continued)
© T. Joseph / Nelson Education Ltd. 2022
14-84
THE SUPPLY CURVE IN A
COMPETITIVE MARKET
WHY THE LONG-RUN SUPPLY CURVE
MIGHT SLOPE UPWARD
 Two reasons why the Long-run Market Supply curve
might slope upward:
1. Some resources used in production may be
available only in limited quantities.
2. Firms may have different costs.
© T. Joseph / Nelson Education Ltd. 2022
14-85
An Upward Sloping Long-Run Supply Curve
© T. Joseph / Nelson Education Ltd. 2022
14-86