Perfect Competition part III
Short Run & Long Run Supply Curves
Chapter 14 completion
Worksheet Problem #4
Stay Open or Shutdown?
Price
MC
ATC
AVC Shutdown
P < AVC
AVC
P1
0
___ -----------------------
__________________
.
Economic Loss .
E1
Q1
D = MR
Stay Open when
P ≥ AVC
Quantity
Individual Firm Supply Curves
• Short-Run Firm Supply Curve
– Min. of AVC & Above
– P < AVC shutdown
• Long-Run Firm Supply Curve
– Min. of ATC & Above
– P < ATC Exit
Short Run Increase in Demand
Increase in market demand =>
Each Firm produces more &
↑ price & quantity supplied
earn a short run economic profit
Entire Market
1- Individual Firm
Price
Price
B
P2
P1
B
S1
P2
A
P1
MC
ATC
D2 = MR2
profit
A
D1 = MR1
D2
D1
0
Q1
Q2
Quantity (market)
0
Q1
Q2
Quantity (firm)
This is can not be a long run equilibrium!
Reaching Long Run Equilibrium
Economic Profit induces new firms to
enter market => supply increases
Price
Entire Market
Price
1 Individual Firm
MC
S1
P2
B
A
C
P1
S2
Long-run
Market supply
B
P2
P1
ATC
D2 = MR2
CA
D1=MR1 D3=MR3
D2
D1
0
Q1
Q2
Q3
Quantity (firm)
0
Q1
Quantity (market)
But total market supply is greater Q3
In long run market price is restored
as more firms are in market
to min. of ATC & Profit = 0
Short-Run Market Supply Curve
Market Supply Curve is the sum of all individual supply curves
(a) Individual
Firm Supply
(b) Market Supply
Price
Price
MC
Supply
$2.00
$2.00
1.00
1.00
0
100
200
Quantity (firm)
0
100,000
An industry with 1,000 identical firms =>
at each price output is 1000 times larger
200,000 Quantity (market)
Long-Run Market Supply Curve
Market supply curve is different than the individual firm supply curve (P > ATC)
Market Supply
Price
Long Run Zero-Profit Condition
Price
Entry/Exit cease
enough supply to
satisfy any demand
MC
ATC
Long Run Market Supply Curve
P = minimum
ATC
0
Quantity (firm)
0
• Is Horizontal at the minimum of ATC
• Market will supply any quantity at P = ATC
Quantity (market)
Practice Multiple Choice Test
• Perfect Competition Equilibrium
Perfect Competition Video
• http://www.youtube.com/watch?v=8IDK_3
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