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Prices and Output decisions for The FIRM In Purely Competitive Market Structure.

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Presentation on theme: "Prices and Output decisions for The FIRM In Purely Competitive Market Structure."— Presentation transcript:

1 Prices and Output decisions for The FIRM In Purely Competitive Market Structure

2 Profit, Loss, and Shutdown P4 Q1Q2 Q3 Q4 P3 P2 P1 Break-even point Shutdown point A B C D AVC ATC MC MR1 MR2 MR3 MR4 PRICE QUANTITY MR5 E P5 Q5

3 Profit, Loss, and Shutdown P4 Q2Q4 P3 P2 P1 Economic Profit A B C D AVC ATC MC MR1 MR2 MR3 MR4 PRICE QUANTITY MR5 E P5 Q5

4 Profit, Loss, and Shutdown P4 Q2 Q3 Q4 P3 P2 P1 Loss A B C D AVC ATC MC MR1 MR2 MR3 MR4 PRICE QUANTITY MR5 E P5

5 Long-run equilibrium for the purely competitive firm P Q ATC MC MR PRICE QUANTITY Zero Economic Profit

6 How an increase in demand changes long-run equilibrium for the Firm and the Industry $50 Q2 Q $40 ATC MC PRICE QUANTITY $60 Q1 QUANTITY The INDUSTRY THE FIRM PRICE D D1 Q1Q S S1 $50 $60

7 Because demand increases, D→D1, the price rises in the industry The rise in price raises the MR curve (remember P=MR) for the firm This rise in price allows the firm to reap economic profits in the short-run Firms in other industries, see these economic profits (profit is the motivator) In the long-run, the “unseen hand” goes to work, and because of ease of entry, firms enter this industry The increase in the number of suppliers (rotteN), increases supply, S→S1 The increase in supply lowers the price in the industry The 2 shifts in the same direction, with certainty, increases quantity although price is indeterminate Only firms that can operate efficiently, at this new equilibrium price, will remain in the industry

8 How a decrease in demand changes long-run equilibrium for the Firm and the Industry $50 Q2 Q $40 ATC MC PRICE QUANTITY $60 Q1 QUANTITY The INDUSTRY THE FIRM PRICE D D1 Q1Q S S1 $50 $60 $40


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