MICROECONOMICS PREPARED BY: Dr. Mohammad Zedan Salem

OUTLINE OF CHAPTER 9:SUPPLY AND PRICING IN COMPETITIVE MARKETS -Supply behavior of the competitive firm -Supply behavior in competitive industries -Efficiency and equity of competitive markets

BEHAVIOR OF A COMPETITIVE FIRM - profit maximization requires that the firm must manage its internal operations efficiently -Because profits involve both costs and revenues, the firm must have a good grasp of its cost structure -The world of perfect competition is the world of price takers. A price taker is a firm that is so small relative to its market that the firm can not affect the market price but simply takes the price as given

COMPETITIVE SUPPLY WHERE MARGINAL COST EQUALS PRICE -the amount of output supplied must depend upon the costs of production - Under normal circumstances, a firm’s output decision is not so obvious and will involve the marginal cost of producing output

TOTAL COST AND THE SHUTDOWN CONDITION -A firm will want to shut down in the short run when it can no longer cover its variable costs. -The critically low market price at which revenues just equal variable cost (or equivalently at which losses exactly equal fixed costs) is called the shutdown point

SUPPLY BEHAVIOR IN COMPETITIVE INDUSTRIES -The total quantity brought to market at a given price will be the sum of the individual quantities that firms supply at that price -Demand shifts produce greater price adjustments in the short run than in the long run. We can understand this observation by distinguishing three time periods for market equilibrium that correspond to different cost categories: (1) momentary equilibrium, when supply is fixed, (2) short run equilibrium, when firms can increase their output even though plant and equipment are fixed, and (3) long run equilibrium, when all factors are variable, so firms can abandon old plants or build new ones and new firms can enter or exit the industry

SUPPLY BEHAVIOR IN COMPETITIVE INDUSTRIES -Firms shut down when they can no longer cover their variable costs. But in the long run, all costs are variable -From the previous analysis, the forces of competition tend to push firms and industries toward a zero-pure-profit long run state

EFFICIENCY AND EQUITY OF COMPETITIVE MARKETS -Allocative efficiency occurs when no possible reorganization of production can make anyone better off without making someone else worse off -We can think of the concept of efficiency intuitively in terms of the production possibility frontier -The total of producer and consumer surplus is called economic surplus which denotes the total utility or satisfaction generated by an economy over the costs of production

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