Principles of MicroEconomics: Econ102

2 of 21 ……………meets the conditions of:  Many buyers and sellers: all participants are small relative to the market.  All firms selling identical products  No barriers to new firms entering the market.

3 of 21 Price taker: A buyer or seller that is unable to affect the market price. A Perfectly Competitive Firm Faces a Horizontal Demand Curve

4 of 21

5 of 21 Profit: Total revenue minus total cost. Profit = TR – TC where, Total Revenue (TR): Price multiplied by quantity, units or output produced. TR=P x Q

6 of 21 Average revenue (AR): Total revenue divided by the number of units sold. Marginal revenue (MR): Change in total revenue from selling one more unit.

7 of 21 NUMBER OF BUSHELS (Q) MARKET PRICE (PER BUSHEL) (P) TOTAL REVENUE (TR) AVERAGE REVENUE (AR) MARGINAL REVENUE (MR) $4 4 $ $4 4 - $4 4 For a firm in a perfectly competitive market, price is equal to both AR and MR.

8 of 21 QUANTITY (BUSHELS) (Q) TOTAL REVENUE (TR) TOTAL COSTS (TC) PROFIT (TR-TC) MARGINAL REVENUE (MR) MARGINAL COST (MC) $ $ $ $ $

9 of 21 Conclusions:  The PMLO is where the difference between total revenue and total cost is the greatest.  The PMLO is also where the marginal revenue equals marginal cost, or MR=MC. One more conclusion:  For a firm in a perfectly competitive industry, price is equal to marginal revenue, or P=MR. So, it logically follows that P=MC, because MR=MC

10 of 21 Profit = (P x Q)  TC Profit = (P  ATC)Q Or

11 of 21 When P > ATC, the firm makes a profit

12 of 21 When P = ATC, the firm breaks even (its total cost equals its total revenue) When P < ATC, the firm experiences losses

13 of 21 In the short-run a firm suffering losses has two choices:  Continue to produce: Only if TR is greater than its variable costs.  Stop production by shutting down temporarily Sunk cost: A cost that has already been paid and that cannot be recovered.

14 of 21 Shutdown point : The minimum point on a firm’s average variable cost curve; if the price falls below this point, the firm shuts down production in the short run.

15 of 21 Long-run Competitive Equilibrium: The situation in which the entry and exit of firms have resulted in the typical firm just breaking even.

16 of 21

17 of 21

18 of 21

19 of 21 Long-run Supply Curve: A curve showing the relationship in the long run between market price and the quantity supplied. In the long-run, a perfectly competitive market will supply whatever amount of a good consumers demand at a price determined by the minimum point on the typical firm’s average total cost curve.

20 of 21

Allocative Efficiency: The situation where every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. For allocative efficiency to hold, firms must charge a price equal to marginal cost. 21 of 21 Productive Efficiency: The situation where every good or service is produced at the lowest possible cost. For productive efficiency to hold, firms must produce at the minimum point of average total cost.