Economics Winter 14 March 24 th, 2014 Lecture 26 Ch. 12: Perfect competition

FINAL EXAM is based on chapters 3, 4, 5 (up to p. 116), 6 (up to p. 138), 8, 9, 10 (up to p. 230, 11, 12, 13, and 14 Its format: 100 Multiple-Choice Questions When and Where: April 21, from 7:00 p.m. to 10:00 p.m; STM 140 Extra Office Hours: April 19, from 1:00 p.m. to 3:00 p.m. Final Exam:

© 2010 Pearson Education Canada In part (c) price is less than average total cost and the firm incurs an economic loss—economic profit is negative. Output, Price, and Profit in the Short Run

P = 131

Loss-Minimizing Case Suppose price falls from $131 to $81…

QTFCTVCTC 0$100$ 0$ MCMR $ 90$ ] ] ] ] ] ] ] ] ]

550/6

Shutdown Condition MR =MC = min AVC A competitive firm will maximize profit or minimize losses in the short-run by producing that output at which MR=P=MC, provided that market price (P) exceeds minimum AVC

Short-run supply curve Short-run supply curve is the portion of the firm’s marginal cost curve lying above its average variable cost curve

© 2010 Pearson Education Canada Short-run supply curve is the portion of the firm’s marginal cost curve lying above its average variable cost curve

Short-Run Supply Curve

Q QPP TotalIndustryDemand Industry Firm (price taker) Firm & Industry D

8000 D Industry Firm (price taker) $111MC Q QPP S=  MCs

MC AVC 8000 D Industry Firm (price taker) The firm “takes” the industry price The firm “takes” the industry price $111 Q QPP

MC AVC 8 D 8000 D $111 $ firms Industry Firm (price taker) Q QPP S=  MCs

Q QPP MC AVC ATC 8 D 8000 D $111 $111 Industry Firm (price taker) EconomicProfitEconomicProfit S=  MCs

Profit Maximization in the Long Run Assumptions: –entry and exit only –identical costs –constant-cost industry

© 2010 Pearson Education Canada

Long-run Equilibrium if price > min ATC –profits attract new firms –as S increases, price drops to min ATC if price < min ATC –losses cause firms to exit –as S decreases, price rises to min ATC so, in the long run, p=min ATC

Long-Run Equilibrium