Perfect Competition part III Short Run & Long Run Supply Curves Chapter 14 completion

Quantity 0 Price MC D = MR P1P1 ATC Worksheet Problem #4 AVC Stay Open or Shutdown? Q1Q1 E1E1 __________________ ___. Economic Loss. Stay Open when P ≥ AVC Shutdown P < AVC

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 Entire Market 1- Individual Firm Quantity (firm) 0 Price P 1 Quantity (market) Price 0 D 1 D 2 P1P1 S 1 P 2 Q 1 A Q 2 P 2 B ATC MC Increase in market demand => ↑ price & quantity supplied Each Firm produces more & earn a short run economic profit This is can not be a long run equilibrium! Q 1 A Q2 B D 1 = MR 1 D 2 = MR 2 profit

Reaching Long Run Equilibrium P 1 Entire Market Quantity (firm) 0 Price MC ATC 1 Individual Firm Quantity (market) Price 0 P 1 P2P2 Q1Q1 Q2Q2 Long-run Market supply B D1 D 2 S1S1 A S 2 Q 3 C Economic Profit induces new firms to enter market => supply increases In long run market price is restored to min. of ATC & Profit = 0 Q 1 A D 1 =MR 1 P 2 D 2 = MR 2 B D 3 =MR 3 C But total market supply is greater Q3 as more firms are in market

Short-Run Market Supply Curve (a) Individual Firm Supply Quantity (firm) 0 Price MC $ ( b) Market Supply Quantity (market) 0 Price Supply ,000 $ ,000 An industry with 1,000 identical firms => at each price output is 1000 times larger Market Supply Curve is the sum of all individual supply curves

Long-Run Market Supply Curve Long Run Zero-Profit Condition Quantity (firm) 0 Price Market Supply Quantity (market) Price 0 P = minimum ATC Long Run Market Supply Curve MC ATC Entry/Exit cease enough supply to satisfy any demand Is Horizontal at the minimum of ATC Market will supply any quantity at P = ATC Market supply curve is different than the individual firm supply curve (P > ATC)

Practice Multiple Choice Test Perfect Competition Equilibrium

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