Micro Chapter 21-Presentation 3

Efficiency Productive Efficiency: Price = Minimum ATC Allocative Efficiency: Price = MC Pure Competition Has Both in its Long-Run Equilibrium

Short-Run Supply Curve Firms will supply the product at prices above its AVC curve MC curve above AVC is the SR S curve

Marginal Cost and Short- Run Supply Generalizing the MR=MC Relationship and its Use P1P1 0 Cost and Revenues (Dollars) Quantity Supplied MR 1 P2P2 MR 2 P3P3 MR 3 P4P4 MR 4 P5P5 MR 5 MC AVC ATC Q2Q2 Q3Q3 Q4Q4 Q5Q5 This Price is Below AVC And Will Not Be Produced a b c d e

LR Equilibrium In the LR, equilibrium is where MR = MC and Price and Minimum ATC are = At this point there is no incentive to leave the industry or for more firms to join

Entry of New Firms When consumer demand increases, existing firms receive economic profits This entices new firms to enter, driving P down back to equilibrium and ending profits

Increasing-Cost Industry An industry with a positively-sloped long-run supply curve. average cost of production increases as industry grows. With rapidly increasing average cost, a relatively large increase in price is needed to get firms to produce more output.

P 0 Q Long-Run Supply Curve Increasing-Cost Industry 90,000100,000110,000 Q3Q3 Q1Q1 Q2Q2 $50 P1P1 S Y1Y1 Y2Y2 Y3Y3 D3D3 D1D1 D2D2 $40 $55 P2P2 P3P3

Decreasing Cost Industry In a decreasing cost industry, the long-run supply curve for that industry is downward sloping. Over time, the price of the good to the consumer is decreasing (increased productivity) Examples: Over time, the price of personal computers has fallen for quality and features. Televisions, DVD, MP3, computer software