MICRO Ch 9

Supply Curve for the Firm and Market

*Given resource prices, the firm's marginal cost curve(ABOVE AVC) is the firm's supply curve*. -As prices RISE ABOVE the short-run shutdown price P1, the firm will supply additional units of the good. -The short-run market supply curve(Ssr) is merely the sum of the firm's supply(MC) curve.

Price-Taker's Demand Curve

*Market forces(supply and demand) determine price* Price-takers have NO control over the price that they may charge. If such a firm was to charge price above that established by the market, consumers would simply buy elsewhere. -Thus, the *price-taker's* firm demand curve is perfectly ELASTIC- it's horizontal at the price determined in the market.

Low entry

Competitive Price-Taker makers are characterized by ______________ barriers and a *LARGE* number of firms selling a *homogeneous product*

Profit-Maximization when the firm is a "Price-Taker"

-In the *short run*, the firm will EXPAND OUTPUT until MR=MC; this will maximize the firm's profits. -When P>MC, production of the units ADDS MORE TO REVENUES THAN COSTS. In order for the firm to maximize its profit, it will EXPAND OUTPUT until MC=P. -When P< MC, the unit ADDS MORE TO COSTS THAN REVENUES. A profit-maximizing firm will *NOT* produce this in output range. It will REDUCE OUTPUT until MC=P.

Supply Elasticity and the Role of Time

-In the *short-run*, fixed factors of production such as plant size LIMIT the ability of firms to EXPAND output quickly. -In the *long-run*, firms can ALTER PLANT SIZE and other fixed factors of production. *Therefore, the market supply curve will be more ELASTIC in the LONG-RUN than the short-run*

Short-Run Supply Curve

A firm's short run-supply curve: - A firm maximizes profits when it produces at P=MC and its variable costs are covered. -A firm's short-run supply curve is that segment of its *marginal cost* curve ABOVE *average variable cost* The market's short-run supply curve: -The market's short-run supply curve is the HORIZONTAL summation of all the firm's short-run supply curves(segments of firm's MC curve ABOVE AVC)

equal

A wheat farmer sells wheat to a grain broker in Chicago. Since the market for wheat is generally considered to be competitive, the wheat farmer maximizes his profits by choosing the quantity at which the *farm's marginal cost* of production is _____ to the *market price*.

Total Revenue/Total Cost Approach

An alternative way of viewing the profit-maximization problem focuses on *total revenue*(TR) and *total cost*(TC). -At LOW levels of OUTPUT *TC>TR* and hence, profits are *negative or losses*. After some point, TC< TR. *Profits are LARGEST where the difference is maximized*

Marginal cost curve

As *market prices* INCREASE, in the short-run, a profit-maximizing firm in a price-taker market will *EXPAND OUTPUT *along its __________________

Marginal Revenue/Marginal Cost Approach

At LOW OUTPUT levels, *MR>MC* -After some point, additional units cost MORE than the MR realized from selling them. -*Profit is maximized at P=MR=MC*

Increasing Cost & Long-Run Supply

Consider an increase in the market demand that leads to a higher market price, leading to short-run profits for firms. -Economic profits entices some new firms to enter the market and others to INCREASE the scale of operation... shifting the market supply curve to the *right*. -The STRONGER demand for resources(inputs) pushes their price up. Consequently, the firm's cost are now HIGHER. -Economic profits are eliminated as the competitive process reaches equilibrium at price P3<P2 and output level Q3>Q2. -This is an increasing cost industry, expansion in market output leads to a higher equilibrium market price. *Thus, the market's long-run supply curve is UPWARD SLOPING*

INcrease in demand ATC

Consider the market for toothpicks. A new candy that sticks to teeth causes the market demand for toothpicks to INCREASE from D1 to D2... market prices INCREASE to P2. *Shifting the firm's demand curve upward* -At the HIGHER PRICE, firms EXPAND output to Q2 and earn *short-run profits*. -*Economic Profits* draw competitors into the industry, shifting the market supply curve from S1 to S2. -After the INCREASE in market supply, a new equilibrium is established at the original market price P1 and a larger rate of output(Q3). -As market pries return to P1, the demand curve facing the firm returns to its *original level*. -In the long-run, economic profits are driven to *zero*. The long-run market supply curve is horizontal.

Characteristics of the Competitive Price-Taker Markets

Factors that promote *cost efficiency* and *customer service* but LIMIT SHIRKING by corporate managers include: -competition among firms for investment funds and customers - compensation and management incentives] -the threat of corporate takeover

Profits and Losses

Firms earn an *economic profit* by producing goods that can be sold for more than the cost the resources required for production. -*Profit*: A REWARD for production of a product that has GREATER VALUE than the value of the resources required for its production. -*Losses*: A PENALTY for the production of a good that consumers VALUE LESS HIGHLY than the value of the resources required for its production.

Economic Losses and Exit

If *ATC exceeds price*, firms will suffer an *economic loss*. Economic losses induce both: -the *exit of firms in the market -*Reduction* in the scale of operation of the remaining firms. -As market supply DECREASES, price will RISE to ATC. *Thus, profits and losses move price toward the zero-profit in the long-run equilibrium*

Economic Profits and Entry

If *price EXCEEDS ATC*, firms will earn an *economic profit*. Economic profit induces both: -The *entry* of new firms -*Expansion* in the scale of operation in existing firms Capital moves into the industry, shifting the market supply to the *right*. THIS WILL CONTINUE UNTIL PRICE FALLS TO ATC. *In the long-run, competition drives ECONOMIC PROFIT to zero*.

Lose

If a single firm in a price-taker market LOWERS its price *below* the market equilibrium price, it will ________ revenue without INCREASING the quantity it can sell.

Marginal Revenue

The change in total revenue divided by the change in output. -In a pricet-taker market, *marginal revenue*(MR) will be EQUAL to *market price* because all units are sold at the same price(market price).

Adjusting to a Decline in Demand

If something causes market demand for toothpicks to DECREASE(D1 TO D2)... market prices fall to P2.*Shifting the demand curve DOWNWARD, leading to a reduction in output to Q2* -Short-run losses cause some competitors to EXIT the market and others to REDUCE the scale of their operation, shifting the market supply curve from S1 to S2. -After the decrease in market supply, a new equilibrium price is established at the original market price P1 and a smaller rate of output Q3. -As market price returns to P1, the firm's demand curve returns to its original level. -In the long-run, *economic profit return to zero*. *Note: The long-run market supply curve is FLAT Short-Run*

neligable

In a competitive price-taker market, the actions of any single buyer/seller will have a ______ impact on the *market price*

same

In the competitive price-taker model, individual firms EXERT no effect on the market price. Therefore, the firm's *marginal revenue* is the ________ as the firm's *demand curve*.

Increasing-Cost Industry

LONG-RUN SUPPLY Industry where per-unit costs *rise* as market output is expanded. -Results because an INCREASE in industry output generally leads to STRONGER demand and HIGHER prices for the inputs. *The Long-Run market supply in an INCREASING-COST INDUSTRY is UPWARD-SLOPING. This is the most common type of industry*

Decreasing-Cost Industry

LONG-RUN SUPPLY Industry where per-unit costs *decline* as market output expands. -Implies either economies of scale exist in the industry or that an INCREASE in demand for inputs leads to LOWER input prices. *The Long-Run Market Supply Curve in a DECREASING-COST INDUSTRY is DOWNWARD SLOPING. These industries are rare!*

Constant-Cost Industry

LONG-RUN SUPPLY Industry where per-unit costs remain *unchanged* as market output is expanded. -Occurs when the industry's demand for a resource input is SMALL relative to the total demand for the resources. *The long-run market supply curve in a CONSTANT-COST INDUSTRY is HORIZONTAL in these markets*

barrier to entry

Several states require cosmetologists to undertake 1,500 hours or more of training in order to obtain a license to provide hair styling/braiding services. This is an example of ________.

Price-Takers

Produce identical product (ex. wheat/corn) and because the firms are *small* relative to the market each must take the price established in the market place.

Price-Searchers

Produce products that differ and therefore they can alter price. The amount that the price-searcher firm is able to sell inversely related to the price it charges. *MOST REAL-WORLD FIRMS ARE PRICE SEARCHERS*

Price exceeds ATC

Profit-maximizing firms enter a competitive market when, for existing firms, in that market, __________

long-run average cost

Regardless of quantity in long-run equilibrium, the competitive price-taker market price *CANNOT EXCEED* the ____________ of supplying that quantity.

increase

The *ENTRY* of new firms into a competitive market will ______ *market supply* and *decrease market price*

decrease

The *EXIT* of existing firms from a competitive market will ______ *market supply* and *increase market price*

Why Study Price-Takers?

The competitive price-taker model... -applies to some markets such as agricultural products -helps us understand the relationship between individual firms and market supply -INCREASES our knowledge of competition as a dynamic process These markets are also called *"purely competitive markets"*

Keys to Prosperity: Competition

The competitive process provides a strong incentive for producers to operate efficiently and heed the views of the consumers. -Competition and the market process harness *self-interest* and use it to direct products into wealth-creating activities.

Operating with Short-Run Losses

The firm operates at an output level where MR=MC, but here ATC>P resulting in a *LOSS*. -The magnitude of the firm's short-run loss is equal to the size of the rectangle "C-A-B-P". A firm experiencing losses but covering *average variable costs* will operate in the short-run. -A firm will SHUT DOWN in the short-run whenever price falls *below* average variable cost(p2). -A firm will EXIT the market in the long-run when price is *less* than average total costs(ATC).

less

The price-taker firm should *discontinue* production immediately if the *market price * is ______ than the firm's *AVC.*

above

The supply curve of a price-taker firm in the *short-run* is the portion of the firm's *marginal cost curve* that lies ______ *AVC curve*

Long-Run Equilibrium

Two conditions necessary for long-run equilibrium in a *price-taker* market are depicted here. -The quantity supplied and quantity demanded must be *EQUAL* in the market. -Given the market price, firms in the industry must earn *ZERO ECONOMIC PROFIT* (P=ATC)

attracts

When *entry barriers* into a market are *LOW*, firms will tend to earn ZERO economic profit in the long-run because short-run profits ______ *additional suppliers* and drives *down* the *market price*

well

When an economist states that a firm earning *zero economic profit*, this statement implies that the firm is doing as _______ as it could in any other lines of business.

increased

Which of the following best explains why a firm in a competitive price-taker market must take the price determined in the market? *If a price taker ______ this price, the consumers would buy from OTHER suppliers*.

Free entry and exit

Which of the following best explains why price in competitive price-taker markets will tend to be driven to the *minimum average total costs*?

Eggs

Which of the following products would most closely fit the competitive price-taker model? *Should have many producers of the relatively homogeneous product*