Chapter 14

The formula to see if their is a loss or gain

= (P − ATC)×Q

The competitive firm's short-run supply curve is...

the portion of its marginal cost curve that lies above average variable cost.

What will make a firm enter

Enter if P>ATC

does a competitive market price equal the marginal cost in the long run short run or both

A firm's price equals marginal cost in both the short run and the long run. In both the short run and the long run, price equals marginal revenue. The firm should increase output as long as marginal revenue exceeds marginal cost, and reduce output if marginal revenue is less than marginal cost. Profits are maximized when marginal revenue equals marginal cost

Shutdown

A shutdown refers to the short-run decision not to produce anything during a specified period of time because of current market conditions.

A Shift in Demand in the Short Run and Long Run

Assume that the market begins in long-run equilibrium. This means that firms are earning zero profit and price equals the minimum of average total cost. If the demand for the product increases, this will lead to an increase in the price of the good. In the new short-run equilibrium, the firms are making positive profit, which over time encourage new firms to enter the market. This entry shifts the short-run supply curve to the right. In the new long-run equilibrium, the price is driven back to the minimum of average total cost, profits are again zero, but the number of firms and the total quantity supplied rise.

Long Run Supply Curve

At the end of the process of entry or exit, firms that remain in the market must be making zero economic profit. a. If firms in an industry are earning profits, new firms will enter the market. This entry will increase the supply of the product, and drive down prices and profits. b. If firms in an industry are incurring losses, some exiting firms will exit the market. Their exit will reduce the supply of the product, and drive up prices and profits.

Short Run Supply Curve

Each firm's short-run supply curve is its marginal cost curve above average variable cost. To get the market supply curve, we add the quantity supplied by each firm in the market at every given price.

What will make a firm exit

Exit if TR<TC Exit if P<AtC

Exit

Exit refers to a long-run decision to leave the market.

MC=MR

For a competitive firm, the firm's price equals both its average revenue and its marginal revenue, which can be shown by a horizontal line. At the profit-maximizing level of output, marginal revenue is equal to marginal cost. Because the firm's marginal cost curve determines how much the firm is willing to supply at any price, it is the competitive firm's supply curve.

Profit for Competitive Market

I can handle ATC

Loss for Competitive Market

I cant handle ATC, too big

What happens to a firm when they shut down?

If a firm shuts down, it will earn no revenue and will have only fixed costs (no variable costs).

The competitive firm's long-run supply curve is

the portion of its marginal cost curve that lies above average total cost.

A competitive firm will produce if...

P > or equal to AVC They will produce at MC=MR

A firm will not enter or exit if...

P= ATC because economic profits are zero.

In the long-run equilibrium of a competitive market with identical firms, what is the relationship between price , marginal cost , and average total cost ?

P=MC P=ATC

What will make a firm shutdown?

Shutdown if TR<VC Shutdown if P<AVC

does a competitive market price equal the minimum of ATC in the long run short run or both

The firm's price equals the minimum of average total cost only in the long run. In the short run, price may be greater than average total cost, in which case the firm is making profits, or price may be less than average total cost, in which case the firm is making losses, or price may be equal to average total cost in which case the firm is breaking even. But the situation is different in the long run. If firms are making profits, other firms will enter the industry, which will lower the price of the good and price will be equal to the minimum of average total cost. If firms are making losses, they will exit the industry, which will raise the price of the good. Entry or exit continues until firms are making neither profits nor losses. At that point, price equals average total cost.

Elasticity

The long-run supply curve of an industry is generally more elastic than the shortrun supply curve of the industry.

Just Need to Know

The process of entry or exit ends only when price and average total cost become equal. The long-run equilibrium of a competitive market with free entry and exit must have firms operating at their efficient scale. The long-run market supply curve is horizontal at the price consistent with zero profit-the minimum of average total cost.

Why the Long-Run Supply Curve Might Slope Upward

There are two possible reasons why the long-run supply curve might slope upward. 1. If some resource used in production is limited in quantity, entry of firms will increase the price of this resource, raising the average total cost of production. 2. If firms have different costs, then it is likely that those with the lowest costs will enter the industry first. Because new entrants have higher costs, the price must rise to make entry profitable for them.

Marginal revenue

the change in total revenue from an additional unit sold. MR = ΔTR / ΔQ For competitive firms, marginal revenue equals the price of the good.

The profit-maximizing quantity can also be found by comparing marginal revenue and marginal cost.

a. If marginal revenue is greater than marginal cost, increasing output will raise profit. b. If marginal revenue is less than marginal cost, decreasing output will raise profit. c. Profit-maximization occurs where marginal revenue is equal to marginal cost.

Under which conditions does a firm exit the market? Explain

a firm will exit the market if the revenue it would get from producing is less than its total costs

Under which conditions does a firm shut down temporarily? Explain

a firm will temporarily shut down if the revenue that it would get from producing is less than the variable costs of production (MR<VC)

Explain the difference between a firm's revenue and its profit. Which do firms maximize?

a firms revenue is the price of the item times the number of items sold. a firms profit is the total revenue minus the total cost of producing the item. Firms will maximize profit based on the intersection of MR and MC

competitive market

a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker.

There are three characteristics of a competitive market (sometimes called a perfectly competitive market).

a. There are many buyers and sellers. b. The goods offered by the sellers are largely the same. c. Firms can freely enter or exit the market.

Why do competitive firms stay in business if they make zero profit?

a. To an economist, total cost includes all of the opportunity costs of the firm. b. In the zero-profit equilibrium, economic profit is zero, but accounting profit is positive

A perfectly competitive firm

takes its price as given by market conditions.

If a profit-maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost, it will

keep producing in the short run but exit the market in the long run.

A competitive firm maximizes profit by choosing the quantity at which

marginal cost equals the price Price = MR

A competitive firm's short-run supply curve is its ________ cost curve above its ________ cost curve.

marginal, average variable

Pretzel stands in New York City are a perfectly competitive industry in long-run equilibrium. One day, the city starts imposing a $100 per month tax on each stand. How does this policy affect the number of pretzels consumed in the short run and the long run?

no change in the short run, down in the long run

Total Revenue

the sale of output is equal to price times quantity. TR= P*Q

Average Revenue

total revenue divided by the quantity sold. AR = TR /Q For all firms, average revenue equals the price of the good.