Chapter 6- Perfectly Competitive Supply

Suppose that when the price of tomatoes is $2 per pound there are 5 farmers each willing to supply 10 pounds per day, and 3 farmers each willing to supply 20 pounds per day. Thus when the price of tomatoes is $2 per pound, the market supply of tomatoes is what?

(5 x 10) + (3 x 20)= $110

What are the characteristics of a perfectly competitive market

1. Firms Can easily enter and exit the market 2. All firms sell the same standardized product 3. Buyers are well informed about the prices that different firms charge 4. The market has many sellers each sells only a small fraction of the total quantity sold in the market

Putting the Four Cost Curves Together

1. marginal cost is upward sloping because of diminishing returns 2. average variable cost also is upward sloping but is flatter than the marginal cost curve 3. average fixed cost is downward sloping because of the spreading effect 4. the marginal cost curve intersects the average total cost curve from below, crossing it at its lowest point 5. Average total cost is U- shaped 6. The marginal cost curve intersects the average total cost curve from below and crossing at its lowest point

Why are supply curves upward sloping?

1.Firms are at a higher opportunity cost of producing the product and from this will start supplying the product 2. Individual suppliers already in the market will be willing to turn to more costly production techniques to supply more product

What order does the graph go in

1.Marginal Cost 2.ATC 3. AVC

Price Taker

A firm that has no control of the price that they sell their product

Profit Maximizing Firm

A firm whose primary goal is to maximize the difference between its total revenue and total cost Demand curves are perfectly elastic in a profit maximizing firm The markets here choose how much they want to produce but not the price of their output.

Profitable Firm

A firm whose total revenue exceeds total cost

Variable factor of production

A input whose quantity can be altered in the short run

Fixed Input

A input whose quantity is fixed for a period of time and can not be varied Ex: Location and electricity

Short Run

A short period of time where some of the firms factors ae fixed

ACT= what

ATC= AVC + AFC

Price Setter

Also the imperfectly competitive market, they also have some control over their price

Factors of Production and examples

An input used in production of a good or service Ex: Land, structures and entrepreneurship

Variable Input

An input where the quantity from the firm can change very quickly

Marginal Output

Change in quantity of output/ Change in quantity of labor The additional input is the additional quantity of output that is produced by using one or more unit of that output

Marginal Cost

Change in total cost/ Change in output

Number of Suppliers

Demand curve shifts to the right when population grows, supply curve's also shift to the right as the number of individual suppliers grow

With diminishing returns doubling the input

Does not result in doubling the output

Expectations

Expectations about future price movements can affect how much sellers choose to offer in the current market

Total Cost

Fixed cost + Variable Cost

Imperfectly competitive Market

Has at least some control over price

What is the main insight we get from the exercise with students and the corn

Increasing variable input eventually results in less than proportional increase of output

Fixed Factors of Production

Input whos quantities can not be altered in the short run

The short run shut down condition

P x Q < VC For all levels of q

Supply Curve

Portion of marginal cost curve that lies above the average variable cost curve

For each point along the market supply curve

Price measures each sellers marginal cost of production

For every price along the market supply curve

Price will be equal to the sellers marginal cost of production. P=MC

Production function

Relationship between the quantity of inputs a firm uses and the quantity of outputs it produces

Total Product Curve

Shows hos the quantity of output depends on the quantity of a variable input for given quantity of fixed inputs

Variable Cost

Sum of all payments made to firms variable factors of production and they can be altered in the short run

You own a chain of bagel shops. Which of the following inputs would be considered a variable input (in the short run)?

The number of people working behind the counter

Law Of Diminishing returns

The relationship between a good or service produced, and the amount of a variable factor required to produce it. The Law says that when some factor of productions are fixed, increased production of the good eventually requires an even larger increase in the variable factor Through this the marginal cost will eventually increase

Fixed Cost

The sum of all payments made to a firms factors of production Changes in the firms fixed costs of production, do not affect the profit maximizing level of output sense firms have to pay their fixed costs regardless of how much they produce

Profit

The total revenue a firm receives from the sale of its product minus all costs explicate and implicit of producing it

Average Total Cost (ATC)

Total Cost/ Total output

Average Variable Cost (AVC)

Variable cost/ Total output

Changes in prices in other products

Variation in the prices of other goods and services that sellers might produce

Input Prices

When interest rates fall, the opportunity cost of capitol equipment also falls. This causes supply to shift to the right

Technology

Will only be adopted if they reduce cost of production