chp 12 - perfect competition and the supply curve

price taking producer

producers actions cannot affect market price of good/service

price taking consumer

consumer actions cannot affect market price of good/service

perfectly competitive market

market in which all market participants (consumers + producers) are price takers

perfectly competitive industry + 2 conditions necessary (+1 feature)

industry in which producers are price takers

1. must be many producers NONE OF WHOM HAVE large market share (fraction of total industry output owned)

2. products of producers must be regarded as equivalent (good substitutes) → standardized products/commodity

3. free entry + exit → not strictly necessary

marginal revenue

change in TOTAL REVENUE (P x q) generated by an additional unit of output → MR of last unit produced ≥ MC of last unit produced (anymore reduces Profit (TR-TC) )

MR = ΔTR/Δq

1. optimal output rule

2. price taking firm optimal output rule

3. why different?

1. profit maximized for outputs when MR=MC → anymore will reduce profit

2. P maximized when market price = MC

3. BC for price taking firms, MR = market price as market price/MR is perfectly elastic demand curve!!!

1. average total revenue (ATR)

2. average total cost (ATC)

1. TR/q or ALSO IS MARKET PRICE

2. TC/q

Market price VS ATC in terms of firm profit

P>ATC = profitable → enter into industry in the long run

P=ATC = breaks even → neither

P<ATC = incurs loss → exit industry in the long run

how does a producer know if it will be profitable (LONG RUN????)? (2)

1. for profit, market Price must exceed min ATC

2. for highest possible profit, MP=MC

how does a producer know if it will be profitable/optimal production decision (in short run)? (2)

1. MP > min AVC

min ATC

min AVC

1. break-even price

2. shut down price

Market price VS AVC in terms of firm profit

P>AVC = firm produces in short run → covers all VC and may cover some FC

P=AVC = only carries VC → firms indifferent

P<AVC = firm shuts down in short run → does not cover VC

Emkt

short run market equilibrium : Qs=Qd of a short run industry supply curve

profit maximization condition

MC=MR(=market P)

SR shut down condition

LR exit condition

SR : AVC>P

LR : ATC>P