1
Review
1.
2.
3.
4.
5.
6.
7.
8.
9.
Identify the 4 Market Structures
Identify the characteristics of perfect competition.
Why is a perfectly competitive firm a “price taker”?
Explain why perfectly competitive firms make little
profit
How do ALL firms determine what output to
produce?
Draw a perfectly competitive firm producing 10
units at a price of $10 making a profit of $30
Draw and label a perfectly competitive firm
making a loss.
On your graph, identify the shut down point
2
List 10 words that rhyme with the word “great”
Side-by-side graph for perfectly
completive industry and firm.
Is the firm making a profit or a loss? Why?
Firm
Industry
P
(Price Taker)
S
P
MC
ATC
AVC
$10
$10
Demand
D
5000
Q
Q
Where is the profit maximization point?
What output should be produced?
What is TR? What is TC?
How much is the profit or loss?
Where is the Shutdown Point?
MC
$25
Cost and Revenue
1.
2.
3.
4.
5.
MR=D=P
20
Profit
15
ATC
AVC
10
Total
TotalRevenue
Cost
0 1 2 3 4 5 6 7 8 9 10
4
Supply
Revisit
5
Marginal Cost & Supply
As price increases, the quantity increases
$50
Cost and Revenue
45
MC
MC above AVC isATC
the
SUPPLY curve
AVC
40
35
30
MR5
25
MR4
20
MR3
15
MR2
10
MR1
5
0
1 2 3 4 5 6 7 8 9 10
Q
6
Marginal Cost & Supply
As price increases, the Q.S. increases.
As price decreases, the Q.S. decreases.
$50
Cost and Revenue
45
MC = Supply
ATC
40
35
30
25
AVC
20
15
10
5
0
MC above AVC is the
SUPPLY curve
1 2 3 4 5 6 7 8 9 10
Q
7
Marginal Cost & Supply
What if variable costs increase (ex: tax)?
$50
Cost and Revenue
45
40
35
30
25
MC2 = Supply2
MC1 = Supply1
AVC2
AVC1
20
15
10
5
0
When MC increases,
SUPPLY decrease
1 2 3 4 5 6 7 8 9 10
Q
8
Marginal Cost & Supply
What if variable costs decrease (ex: Subsidy)?
$50
Cost and Revenue
45
40
35
30
25
MC1 = Supply1
MC2 = Supply2
AVC1
AVC2
20
15
10
5
0
When MC decreases,
SUPPLY increase
1 2 3 4 5 6 7 8 9 10
Q
9
Perfect Competition in
the Long-Run
You are a wheat farmer. You learn that
there is a more profit in making corn.
What do you do in the long run?
10
In the Long-Run…
 Firms will enter if there is profit
 Firms will leave if there is loss
 So, ALL firms break even, they make
NO economic profit
 In long run equilibrium a perfectly
competitive firm is EXTREMELY
efficient.
11
Side-by-side graph for perfectly completive
industry and firm in the LONG RUN
Is the firm making a profit or a loss? Why?
Firm
(Price Taker)
Industry
P
S
P
$10
MC
ATC
Demand
$10
D
5000
Q
8
Q
Firm in Long-Run Equilibrium
Price = MC = Minimum ATC
Firm making a normal profit
P
MC
$15
ATC
MR=D
Total
TC =Revenue
TR
Cost
Total
8
NO incentive to enter
or leave the industry
Q
13
From Short-Run
to Long-Run
14
1. Is this the short or the long run? Why?
#1 2. What will firms do in the long run?
3. What happens to P and Q in the industry?
4. What happens to P and Q in the firm?
Firm
Industry
S1
P
$15
(Price Taker)
1
5000
P
$15
D1
Q
MC
ATC
Profit
1
8
MR1=D1
Q
In industry…
Firms enter to earn profit so
supply increases in the industry
Price decreases and quantity increases
Firm
Industry
(Price Taker)
S1
P
S2
$15
$10
1
P
$15
MC
ATC
1
MR1=D1
2
D1
Q
5000 6000
8
Q
In Firm…
Price falls for the firm because
they are price takers.
Price decreases and quantity decreases
Firm
Industry
(Price Taker)
S1
P
S2
$15
$10
1
P
MC
ATC
1
$15
2
D1
Q
5000 6000
$10
2
5
MR1=D1
MR2=D2
8
Q
New LONG-RUN Equilibrium at $10
Zero Economic Profit
Firm
Industry
(Price Taker)
P
S2
$10
2
D1
Q
6000
P
$10
MC
ATC
2
5
MR2=D2
Q
1. Is this the short or the long run? Why?
#2 2. What will firms do in the long run?
3. What happens to P and Q in the industry?
4. What happens to P and Q in the firm?
Firm
Industry
(Price Taker)
P
P
MC
S1
ATC
Loss
$15
1
D1
Q
5000
$15
1
8
MR1=D1
Q
In industry…
Firms leave to avoid losses so
supply decreases in the industry
Price increases and quantity decreases
Firm
Industry
(Price Taker)
S2
P
P
MC
S1
$20
$15
ATC
2
1
D1
Q
4000 5000
$15
1
8
MR1=D1
Q
In Firm…
Price increases for the firm
because they are price takers.
Price increases and quantity increases
Firm
Industry
(Price Taker)
S2
P
P
MC
S1
$20
$15
2
2
$20
1
D1
Q
4000 5000
$15
1
8 9
ATC
MR2=D2
MR1=D1
Q
New LONG-RUN Equilibrium at $20
Zero Economic Profit
Firm
Industry
S2
P
$20
(Price Taker)
2
P
$20
MC
2
ATC
MR2=D2
$15
4000
D1
Q
9
Q
From Long-Run
to Long-Run
23
Currently in Long-Run Equilibrium
If demand increases,
what happens in the short-run
and how does it return to the long run?
Firm
Industry
S1
P
$15
(Price Taker)
1
500
MC
ATC
P
$15
D1
Q
1
8
MR1=D1
Q
24
Demand Increases
The price increases & quantity increases
Profit is made in the short-run
Firm
Industry
S1
P
$20
$15
(Price Taker)
MC
ATC
P
2
$20
$15
1
Profit
2
1
MR2=D2
MR1=D1
D2
500 600
D1
Q
8 9
Q
25
Firms enter to earn profit so
supply increases in the industry
Price Returns to $15
Firm
Industry
S1 S
2
P
$20
$15
(Price Taker)
2
1
$20
$15
3
MC
ATC
P
2
1
MR2=D2
MR1=D1
D2
500
700
D1
Q
8 9
Q
26
Firm
Industry
S2
P
$15
(Price Taker)
3
MC
ATC
P
$15
1
MR1=D1
D2
700
Q
8
Q
27
Practice
1. Draw correctly labeled side-by-side graphs for the
perfectly competitive industry and firm in the longrun.
2. On the same graph, if the demand is decreasing,
what will happen to the new equilibrium price and
quantity in the industry and firm in the short-run?
3. As the industry adjusts to a new long-run
equilibrium,
(i) what will happen to the number of firms.
(ii) what will happen to the firm’s price & quantity.
Efficiency
29
Pure Competition & Efficiency
In Perfect Competition,…
There are 2 kinds
 Producers have to use limited of efficiency:
resources to their fullest.
1.
Productive
 Inefficient firms have higher
costs and are the first to
Efficiency
leave the industry.
2. Allocative
 Perfectly competitive
Efficiency
industries are extremely
30
efficient
Efficiency Revisited
14
A
B
12
Productive Efficient
G
Combinations are A thru D
(produced @ the lowest cost)
Bikes
10
8
Allocative Efficient
C
E
6
4
Combinations depend on the
society’s needs
F
2
D
0
2
4
6
8
10
Computers
31
Productive Efficiency
Graphically it is where…
32
Short Run
Price
Notice that the product is NOT being
made at the lowest possible cost.
(ATC not at lowest point)
MC
P
ATC
D=MR
Profit
Q
Quantity
33
Short Run
Price
Notice that the product is NOT being
made at the lowest possible cost
(ATC not at lowest point).
P
MC
ATC
Loss
D=MR
Q
Quantity
34
Long-Run Equilibrium
Price
Notice that the product is being
made at the lowest possible cost
(Minimum ATC)
MC
ATC
D=MR
P
Q
Quantity
35
Allocative Efficiency
Producers are allocating resources to
make the products most wanted by
society.
Graphically it is where…
Why?
Price represents the benefit
people get from a product.
36
Long-Run Equilibrium
The marginal benefit to society
(as measured by the price) equals
the marginal cost.
Price
MC
P
MR
Optimal amount
being produced
Q
Quantity
37
What if firm makes 15 units?
The marginal benefit to
society is greater than MC.
Not enough produced.
Society wants more.
Price
MC
$5
MR
$3
15 20
Quantity
38
What if firm makes 22 units?
MC
Price
The marginal benefit to
society is less than MC.
Too much produced.
Society wants less.
MR
$7
$5
20 22
Quantity
39
Long-Run Equilibrium
MC
Price
ATC
D=MR
P
Q
Quantity
40