1 Warm Up: Two Quest ions! 1. Which of the following is true of the marginal cost curve? (A)It intersects the average variable cost curve and the average fixed cost curve at each curve’s minimum point. (B)It lies between the total cost curve and the total variable cost curve. (C)It increases initially, for a time, but begins to decline when the point of diminishing returns is reached. (D)It decreases, because average variable cost is less than marginal cost. (E)It intersects the average 2. If a firm's average total cost decreases as the firm increases its output, the firm's marginal cost must be A) greater than the average variable cost B) less than the average fixed cost C) less than the average total cost D) decreasing E) negative
Transcript
1
Warm Up: Two
Questions!
1. Which of the following is true of the marginal cost curve? (A) It intersects the average variable cost curve
and the average fixed cost curve at each curve’s minimum point.
(B) It lies between the total cost curve and the total variable cost curve.
(C) It increases initially, for a time, but begins to decline when the point of diminishing returns is reached.
(D) It decreases, because average variable cost is less than marginal cost.
(E) It intersects the average variable cost curve and the average total cost curve at each curve’s minimum point
2. If a firm's average total cost decreases as the firm increases its output, the firm's marginal cost must be
A) greater than the average
variable cost
B) less than the average fixed cost
C) less than the average total cost
D) decreasing
E) negative
2
Warm Up: Two
Questions!
1. Which of the following is true of the marginal cost curve? (A) It intersects the average variable cost curve
and the average fixed cost curve at each curve’s minimum point.
(B) It lies between the total cost curve and the total variable cost curve.
(C) It increases initially, for a time, but begins to decline when the point of diminishing returns is reached.
(D) It decreases, because average variable cost is less than marginal cost.
(E) It intersects the average variable cost curve and the average total cost curve at each curve’s minimum point
2. If a firm's average total cost decreases as the firm increases its output, the firm's marginal cost must be
A) greater than the average
variable cost
B) less than the average fixed cost
C) less than the average total cost
D) decreasing
E) negative
3
4
Warm Up: Two
Questions!
1. Which of the following is true of the marginal cost curve? (A) It intersects the average variable cost curve
and the average fixed cost curve at each curve’s minimum point.
(B) It lies between the total cost curve and the total variable cost curve.
(C) It increases initially, for a time, but begins to decline when the point of diminishing returns is reached.
(D) It decreases, because average variable cost is less than marginal cost.
(E) It intersects the average variable cost curve and the average total cost curve at each curve’s minimum point
2. If a firm's average total cost decreases as the firm increases its output, the firm's marginal cost must be
A) greater than the average
variable cost
B) less than the average fixed cost
C) less than the average total cost
D) decreasing
E) negative
5
Warm Up: Two
Questions!
1. Which of the following is true of the marginal cost curve? (A) It intersects the average variable cost curve
and the average fixed cost curve at each curve’s minimum point.
(B) It lies between the total cost curve and the total variable cost curve.
(C) It increases initially, for a time, but begins to decline when the point of diminishing returns is reached.
(D) It decreases, because average variable cost is less than marginal cost.
(E) It intersects the average variable cost curve and the average total cost curve at each curve’s minimum point
2. If a firm's average total cost decreases as the firm increases its output, the firm's marginal cost must be
A) greater than the average
variable cost
B) less than the average fixed cost
C) less than the average total cost
D) decreasing
E) negative
6
Four Market Structures
7
PerfectCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
FOUR MARKET STRUCTURES
Every product falls somewhere on this spectrum
Examples:1. Agricultural Commodities2. Mexican Restaurants3. Oil4. Diamonds – de Beers
8
Perfect Competition
9
PerfectCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
FOUR MARKET STRUCTURES
Characteristics of Perfect Competition:• Many small firms• Identical products (perfect substitutes)• Easy for firms to enter and exit the industry
• Seller has no need to advertise • Firms are “Price Takers” The seller has NO control over price.
Imperfect Competition
10
Example of Perfect Competition: Candy bar salesmen on the streets of Chile
11
Law of One Price
12
In an efficient market, all identical goods must have only one price.
Result: Each firm is a price taker. Firms have no control of the price
Traffic AnalogyWhen there is heavy traffic, why do all lanes seem to go
the same speed? Cars leave slower lanes and
enter faster lanes. Similarly, what do you think
happens in perfectly competitive markets if firms
earn excessive profit?
Perfectly Competitive FirmsExample:
• Say you go out to buy a candy bar on the streets of Viña del Mar, Chile.
• You quickly find that the price every vendor is charging is 500 pesos.
• This is the market price (where demand and supply meet)
1. Is it likely that any vendor can sell one for 600 pesos?
2. Is it likely that any shop would sell one for 400?3. Do you think that vendors make a large profit off of
candy bars? Why? These vendors are “price takers” because they sell
their products at a price set by the market.13
Perfectly Competitive FirmsWhy are they Price Takers?• If a firm charges above the market price, NO ONE will buy. Customers will go to other firms
• If one firm charges less, all firms will quickly lower their prices to match that firm
• Therefore, firms are already charging as little as they possibly can
• Since the price is the same at all quantities demanded, the demand curve for each firm is… Perfectly Elastic
(A Horizontal straight line) 14
P
Q
Demand
P
Q5000
D
S
Industry Firm(price taker)
$15 $15
The Competitive Firm is a Price TakerPrice is set by the Industry
15
16
What is the additional revenue for selling an
additional unit? 1st unit earns $152nd unit earns $15Marginal revenue is constant at $15Notice:
• Total revenue increases at a constant rate
• MR equal Average Revenue
P
Q
Demand
Firm(price taker)
$15
16
MR=D=AR=P
The Competitive Firm is a Price TakerPrice is set by the Industry
17
What is the additional revenue for selling an
additional unit? 1st unit earns $152nd unit earns $15Marginal revenue is constant at $15Notice:
• Total revenue increases at a constant rate
• MR equal Average Revenue
P
Q
Demand
Firm(price taker)
$15
17
MR=D=AR=P
The Competitive Firm is a Price TakerPrice is set by the Industry
For Perfect Competition:Demand = MR
(Marginal Revenue)
18
Which of the following is true about the marginal revenue of a firm in a perfectly competitive industry?
A) It is constantB) It increases as output sold increases.C) It decreases as output sold increases. D) It increases at first, then decreases.E) It decreases at first, then increases.
19
Which of the following is true about the marginal revenue of a firm in a perfectly competitive industry?
A) It is constantB) It increases as output sold increases.C) It decreases as output sold increases. D) It increases at first, then decreases.E) It decreases at first, then increases.
MaximizingPROFIT!
20
Short-Run Profit MaximizationWhat is the goal of every business? To Maximize Profit!
• To maximize profit firms must make the right output
• Firms should continue to produce until the additional revenue from each new output equals the additional cost.
Example (Assume the price is $10) Should you produce…
…if the additional cost of another unit is $5?…if the additional cost of another unit is $9?…if the additional cost of another unit is $11?
21
Short-Run Profit MaximizationWhat is the goal of every business?To Maximize Profit!!!!!!
• To maximum profit firms must make the right output
• Firms should continue to produce until the additional revenue from each new output equals the additional cost.
Example (Assume the price is $10) • Should you produce…
…if the additional cost of another unit is $5
…if the additional cost of another unit is $9
…if the additional cost of another unit is $11
22
Profit Maximizing Rule
MR=MC
Total Revenue =$63
$9
8
7
6
5
4
3
2
1
1 2 3 4 5 6 7 8 9 10
MC
AVCATC
• How much output should be produced?• How much is Total Revenue? How much is Total Cost? • Is there profit or loss? How much?
MR=D=AR=P
Total Cost=$45
Profit = $18
Don’t forget that averages
show PER UNIT COSTS
23
Q
P
Suppose the market demand falls. What would happen if the price is
lowered from $7 to $5? The MR=MC rule still applies but now the firm will make an economic loss.
The profit maximizing rule is also the loss minimizing rule!!!
24
Co
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nd
Rev
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1 2 3 4 5 6 7 8 9 10
MC
AVC
ATC
• How much output should be produced?• How much is Total Revenue? How much is Total Cost? • Is there profit or loss? How much?
MR=D=AR=PTotal Cost = $42
Loss =$7
$9
8
7
6
5
4
3
2
1
25
Q
Total Revenue=$35
26
If a perfectly competitive firm is producing wheremarginal cost is rising and greater than marginalrevenue, to maximize profits it should
(A) increase the level of production(B) decrease the level of production(C) maintain current level of production(D) increase price(E) decrease price
27
If a perfectly competitive firm is producing wheremarginal cost is rising and greater than marginalrevenue, to maximize profits it should
(A) increase the level of production(B) decrease the level of production(C) maintain current level of production(D) increase price(E) decrease price
28
Warm Up: Two
Questions!
1. All of the following are essential characteristics of a perfectly competitive industry EXCEPT:
(A) All products produced by the firms in the industry are homogeneous.(B) All firms in the industry are price takers.(C) All consumers and firms are completely aware of the prices at which transactions take place in the industry.(D) There are barriers to entry into and exit from the industry.(E) Price is equal to marginal revenue for every firm in the industry.
2. If a firm is experiencing economies of scale, which of the following will decrease as output increases?
(A) Fixed cost(B) Long-run total cost(C) Long-run average total cost(D) Marginal cost(E) Short-run average total cost
29
Warm Up: Two
Questions!
1. All of the following are essential characteristics of a perfectly competitive industry EXCEPT:
(A) All products produced by the firms in the industry are homogeneous.(B) All firms in the industry are price takers.(C) All consumers and firms are completely aware of the prices at which transactions take place in the industry.(D) There are barriers to entry into and exit from the industry.(E) Price is equal to marginal revenue for every firm in the industry.
2. If a firm is experiencing economies of scale, which of the following will decrease as output increases?
(A) Fixed cost(B) Long-run total cost(C) Long-run average total cost(D) Marginal cost(E) Short-run average total cost
30
Warm Up: Two
Questions!
1. All of the following are essential characteristics of a perfectly competitive industry EXCEPT:
(A) All products produced by the firms in the industry are homogeneous.(B) All firms in the industry are price takers.(C) All consumers and firms are completely aware of the prices at which transactions take place in the industry.(D) There are barriers to entry into and exit from the industry.(E) Price is equal to marginal revenue for every firm in the industry.
2. If a firm is experiencing economies of scale, which of the following will decrease as output increases?
(A) Fixed cost(B) Long-run total cost(C) Long-run average total cost(D) Marginal cost(E) Short-run average total cost
Assume the market demand falls even further. If the price is lowered from $5 to
$4 the firm should stop producing.
Shut Down Rule:•A firm should continue to produce as long as the price is above the AVC
•When the price falls below AVC then the firm should minimize its losses by shutting down
•Why? If the price is below AVC the firm is losing more money by producing than they would if they shut down altogether 31
Co
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nd
Rev
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1 2 3 4 5 6 7 8 9 10
MC
AVC
ATC
SHUT DOWN! Produce Zero
$9
8
7
6
5
4
3
2
1
Minimum AVC is shut down
point
32
Q
TC=$35
TR=$20
Co
st a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
MC
AVC
ATC
P<AVC. They should shut down Producing nothing is cheaper than staying
open.
MR=D=AR=P
Fixed Costs=$10
$9
8
7
6
5
4
3
2
1
33
Q
34
In the short run, the firm will realize an economic loss but will continue to produce if the price is
(A) below P1 (B) between P1 and P2(C) below P2 (D) between P2 and P3(E) between P3 and P4
35
In the short run, the firm will realize an economic loss but will continue to produce if the price is
(A) below P1 (B) between P1 and P2(C) below P2 (D) between P2 and P3(E) between P3 and P4
Three Characteristics of MR=MC Rule:
1. Rule applies to ALL market structures (PC, Monopolies, etc.)
2. The rule applies only if price is above AVC
3. Rule can be restated P = MC for perfectly competitive firms (because MR = P)
Profit Maximizing RuleMR = MC
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Practice
37
$10
8
54
2
0
Co
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nd
Rev
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MC
AVC
ATC
Should the firm produce?What output should the firm produce?What is TR at that output? What is TC?How much profit or loss?
3
MR=D=AR= P
Yes10TR=$140
Profit=$40 TC=$100
#1
38Q6 7 104
7
$20
15
10
5
0
Co
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Rev
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5 7
MC
MR=D=AR=P
AVCATC
11
What output should the firm produce?What is TR where MR=MC?What is TC where MR=MC?How much profit or loss?
9
Loss= $10
Zero$45$55
#2
39Q
$40
30
20
10
0
Co
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nd
Rev
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6 8
MC
MR=D=AR=P
AVC
ATC
1519
What output should the firm produce?What is TR at that output?What is TC?How much profit or loss?
6$90
$120Loss= $30
#3
40Q
P
Q
P
Q5000
D
S
Industry Firm(price taker)
$15 $15
Side-by-side graph for a perfectly competitive industry and firm.
41
AVCMR=D
ATC
MC
8
Is the firm making a profit or a loss? Why?
Total Revenue
$25
20
15
10
0
Co
st a
nd
Rev
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1 2 3 4 5 6 7 8 9 10
MC
AVC
ATC
Where is the profit maximization point? How do you know?
MR=P
Total Cost
Profit
How much is the profit or loss?
What is TR? What is TC?
Where is the Shutdown Point?
What output should be produced?
42
Supply Revisited
43
$50
4540353025 2015 105
0
Co
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1 2 3 4 5 6 7 9
AVC
ATC
44
MR1
Marginal Cost and Supply
MR2
MR3
MR4
MR5
MC
Q
As price increases, quantity increases
When price increases, quantity increases When price decreases, quantity decreases
$50
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1 2 3 4 5 6 7 9
AVC
ATC
45
Marginal Cost and Supply
MC
Q
= Supply
MC above AVC is the (short run) supply curve
(short run)
What if variable costs increase (e.g. a tax)?
$50
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Co
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nd
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1 2 3 4 5 6 7 9
AVC
46
Marginal Cost and Supply
Q
MC1=Supply1
AVC
MC2=Supply2
When MC increases, SUPPLY decreases
What if variable costs decrease (e.g. a subsidy)?
$50
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Co
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nd
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1 2 3 4 5 6 7 9
AVC
47
Marginal Cost and Supply
Q
MC1=Supply1
AVC
MC2=Supply2
When MC decreases, SUPPLY increases
48
Warm Up
Take a minute to review for the quiz!
49
Assume that, for a perfectly competitive firm, marginal cost equals average variable cost at $10, marginal cost equals average total cost at $15, and marginal revenue equals marginal cost at $12. On the basis of this information, the firm should
(A) close down in the short run(B) operate in the short run, even though it will sustain a loss(C) operate in the short run, because it will make an economic profit of $3 per unit(D) operate in the long run, because it will make an economic profit of $3 per unit(E) operate in the short run, but decrease output to decrease its cost
Question!
50
Assume that, for a perfectly competitive firm, marginal cost equals average variable cost at $10, marginal cost equals average total cost at $15, and marginal revenue equals marginal cost at $12. On the basis of this information, the firm should
(A) close down in the short run(B) operate in the short run, even though it will sustain a loss(C) operate in the short run, because it will make an economic profit of $3 per unit(D) operate in the long run, because it will make an economic profit of $3 per unit(E) operate in the short run, but decrease output to decrease its cost
Question!
51
(A) STU(B) RSTU(C) RSTUV(D) RS(E) TUV
Question!Which of the following segments of the
marginal cost curve lies entirely on the firm’s short-run supply curve?
52
(A) STU(B) RSTU(C) RSTUV(D) RS(E) TUV
Question!Which of the following segments of the
marginal cost curve lies entirely on the firm’s short-run supply curve?
53
The short-run supply curve for a firm in a perfectly competitive industry is
(A) its entire marginal cost curve(B) its average variable cost curve above its marginal cost
curve (C) its average total cost curve above its marginal cost
curve (D) its marginal cost curve above the minimum point of its
average total cost curve (E) its marginal cost curve above the minimum point of its
average variable cost curve
Do Now:
Question!
1. Take out your Cost Curves and Utility FRQs Homework
2. Try this
54
The short-run supply curve for a firm in a perfectly competitive industry is
(A) its entire marginal cost curve(B) its average variable cost curve above its marginal cost
curve (C) its average total cost curve above its marginal cost
curve (D) its marginal cost curve above the minimum point of its
average total cost curve (E) its marginal cost curve above the minimum point of
its average variable cost curve
Do Now:
Question!
1. Take out your Cost Curves and Utility FRQs Homework
2. Try this
Costs FRQ7 points
Assume that a firm uses capital as a fixed factor of production and uses labor as a variable factor. The marginal product of labor at first increases and then decreases with the amount of labor.
(a) Using a correctly labeled graph, draw and identify the firm's average total cost curve (ATC), average variable cost curve (AVC), and marginal cost curve (MC).
•One point is earned for a U-shaped ATC curve. •One point is earned for a U-shaped AVC curve that lies below the ATC curve. •One point is earned for an MC curve that is drawn correctly given the average costs curve.
(b) Given your graph in part (a), answer each of the following.
(i) Why is the MC curve shaped as it is?
One point is earned for stating that the MC curve is U-shaped because there are increasing returns to labor followed by decreasing returns to labor OR because of the law of diminishing marginal returns.
(b) Given your graph in part (a), answer each of the following.
(i) Why is the MC curve shaped as it is? (ii) What does the difference between the AVC and the ATC represent?
One point is earned for stating the average fixed cost
(c) Define economies of scale.
One point is earned for stating that the long-run average cost curve decreases as the firm increases output.
(d) Draw a long-run average total cost curve that has a region of economies of scale followed by a region of diseconomies of scale, as output increases.
One point is earned for drawing a U-shaped long-run average total cost curve.
Number of Bagels
Marginal Utility from
Bagels
Number of Toy Cars
Marginal Utility from Toy Cars
1 8 1 102 7 2 83 6 3 64 5 4 45 4 5 36 3 6 2
(a) The table above shows Theresa’s marginal utility from bagels and toy cars.
(i) What is her total utility from purchasing three toy cars?
One point: 24 (10+8+6)
Number of Bagels
Marginal Utility from
Bagels
Number of Toy Cars
Marginal Utility from Toy Cars
1 8 1 10
2 7 2 8
3 6 3 6
4 5 4 4
5 4 5 3
6 3 6 2
(ii) Theresa’s weekly income is $11, the price of a bagel is $2, and the price of a toy car is $1. What quantity of bagels and toy cars will maximize Theresa’s utility if she spends her entire weekly income on bagels and toy cars? Explain your answer using marginal analysis.
Number of Bagels
Marginal Utility from
Bagels
Number of Toy Cars
Marginal Utility from Toy Cars
1 8 1 10
2 7 2 8
3 6 3 6
4 5 4 4
5 4 5 3
6 3 6 2
One point: 5 toy cars, 3 bagels
66
One point is earned for explaining that with this combination of bagels and toys, the marginal utility per dollar spent on bagels equals the marginal utility per dollar spent on toy cars.
(b) Assume that the price of wheat, an input for the production of bagels, increases. Will Theresa’s demand for bagels increase, decrease, or not change? Explain.
One point: Not change; this affects supply, not demand
Number of Bagels
Marginal Utility from
Bagels
MarginalUtility Per
Dollar
Number of Toy Cars
Marginal Utility
from Toy Cars
MarginalUtility Per
Dollar
1 8 4 1 10 10
2 7 3.50 2 8 8
3 6 3 3 6 6
4 5 2.50 4 4 4
5 4 2 5 3 3
6 3 1.50 6 2 2
(c) Suppose that Theresa’s income elasticity for bagels is –0.2. Does the value of Theresa’s income elasticity indicate that bagels are normal goods, inferior goods, substitutes, or complements?.
One point: inferior goods
Number of Bagels
Marginal Utility from
Bagels
MarginalUtility Per
Dollar
Number of Toy Cars
Marginal Utility
from Toy Cars
MarginalUtility Per
Dollar
1 8 4 1 10 10
2 7 3.50 2 8 8
3 6 3 3 6 6
4 5 2.50 4 4 4
5 4 2 5 3 3
6 3 1.50 6 2 2
(d) Suppose that when the price of toy cars increases by 10 percent, Theresa buys 5 percent fewer toy cars and 4 percent less of a different toy, blocks. Calculate the cross-price elasticity for toy cars and blocks and indicate if it is positive or negative.
One point: -0.4 ( -4% / 10% )
Number of Bagels
Marginal Utility from
Bagels
MarginalUtility Per
Dollar
Number of Toy Cars
Marginal Utility
from Toy Cars
MarginalUtility Per
Dollar
1 8 4 1 10 10
2 7 3.50 2 8 8
3 6 3 3 6 6
4 5 2.50 4 4 4
5 4 2 5 3 3
6 3 1.50 6 2 2
Perfect Competition in the
Long-Run
70
You are a Chilean candy bar street vendor. You learn that there is a lot
more profit in selling completos. What do you do in the long run?
71
The Chilean Completo = A Recipe for Profit
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
(No Economic Profit = “Normal Profit”) • In long run equilibrium, a perfectly competitive firm is EXTREMELY efficient.
72
P
Q
P
Q5000
D
S
Industry Firm(price taker)
$15 $15
Side-by-side graph for perfectly competitive industry and firm in the LONG RUN
73
MR=D
ATC
MC
8
Is the firm making a profit or a loss? Why?
Price = MC = Minimum ATCFirm making a normal profit
Firm in Long-Run Equilibrium
74
P
Q
$15
74
MR=D
ATC
MC
8
There is no incentive to enter or leave the
industryTC = TR
Going from Short-Run
to Long-Run
75
P
Q
P
Q5000
D
S
Industry Firm
$15 $15
76
MR=DATC
MC
8
1. Is this the short or the long run? Why?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?
6000
P
Q
P
Q5000
D
S
Industry Firm
$15 $15
77
MR=DATC
MC
8
S1
$10
Firms enter to earn profit so supply increases in the industry Price decreases and quantity increases
6000
P
Q
P
Q5000
D
S
Industry Firm
$15 $15
78
MR=DATC
MC
8
Price falls for the firm because they are price takers.
Price decreases and quantity decreases
S1
$10 $10 MR1=D1
56000
P
Q
P
Q5000
D
Industry Firm 79
ATC
MC
New Long Run Equilibrium at $10 Price
Zero Economic Profit
S1
$10 $10 MR1=D1
56000
P
Q
P
Q5000
D
S
Industry Firm
$15 $15
80
MR=D
ATCMC
8
1. Is this the short or the long run? Why?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?
4000
P
Q
P
Q5000
D
S
Industry Firm
$15 $15
81
MR=D
MC
8
S1
$20
Firms leave to avoid losses so supply decreases in the industry Price increases and quantity decreases
ATC
4000
P
Q
P
Q5000
D
S
Industry Firm
$15 $15
82
MR=D
MC
8
S1
$20
Price increase for the firm because they are price takers.
Price increases and quantity increases
ATC
4000
MR1=D1
9
$20
P
Q
P
Q
D
Industry Firm 83
MC
S1
$20
New Long Run Equilibrium at $20 Price
Zero Economic Profit
ATC
4000
MR1=D1
9
$20
84
Assume that a firm that produces a good in a perfectly competitive industry is in long-run equilibrium. If the demand for the good increases, the profit-maximizing output by the firm will change in which of the following ways in the short run and long run?
Short Run Long Run(A) Return to original level Return to original level(B) Increase Increase(C) Increase Return to original level(D) Decrease Decrease(E) Decrease Return to original level
Question!
85
Assume that a firm that produces a good in a perfectly competitive industry is in long-run equilibrium. If the demand for the good increases, the profit-maximizing output by the firm will change in which of the following ways in the short run and long run?
Short Run Long Run(A) Return to original level Return to original level(B) Increase Increase(C) Increase Return to original level(D) Decrease Decrease(E) Decrease Return to original level
Question!
86
Which of the following indicates that a perfectly competitive firm is in long-run equilibrium?
(A) Price equals marginal cost.(B) Price equals average revenue.(C) Price equals marginal cost, which equals average total cost.(D) Price equals average revenue, which equals marginal revenue.(E) Price equals average fixed cost.
Question!
87
Which of the following indicates that a perfectly competitive firm is in long-run equilibrium?
(A) Price equals marginal cost.(B) Price equals average revenue.(C) Price equals marginal cost, which equals average total cost.(D) Price equals average revenue, which equals marginal revenue.(E) Price equals average fixed cost.
Question!
Going from Long-Run to Long-Run
88
P
Q
P
Q5000
D
S
Industry Firm
$15 $15
89
MR=D
MC
8
Currently in Long-Run Equilibrium If demand increases, what happens in the short
run and how does it return to the long run?
ATC
MR1=D1
P
Q
P
Q5000
D
S
Industry Firm
$15 $15
90
MR=D
MC
8
D1
$20
Demand Increases The price increases and quantity increases
Profit is made in the short-run
ATC
MR1=D1
9
$20
P
Q
P
Q5000
D
S
Industry Firm
$15 $15
91
MR=D
MC
8
D1
$20
Firms enter to earn profit so supply increases in the industry
Price Returns to $15
ATC
MR1=D1
9
$20
7000
S1
P
Q
P
Q
D
Industry Firm
$15 $15
92
MR=D
MC
8
D1
Back to Long-Run EquilibriumThe only thing that changed from long-run to
long-run is quantity in the industry
ATC
7000
S1
93
Constant Cost Industry • In the long run, an increase in demand for the product
won’t change the market price• Resources used to make the product are assumed to
be unlimited and won’t get depleted by new firms entering the industry
• Long run industry supply curve is horizontal
Increasing Cost Industry• In the long run, an increase in demand for the product
will increase the market price• Resources used to make the product are limited • More firms entering the industry drive up resource
prices – every firm’s long run average cost curve shifts upward
• Long run industry supply curve is upward sloping
Constant Cost vs. Increasing Cost Industries
94
For a perfectly competitive, increasing-cost industry, an increase in the industry’s demand will lead to which of the following in the long run?
(A) An increase in each firm’s profit(B) A decrease in the price of an input and a decrease in total industry profits(C) A decrease in total industry sales(D) A decrease in total producer surplus and an increase in total consumer surplus(E) An upward shift in each firm’s long-run average cost curve
Question!
95
For a perfectly competitive, increasing-cost industry, an increase in the industry’s demand will lead to which of the following in the long run?
(A) An increase in each firm’s profit(B) A decrease in the price of an input and a decrease in total industry profits(C) A decrease in total industry sales(D) A decrease in total producer surplus and an increase in total consumer surplus(E) An upward shift in each firm’s long-run average cost curve
Question!
96
Which of the following statements about a constant-cost perfectly competitive industry in long-run equilibrium must be true?
A) The long run supply curve is upward slopingB) The long run supply is curve is perfectly inelasticC) The total cost of production remains the same
as output increasesD) An increase in demand will cause no change in
the long run equilibrium priceE) An increase in demand will cause no change in
the long run equilibrium quantity
Question!
97
Which of the following statements about a constant-cost perfectly competitive industry in long-run equilibrium must be true?
A) The long run supply curve is upward slopingB) The long run supply is curve is perfectly inelasticC) The total cost of production remains the same
as output increasesD) An increase in demand will cause no change
in the long run equilibrium priceE) An increase in demand will cause no change in
the long run equilibrium quantity
Question!
Efficiency
98
PERFECT COMPETITION AND EFFICIENCY
• Perfect Competition forces producers to use limited resources to their fullest.
• Inefficient firms have higher costs and are the first to leave the industry.
• Perfectly competitive industries are extremely efficient
Efficiency refers to the optimal use of society’s scarce resources
1. Productive Efficiency2. Allocative Efficiency
There are two kinds of efficiency:
99
Efficiency RevisitedB
ikes
Computers
14
12
10
8
6
4
2
0
0 2 4 6 8 10
A
B
C
D
F
E
Which points are productively efficient?Which are allocatively efficient?
G
100
Productive Efficient combinations are A
through D(they are produced at the
lowest cost) Allocative Efficient
combinations depend on the wants of
society
Productive Efficiency
Price = Minimum ATC
The production of a good in the least costly way. (Minimum amount of resources are being used) Graphically, it is where…
101
P
Q
MCATC
Quantity
Pri
ce
Notice that the product is NOT being made at the lowest possible cost
(ATC not at lowest point).
Short-Run
Profit
102
D=MR
P
Q
MC
ATC
Quantity
Pri
ce
Notice that the product is NOT being made at the lowest possible cost (ATC not at lowest point).
Short-Run
Loss
103
D=MR
PD=MR
Q
MCATC
Quantity
Pri
ce
Notice that the product is being made at the lowest possible cost (Minimum ATC)
Long-Run Equilibrium
104
Allocative Efficiency
Price = MC
Producers are allocating resources to make the products most wanted by society.
Graphically it is where…
105
Why? Price represents the benefit people get from a product.
P MR
Q
MC
Quantity
Pri
ce
The marginal benefit to society (as measured by the price) equals the marginal
cost.
Long-Run Equilibrium
Optimal amount being produced
106
$5 MR
15
MC
Quantity
Pri
ce
The marginal benefit to society is greater the
marginal cost.Not enough produced.
Society wants more
What if the firm makes 15 units?
20 Underallocation of resources
$3
107
$5 MR
22
MC
Quantity
Pri
ce
The marginal benefit to society is less than the
marginal cost. Too much Produced.Society wants less
