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Perfect Competition part III

Perfect Competition part III. Short Run & Long Run Supply Curves Chapter 14 completion. Competitive Markets in Action. D 2 = MR 2. $18. ----------------------. E 2. $18. E 2. Profit. ------------------------. AVC. -----------------------. --------------------. D 2. Q 2. Q 2.

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Perfect Competition part III

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  1. Perfect Competitionpart III Short Run & Long Run Supply Curves Chapter 14 completion

  2. Competitive Markets in Action D2 = MR 2 $18 ---------------------- E2 $18 E2 Profit ------------------------ AVC ----------------------- -------------------- D2 Q2 Q2 New firms enter industry in Long run => Supply shifts right Price driven down to minimum of ATC

  3. Individual Firm Supply Curves MC • Short-Run FIRMSupply Curve • MC curve from Min. of AVC & Above • P ≥ AVC => stay open • If P < AVC shutdown • Long-Run FIRM Supply Curve • MC curvefrom Min. of ATC & Above • P ≥ ATC => Stay in industry • If P < ATC Exit Industry

  4. MC ATC AVC AVC = MR P1 D Stay Open or Shutdown? Price Shutdown P < AVC __________________ . Economic Loss. Stay Open when P ≥ AVC ___ E1 ----------------------- Q1 Quantity 0

  5. Land Oil Well Ocean Oil Well Fracking Oil Well What happens when oil price fall? These 3 types of oil wells have different variable costs to pump oil (AVC) So, they shutdown as the price of oil falls Below their AVC per barrel Land oil wells are cheapest to operate, they Shutdown only below $20 per barrel

  6. ATC S MC 1 B P P 2 2 B A A P 1 D 2 D 1 Q2 Q Q Q 2 1 1 This is can not be a long run equilibrium! ShortRun Increase in Demand Increase in market demand=> ↑ price & quantity supplied Each Firm produces more & earn a short run economic profit Entire Market 1- Individual Firm Price Price D2 = MR2 profit D1 = MR1 P1 0 0 Quantity (market) Quantity (firm)

  7. MC P S 2 2 A C D 2 Q2 Q 1 Q 3 Reaching Long Run Equilibrium Economic Profit causes new firms to enter market => supply increases Entire Market 1 Individual Firm Price Price S1 ATC B B P2 D2 = MR2 A C P3 D1=MR1 P3 D3=MR3 P P 1 1 D1 Q1 Q2 Quantity (firm) 0 Quantity (market) 0 Q3 Market price is restored to min. of ATC & economic profit falls to zero But total market supplyis greater (Q3) as more individual firms are in market

  8. Practice Multiple Choice Test Part 1 • Perfect Competition Equilibrium

  9. Perfect Competition Video • http://www.youtube.com/watch?v=8IDK_37fAMs

  10. MC Supply $2.00 $2.00 1.00 1.00 100,000 200,000 100 200 Short-Run Market Supply Curve Market Supply Curve is the sum of all individual supply curves (a) Individual Firm Supply (b) Market Supply Price Price Quantity (firm) Quantity (market) 0 0 An industry with 1,000 identical firms => at each price output is 1000 times larger

  11. Entry/Exit create enough supply to satisfy any demand MC ATC Long Run Market Supply Curve P = minimum ATC Long-Run Market Supply Curve Market supply curve is different than the individual firm supply curve (P > ATC) Market Supply Long Run Zero-Profit Condition Price Price Quantity (market) Quantity (firm) 0 0 • Is Horizontal at the minimum of ATC • Market will supply any quantity at P = ATC

  12. Practice Multiple Choice Test Part 2 • Firm vs Market Supply Curves

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