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Individual Firm

MARKET DEMAND: Markets finds equilibrium through Supply & Demand. MC. ATC. Short-run supply,. S. 1. A. P. P. 1. 1. Demand,. D. 1. Q. 1. AVC. YOU must draw 2 graphs for competitive markets. In a Competitive Market: LONG RUN: Firms Enter market if: P > ATC

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Individual Firm

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  1. MARKET DEMAND: Markets finds equilibrium through Supply & Demand MC ATC Short-run supply, S 1 A P P 1 1 Demand, D 1 Q 1 AVC YOU must draw 2 graphs for competitive markets In a Competitive Market: LONG RUN: Firms Enter market if: P > ATC Firms Exit market if: P < ATC SHORT RUN: Firms Shutdown if: P < AVC Firms remain open if: P > AVC Entire Market Individual Firm Price Price Quantity (firm) Quantity (market) 0 0

  2. MC ATC Short-run supply, S 1 A P P 1 1 Demand, D 1 Q 1 Long Run Equilibrium Market Individual Firm Price Price AVC Quantity (firm) Quantity (market) 0 0 Must produce at Efficient Scale Economic profit = ZERO P = MC = ATC = MR

  3. ATC S MC 1 B P P 2 2 A P Long-run 1 supply D 2 D 1 Q Q 2 1 Short Run Increase in Demand This can not be a long term equilibrium! Market Firm Price Price AVC P1 0 0 Quantity (market) Quantity (firm)

  4. Entry/Exit is a Long run concept! MC S 2 C Long-run supply D 2 Q 3 Long Run Impact Profits induce entry and market supply increases Market Firm Price Price S1 ATC B P2 AVC A P P 1 1 D1 Q1 Q2 Quantity (firm) 0 Quantity (market) 0 The increase in supply lowers market price. In the long run market price is restored, but market supply is greater.

  5. Last Details…. • Market long run supply curve is perfectly elastic because of unlimited entry/exit into the marketplace at minimum of ATC • Short Run supply curve is upward sloping • Above AVC curve

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