MGTA01H3 Lecture Notes - Lecture 3: Economic Equilibrium, Demand Curve, Competitive Equilibrium

• School: UTSC
• Department: Management
• Course: MGTA01H3
• Professor: Chris Bovaird

Document Summary

Many small boats are made of fibreglass, which is derived from crude oil. The rise in the price of petroleum increases production costs for individual firms and thus shifts the industry supply curve up, as shown in figure 1. The typical firm"s initial marginal-cost curve is mc1 and its average-total-cost curve is atc1. In the initial equilibrium, the industry supply curve, s1, intersects the demand curve at price p1, which is equal to the minimum average total cost of the typical firm. Thus the typical firm earns no economic profit. The increase in the price of oil shifts the typical firm"s cost curves up to mc2 and atc2, and shifts the industry supply curve up to s2. The equilibrium price rises from p1 to p2, but the price does not increase by as much as the increase in marginal cost for the firm. As a result, price is less than average total cost for the firm, so profits are negative.