Wednesday January 8
Main concepts that you need to remember when looking at graphs:
1. Firm vs. Market – is it the firm’s graph or the market’s graph?
2. Is it a SR or LR scenario
3. Economically efficient (the level of output that maximizes total surplus)
• Q occurs where P = MC (ch. 10)
Reviewed ch. 9 on perfect competition
Note: you won’t be asked any math questions on ch. 9 this term (we covered this
A perfectly competitive market is characterized by:
1. Many buyers and sellers (everyone is a price taker)
2. Identical products (one firm’s product didn’t differentiate from another
firm’s product in any significant way)
3. Perfect information about price and quality
4. Ease of entry and exit (equal access to resources)
A firm may have positive or negative profits in the short run, but in the long run,
profits ALWAYS go to 0 (for every firm in the market)
o Ease of entry and exit is what drives profits to 0 in the long run
Example of firm’s graph vs. market’s graph: Figure 1
There was a different supply curve for the firm and for the market
o The firm sees a horizontal demand curve, which tells us that the firm can
sell as much as it wants to at the given market price, P 1. It doesn’t
determine the market price, it just observes that market price.
o The market demand curve is a normal downward sloping demand curve
where market supply and market demand intersect. This sets the market
price P .
The perfectly competitive firm takes that market price as given and maximizes its
profit by producing a quantity where the market price is equal to the marginal
cost of producing.
The perfectly competitive firm will set and produce quantity to maximize profits,
and this occurs where P = MC.
If there’s an increase in demand in the short-run, the market price increases
from P Oo P in2the short run. The firm will increase its quantity produced from q 1
to q2, and in the short run, the price goes up.
In the long-run, you get entry into the market because it is perfectly competitive,
and the firm is not made to block entry.
It showed us an example of a constant cost industry, which means we get
entry until the price returns to its original level, and we have a horizontal long-run
supply curve. o Output is higher (there is more being sold in the market), but the price is
the same as before
Increasing Cost Industry: an industry with specialized labour or scarce resources
Has an upward sloping long-run supply curve
Decreasing Cost Industry: experiences economies of scale (decreasing long-run
average costs) in the production of its inputs
Has a downward sloping long-run supply curve
*Note: you want to think about what is happening both in the short-run and the long-run
(because the effects will be different.)
Definitions of Profit:
π = TR – TC
π = Q x (P - AC)
o This definition is useful for graphs
What does supply look like in perfect competition?
1. FIRM’S SUPPLY CURVE – average costs of production in relation to marginal
costs of production
a. Short Run Supply Curve – MC above min. average avoidable costs,
Some inputs are fixed
Some costs may be sunk
Shows the SMC curve, SAC curve, ANSC (average non-sunk cost)
curve, and AVC (average variable cost) curve