ECON 310 Lecture 6: l310x6

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ECON 310
E Funkhouser

Lecture 6 Supply Function of a Competitive Firm I. Introduction Firms in a competitive market are pricetakers Equilibrium price is determined by market supply and demand. Individual firms take the market price as exogenous. An individual firm can sell as much as it wants at the market price. Key idea == The Demand Curve faced by an individual firm is perfectly elastic at the equilibrium price Marginal Revenue == Additional Revenue received from selling last unit of output Since, for a competitive firms, all units of output sold are sold at the equilibrium price, marginal revenue is the price. II. Shortrun Supply Function of a Competitive Firm Shortrun == Firm has fixed costs that have already been paid. This means that the firm will lose the fixed cost even if it decides not to produce anything. Key idea == Firm will produce if total variable cost is less than total revenue. Another way of saying this is that the firm will produce if average variable cost is less than the price. Shutdown Price = Price below which the firm will not produce. It would rather lose the fixed cost than produce at a loss (and lose more than the fixed cost). The competitive firm will produce more output as long as the additional revenue received from producing one more unit of output is greater than or equal to the additional cost of producing one more unit of output. Thus, the firm will produce until MC (q) = MR ( = P) Shortrun Costs Marginal Cost MR=P 1 P1 Average Variable Cost Quantity Produced Q 1
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