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Perfect Competition Study Notes.docx

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Department
Economics
Course
ECON 1B03
Professor
Hannah Holmes
Semester
Winter

Description
Perfect Competition Marginal Costs are rising at the point where MC = Marginal Revenue. A firm maximizes profit by charging a price where MR (which equals Price) = Marginal Costs. In the Short Run: When MC=MR is above the Average Total Cost curve, economic profit is made. - This economic profit equals Quantity*(Price – Average Total Cost) When MC=MR is below the Average Total Cost curve, there is economic loss. - This economic loss equals Quantity*(Average Total Cost – Price When MC=MR at a point on the Average Total Cost curve, then there is zero economic profit. This is the break-even point for a firm, and where most firms aim to be. Since the marginal cost curve crosses the average variable cost curve and the average total cost curve at their minimum, when P=MC=MR = Average Total Cost, the minimum average total cost is achieved. Short-Run Showdown Decision A firm will shut down in the short run if Total Revenue is less than Total Variable Costs. - This is the same as Price < Average Variable Costs. Therefore, graphically: Short Run Industry Supply Curve - The quantity supplied by the entire industry at each price point. - The sum of the quantities supplied by all firms in the industry - Note that at the shut-down point, the supply curve is a horizontal line that goes back to the price axis. Long Run Exit and Entry - In the long run, and industry adjusts in two ways o Entry and exit o Changes in plant size A firm will exit an industry if Price < Average Total Costs. This is because it is making Economic Losses as seen above. Firms will enter the industry if Price > A
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