Step for solving a perfect competition question.
Start by either solving for the number of firms if you are given the firm’s marginal cost
curve and the short run industry supply curve. If you are given the number of firms but
not the industry supply curve then you must draw the industry supply curve in.
1. From the industry diagram, find the equilibrium Price, P and industry0,uantity,
Q 0nd label them.
2. At that price, draw the firm’s marginal revenue curve on the firm diagram. (P = 0
MR ).0Find the quantity where MR = MC. And0label that quantity q . 0
3. At that quantity q , fi0d the value of Average total cost. Shade in the rectangle
representing profits. Profits = (P -ATC0)q If p0of0ts equal zero then there is no
area to shade in.
4. Possible shocks and their short run impacts: A) Change in demand → only
B) Change in variable cost → AVC, ATC, MC, and the short run supply curve shifts.
C) Change in fixed cost → only ATC shifts.
5. After making the appropriate shifts then from the industry diagram, find the
equilibrium Price, P and1,ndustry quantity, Q and label1them.
6. At that price, draw the firm’s marginal revenue curve on the firm diagram. (P =