Perfect Competition part III Short Run Long Run

Perfect Competition part III Short Run & Long Run Supply Curves Chapter 14 completion

Competitive Markets in Action ---------- D 2 Q 2 New firms enter industry in Long run => Supply shifts right Price driven down to minimum of ATC Profit ------------ D 2 = MR 2 E 2 ------------ $18 ----------- E 2 Q 2 AVC

Individual Firm Supply Curves • Short-Run FIRM Supply Curve – MC curve from Min. of AVC & Above – P ≥ AVC => stay open – If P < AVC shutdown • Long-Run FIRM Supply Curve – MC curve from Min. of ATC & Above – P ≥ ATC => Stay in industry – If P < ATC Exit Industry MC

Stay Open or Shutdown? Price MC 0 P < AVC _________. Economic Loss. ___ ------------ P 1 ATC AVC Shutdown E 1 Q 1 D = MR Stay Open when P ≥ AVC Quantity

Land Oil Well Ocean Oil Well Fracking Oil Well What happens when oil price fall? These 3 types of oil wells have different variable costs to pump oil (AVC) So, they shutdown as the price of oil falls Below their AVC per barrel Land oil wells are cheapest to operate, they Shutdown only below $20 per barrel

Short Run Increase in Demand Increase in market demand => Each Firm produces more & ↑ price & quantity supplied earn a short run economic profit Entire Market 1 - Individual Firm Price P 2 P 1 Price B B S 1 P 2 A P 1 MC ATC D 2 = MR 2 profit A D 1 = MR 1 D 2 D 1 0 Q 1 Q 2 Quantity (market) 0 Q 1 Q 2 Quantity (firm) This is can not be a long run equilibrium!

Reaching Long Run Equilibrium Economic Profit causes new firms to enter market => supply increases Price P 2 Entire Market B Market price is restored to min. of ATC & economic profit falls to zero Price 1 Individual Firm MC S 1 S 2 A P 2 C P 3 P 1 B CA D 2 ATC D 2 = MR 2 D 1=MR 1 D 3=MR 3 D 1 0 Q 1 Q 2 Q 3 Quantity (firm) 0 Q 1 Q 2 Q 3 Quantity (market) But total market supply is greater (Q 3) as more individual firms are in market

Practice Multiple Choice Test Part 1 • Perfect Competition Equilibrium

Perfect Competition Video • http: //www. youtube. com/watch? v=8 IDK_3 7 f. AMs

Short-Run Market Supply Curve is the sum of all individual supply curves (a) Individual Firm Supply (b) Market Supply Price MC Supply $2. 00 1. 00 0 100 200 Quantity (firm) 0 100, 000 An industry with 1, 000 identical firms => at each price output is 1000 times larger 200, 000 Quantity (market)

Long-Run Market Supply Curve Market supply curve is different than the individual firm supply curve (P > ATC) Price Long Run Zero-Profit Condition Market Supply Price Entry/Exit create enough supply to satisfy any demand MC ATC Long Run Market Supply Curve P = minimum ATC 0 Quantity (firm) 0 • Is Horizontal at the minimum of ATC • Market will supply any quantity at P = ATC Quantity (market)

Practice Multiple Choice Test Part 2 • Firm vs Market Supply Curves