Chapter 6 Perfect Competition For individuals in this market situation, they essentially face a horizontal demand curve o The

he entire market curves down, however Shifts in Supply and Demand Curves Two most important factors causing shifts in supply curves are technological advancements and changes in the input prices The Output Decision of a Perfectly Competitive Firm In this situation P = MC (P=MR) o Managers want to avoid these markets because the goal is to grind the price down to Marginal Cost Marginal Revenue Curve which is horizontal is also the firms demand curve Managers maximize profit where the price = MC Setting the Marginal Cost Equal to the Price Managers often accrue negative profits even if MC = P and MC is increasing For any output where price exceeds average variable costs, managers should produce even though the price does not cover average total costs If no output rate at which price exceeds AVC, shut down the plant If the loss from producing is less than the firms fixed costs, it is more profitable to produce than to discontinue Managers want TR to exceed VC by as much as possible Thus, P = MC, but it also must exceed AVC Shutdown Point when the price equals the minimum average variable cost if manager maximizes profit or minimizes loss, output is set so that short-run marginal cost equals the price and the marginal cost is rising. Another Way of Viewing The Price Equals Marginal Cost Profit-Maximizing Rule Marginal Revenue Product the amount an additional unit of the variable input adds to the firms total revenue MRPL = (MR)(MPL) or = DTR/dL o the marginal revenue per unit times the number of units gives the additional revenue obtained by managers Marginal Expenditure the amount an additional unit of labour adds to the firms total costs MEL=DTC/dL To maximize profit, managers should set MRPL=MEL P x MPL = MEL = PL Therefore, managers should continue to hire as long as P x MPL > PL o To max profits set P x MPL = PL Producer Surplus in the Short Run Producer Surplus the difference between the market price and the price the producer is willing to receive for a good or service (producers reservation price) o Reservation price about the break-even point the MC

The difference between what the demanders are willing to spend and what the suppliers are willing to receive is the measure of social welfare A + B Market exchanges generally provide opportunities for gains savy managers can exploit these gains Long Run Equilibrium of the Firm Long run equilibrium is where the long-run average total cost curve equals the price If price exceeds average total costs then economic profit is earned and new firms will enter the industry If price is less than the average total costs than a firm will exist the industry Only when economic profit is zero is a firm in long-run equilibrium The price must equal the lowest value of the long-run average total cost Essentially, Long-run marginal cost curve, short-run marginal cost, short run average cost and long-run average cost curve are equal to P when profit is maximizing meaning that they all intersect at P Long-run marginal cost equals short-run marginal cost equals profit Essentially, the equilibrium point is the bottom of the long-run average cost curve The Long-Run Adjustment Process: A Constant-Cost Industry Assume that this is a constant-cost industry expansion of the industry does not increase input prices o