Micro Chap. 8

1. Underperfect competition, there are many small f rms, each producing an identical product and each too small to affect the market price. 2. The perfect competitor faces a completely horizontal demand (ordd ) curve. 3. The extra revenue gained from each extra unit sold is therefore the market price.

Rule for a f rm’s supply under perfect competition: A f rm will maximize prof ts when it produces at that level where marginal cost equals price: Marginal cost = price or MC = P /A prof t-maximizing f rm will set its output at that level where marginal cost equals price. Diagrammatically, this means that a f rm’s marginal cost curve is also its supply curve.

Price is equal to average variable costs / The shutdown point comes where revenues just cover variable costs or where lossesare equal to f xed costs. When the price falls belowaverage variable costs, the f rm will maximize prof ts(minimize its losses) by shutting down.

The market supply curve for a good in a perfectlycompetitive market is obtained by adding horizontally the supply curves of all the individual producersof that good

price equals average total cost./In a competitive industry populated by identical f rms with free entryand exit, the long-run equilibrium condition is thatprice equals marginal cost equals the minimum longrun average cost for each identical f rm:P = MC = minimum long-run AC = zero-prof t priceThis is the long-runzero-economic-prof t condition

(a) Generally, an increase indemand for a commodity (the supply curve beingunchanged) will raise the price of the commodity.(b) For most commodities, an increase in demandwill also increase the quantity demanded. A decreasein demand will have the opposite effects.

(c) An increase in supply of a commodity (the demand curve being constant) will generally lower the price and increase the quantity boughtand sold. (d) A decrease in supply has the oppositeeffects

(c) An increased supply will decrease P most whendemand is inelastic. (d) An increased supply will increaseQ least whendemand is inelastic