Micro Chap. 8

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

(or sometimes justefficiency )occurs when no possible reorganization of production or distribution can make anyone better off withoutmaking someone else worse off. Under conditions ofallocative eff ciency, one person’s satisfaction or utility can be increased only by lowering someone else’sutility

area between priceline and consumer curve

area between priceline and surply curve

The perfectly competitive market is a device forsynthesizing (a) the willingness of consumers possessing dollar votes to pay for goods with (b) the marginal costs of those goods as represented by f rms’supply. Under certain conditions, competition guarantees eff ciency, in which no consumer’s utility canbe raised without lowering another consumer’s utility. This is true even in a world of many factors andproducts.

Marginal cost is a fundamental concept foreff ciency. For any goal-oriented organization, eff ciency requires that the marginal cost of attainingthe goal should be equal in every activity. In a market, an industry will produce its output at minimumtotal cost only when each f rm’sMC is equal to acommon price.

There are no scientif cally correct answers tothese questions. Positive economics cannot say howmuch governments should intervene to correctthe inequalities and ineff ciencies of the marketplace. These normative questions are appropriatelyanswered through political debate and fair elections.But economics can offer valuable insights into themerit of alternative interventions so that the goals ofa modern society can be achieved in the most effective manner

Firms that are so small relative to the size of the market that they perceive their demand curve to be perfectly elastic.

profit-maximizing output condition for a perfectly competitive fum.

price is equal to average variable costs.

Occur when price is greater than average total costs.

At least one input is fixed

when capital and all other factors are variable and there is free entry and exit of firms into and from the industry

The horizontal summation of the individual firm's marginal cost curves. (Above minimum AVC)

Leads to no change in price as a fum or industry expands output in the long run

Implies that there is a direct relationship between price and quantity supplied in an industry.

The price of a factor of'production that is fixed in total supply e.g. land, art /when the quantity is constant at every price

Occm when there emts a directrelstionsbip between price and quantity supplied at low prices, but an indirect relationship between price and quantity supplied at high prices.

.Implies that the quantity supplied will not change as prices change.

No possible reorganization of production can make anyone better off vithout making someone else worse off.

Occur when firms or individuals ignore the full social costs of their actions.

Involves issues of fairness in the allocation of resources.