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23 CHAPTER Pure Competition Copyright Mc. Graw-Hill/Irwin, 2002 23 CHAPTER Pure Competition Copyright Mc. Graw-Hill/Irwin, 2002

FOUR MARKET MODELS Pure Competition Very large number of firms, standardized product, new firms FOUR MARKET MODELS Pure Competition Very large number of firms, standardized product, new firms can enter or exit from the industry very easily Copyright Mc. Graw-Hill/Irwin, 2002

FOUR MARKET MODELS 1. Pure Competition: • Very Large Numbers • Standardized Product • FOUR MARKET MODELS 1. Pure Competition: • Very Large Numbers • Standardized Product • “Price Takers” • Free Entry and Exit Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Copyright Mc. Graw-Hill/Irwin, 2002

 • Very large numbers Very large number of independently acting sellers, e. g. • Very large numbers Very large number of independently acting sellers, e. g. , farm products, stock market, foreign exchange market. • Standardized product Identical or homogeneous product. As long as the price is the same, consumers will be indifferent about which seller they buy the product from • Price takers - Individual firms exert no significant control over the market price. Each firm’s quantity is too small to affect the market supply or price. - Competitive firms are price takers, they cannot affect the price, but adjust to it. - None of the sellers can ask for a higher price - None will sell at a lower price Copyright Mc. Graw-Hill/Irwin, 2002

 • Free entry and exit • New firms can freely enter and existing • Free entry and exit • New firms can freely enter and existing firms can freely leave the market. • No significant legal, technological, financial, or other obstacles prohibit new firms from selling their output in the market. • Relevance of pure competition • Pure competition is rare • It is highly relevant, we can learn much about markets by studying pure competition model. • It is meaningful as a starting point for discussing price and output determination. Copyright Mc. Graw-Hill/Irwin, 2002

DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average Revenue) Demanded (Q) Revenue (TR) $131 Copyright Mc. Graw-Hill/Irwin, 2002 0 $ 0 Marginal Revenue (MR)

DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average Revenue) Demanded (Q) Revenue (TR) $131 Copyright Mc. Graw-Hill/Irwin, 2002 0 1 $ 0 ] 131 Marginal Revenue (MR) $131

DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average Revenue) Demanded (Q) Revenue (TR) $131 131 Copyright Mc. Graw-Hill/Irwin, 2002 0 1 2 $ 0 ] 131 ] 262 Marginal Revenue (MR) $131

DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average Revenue) Demanded (Q) Revenue (TR) $131 131 Copyright Mc. Graw-Hill/Irwin, 2002 0 1 2 3 $ 0 ] 131 ] 262 ] 393 Marginal Revenue (MR) $131 131

DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average Revenue) Demanded (Q) Revenue (TR) $131 131 131 Copyright Mc. Graw-Hill/Irwin, 2002 0 1 2 3 4 $ 0 ] 131 ] 262 ] 393 ] 524 Marginal Revenue (MR) $131 131

DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average Revenue) Demanded (Q) Revenue (TR) $131 131 131 Copyright Mc. Graw-Hill/Irwin, 2002 0 1 2 3 4 5 6 7 8 9 10 $ 0 ] 131 ] 262 ] 393 ] 524 ] 655 ] 786 ] 917 ] 1048 ] 1179 ] 1310 Marginal Revenue (MR) $131 131 131

Revenue • • • Average revenue (AR) Revenue per unit The firms demand schedule Revenue • • • Average revenue (AR) Revenue per unit The firms demand schedule is its revenue schedule Price and average revenue are the same Total revenue (TR) The price times the quantity Total revenue increases by a constant amount for each units of sales Marginal revenue (MR) ∆ TR due to ∆ Q (by one unit) MR is constant MR = P Copyright Mc. Graw-Hill/Irwin, 2002

note • In a competitive market: Price = Average revenue = Marginal revenue P note • In a competitive market: Price = Average revenue = Marginal revenue P = AR = MR Copyright Mc. Graw-Hill/Irwin, 2002

DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average Revenue) Demanded (Q) Revenue (TR) $131 131 131 Copyright Mc. Graw-Hill/Irwin, 2002 0 1 2 3 4 5 6 7 8 9 10 $ 0 ] 131 ] 262 ] 393 ] 524 ] 655 ] 786 ] 917 ] 1048 ] 1179 ] 1310 Marginal Revenue (MR) $131 131 131

DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Product Price (P) Quantity Total (Average Revenue) Demanded (Q) Revenue (TR) $131 131 131 0 1 2 3 4 5 6 7 8 9 10 $ 0 ] 131 ] 262 ] 393 ] 524 ] 655 ] 786 ] 917 ] 1048 ] 1179 ] 1310 Graphically Presented… Copyright Mc. Graw-Hill/Irwin, 2002 Marginal Revenue (MR) $131 131 131

Perfectly elastic demand • Demand curve faced by the individual competitive firm is perfectly Perfectly elastic demand • Demand curve faced by the individual competitive firm is perfectly elastic at the market price • Note the competitive market demand curve is a down-sloping curve. Copyright Mc. Graw-Hill/Irwin, 2002

DEMAND, MARGINAL REVENUE, AND TOTAL REVENUE IN PURE COMPETITION TR 1179 Price and revenue DEMAND, MARGINAL REVENUE, AND TOTAL REVENUE IN PURE COMPETITION TR 1179 Price and revenue 1048 917 786 655 524 393 262 D = MR 131 0 1 2 3 4 5 6 7 8 Quantity Demanded (sold) Copyright Mc. Graw-Hill/Irwin, 2002 9 10

PROFIT MAXIMIZATION IN THE SHORT RUN First: TR -TC Approach The Decision Process: • PROFIT MAXIMIZATION IN THE SHORT RUN First: TR -TC Approach The Decision Process: • Should the firm produce? If so… • What quantity should be produced? • What profit or loss will be realized? The Decision Rule: Produce in the short-run if: 1 - make a profit, (or) 2 - A loss < fixed costs Copyright Mc. Graw-Hill/Irwin, 2002

SHORT RUN PROFIT MAXIMIZATION First: TR -TC Approach Applied The Decision Process: • Should SHORT RUN PROFIT MAXIMIZATION First: TR -TC Approach Applied The Decision Process: • Should the firm produce? If so… Graphically • What quantity should be produced? • What profit or loss will be realized? … The Decision Rule: Produce in the short-run if: 1 - make a profit, (or) 2 - A loss < fixed costs Copyright Mc. Graw-Hill/Irwin, 2002

TOTAL REVENUE-TOTAL COST APPROACH Total Fixed Variable Total Product Cost 0 1 2 3 TOTAL REVENUE-TOTAL COST APPROACH Total Fixed Variable Total Product Cost 0 1 2 3 4 5 6 7 8 9 10 $ 100 90 100 170 270 100 240 340 100 300 400 100 370 470 100 450 550 100 540 640 100 649 749 100 780 880 100 930 1030 Copyright Mc. Graw-Hill/Irwin, 2002 Price: $131 Total Revenue Profit $ 0 131 262 393 524 655 786 917 1048 1179 1310 - $100 - 59 -8 + 53 + 124 + 185 + 236 + 277 + 299 + 280

TOTAL REVENUE-TOTAL COST APPROACH Total Fixed Variable Total he n? Cost Product t. Cost TOTAL REVENUE-TOTAL COST APPROACH Total Fixed Variable Total he n? Cost Product t. Cost e o se zati ou 0 imi$ 100 y x 100 90 190 an ma 1 C t 2 100 170 270 i f ro 100 3 240 340 p 4 5 6 7 8 9 10 100 100 Copyright Mc. Graw-Hill/Irwin, 2002 300 370 450 540 649 780 930 400 470 550 640 749 880 1030 Price: $131 Total Revenue Profit $ 0 131 262 393 524 655 786 917 1048 1179 1310 - $100 - 59 -8 + 53 + 124 + 185 + 236 + 277 + 299 + 280

TOTAL REVENUE-TOTAL COST APPROACH Total Fixed Variable Total al Productot. Cost e T g TOTAL REVENUE-TOTAL COST APPROACH Total Fixed Variable Total al Productot. Cost e T g enu in ev 100 $ 100 h 0 $ ap &1 R 100 90 190 r G st 2 100 170 270 o C 100 3 240 340 4 5 6 7 8 9 10 100 100 Copyright Mc. Graw-Hill/Irwin, 2002 300 370 450 540 649 780 930 400 470 550 640 749 880 1030 Price: $131 Total Revenue Profit $ 0 131 262 393 524 655 786 917 1048 1179 1310 - $100 - 59 -8 + 53 + 124 + 185 + 236 + 277 + 299 + 280

Total revenue and total cost TOTAL REVENUE-TOTAL COST APPROACH $1, 800 1, 700 1, Total revenue and total cost TOTAL REVENUE-TOTAL COST APPROACH $1, 800 1, 700 1, 600 1, 500 1, 400 1, 300 1, 200 1, 100 1, 000 900 800 700 600 500 400 300 200 100 0 Total Revenue 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Copyright Mc. Graw-Hill/Irwin, 2002

Total revenue and total cost TOTAL REVENUE-TOTAL COST APPROACH $1, 800 1, 700 1, Total revenue and total cost TOTAL REVENUE-TOTAL COST APPROACH $1, 800 1, 700 1, 600 1, 500 1, 400 1, 300 1, 200 1, 100 1, 000 900 800 700 600 500 400 300 200 100 0 Total Revenue Total Cost 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Copyright Mc. Graw-Hill/Irwin, 2002

Total revenue and total cost TOTAL REVENUE-TOTAL COST APPROACH $1, 800 1, 700 1, Total revenue and total cost TOTAL REVENUE-TOTAL COST APPROACH $1, 800 1, 700 1, 600 1, 500 1, 400 1, 300 1, 200 1, 100 1, 000 900 800 700 600 500 400 300 200 100 0 Break-Even Point (Normal Profit) Total Revenue Total Cost Break-Even Point (Normal Profit) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Copyright Mc. Graw-Hill/Irwin, 2002

Total revenue and total cost TOTAL REVENUE-TOTAL COST APPROACH $1, 800 1, 700 1, Total revenue and total cost TOTAL REVENUE-TOTAL COST APPROACH $1, 800 1, 700 1, 600 1, 500 1, 400 1, 300 1, 200 1, 100 1, 000 900 800 700 600 500 400 300 200 100 0 Break-Even Point (Normal Profit) Total Revenue Maximum Economic Profits $299 Total Cost Break-Even Point (Normal Profit) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Copyright Mc. Graw-Hill/Irwin, 2002

SHORT RUN PROFIT MAXIMIZATION Two Approaches. . . First: Total-Revenue -Total Cost Approach Second: SHORT RUN PROFIT MAXIMIZATION Two Approaches. . . First: Total-Revenue -Total Cost Approach Second: MR -MC Approach MR = MC Rule And P = MC Copyright Mc. Graw-Hill/Irwin, 2002

MARGINAL REVENUE-MARGINAL COST APPROACH Average Price = Total Fixed Variable Total Marginal Economic Cost MARGINAL REVENUE-MARGINAL COST APPROACH Average Price = Total Fixed Variable Total Marginal Economic Cost Product Cost Revenue Profit/Loss 0 1 $100. 00 $90. 00 $190. 00 90 2 50. 00 85. 00 135. 00 80 3 33. 33 80. 00 113. 33 70 4 25. 00 75. 00 100. 00 60 5 20. 00 74. 00 94. 00 70 6 16. 67 75. 00 91. 67 80 7 14. 29 77. 14 91. 43 90 8 12. 50 81. 25 93. 75 110 9 11. 11 86. 67 97. 78 131 10 10. 00 93. 00 103. 00 150 Copyright Mc. Graw-Hill/Irwin, 2002 $ 131 131 131 - $100 - 59 -8 + 53 + 124 + 185 + 236 + 277 + 299 + 280

MARGINAL REVENUE-MARGINAL COST APPROACH Average Price = Total Fixed Variable Total Marginal Economic Cost MARGINAL REVENUE-MARGINAL COST APPROACH Average Price = Total Fixed Variable Total Marginal Economic Cost Product Cost Revenue Profit/Loss 0 The 1 $100. 00 $90. 00 $190. 00 90 same 85. 00 135. 00 80 profit 2 50. 00 3 33. 33 80. 00 113. 33 70 maximizing 4 25. 00 75. 00 100. 00 60 result! 94. 00 70 5 20. 00 74. 00 6 16. 67 75. 00 91. 67 80 7 14. 29 77. 14 91. 43 90 8 12. 50 81. 25 93. 75 110 9 11. 11 86. 67 97. 78 131 10 10. 00 93. 00 103. 00 150 Copyright Mc. Graw-Hill/Irwin, 2002 $ 131 131 131 - $100 - 59 -8 + 53 + 124 + 185 + 236 + 277 + 299 + 280

MARGINAL REVENUE-MARGINAL COST APPROACH Average Price = Total Fixed Variable Total Marginal Economic Cost MARGINAL REVENUE-MARGINAL COST APPROACH Average Price = Total Fixed Variable Total Marginal Economic Cost Product Cost Revenue Profit/Loss 0 1 $100. 00 $90. 00 $190. 00 90 Graphically 2 50. 00 85. 00 135. 00 80 3 33. 33 80. 00 113. 33 70 4 25. 00 75. 00 100. 00 60 5 20. 00 74. 00 94. 00 70 6 16. 67 75. 00 91. 67 80 7 14. 29 77. 14 91. 43 90 8 12. 50 81. 25 93. 75 110 9 11. 11 86. 67 97. 78 131 10 10. 00 93. 00 103. 00 150 Copyright Mc. Graw-Hill/Irwin, 2002 $ 131 131 131 - $100 - 59 -8 + 53 + 124 + 185 + 236 + 277 + 299 + 280

MARGINAL REVENUE-MARGINAL COST APPROACH Profit Maximization Position Cost and Revenue $200 Economic Profit MC MARGINAL REVENUE-MARGINAL COST APPROACH Profit Maximization Position Cost and Revenue $200 Economic Profit MC 150 MR ATC AVC $131. 00 100 $97. 78 50 0 1 2 3 4 5 6 7 8 9 10 Copyright Mc. Graw-Hill/Irwin, 2002

MARGINAL REVENUE-MARGINAL COST APPROACH Profit Maximization Position Cost and Revenue $200 P > ATC MARGINAL REVENUE-MARGINAL COST APPROACH Profit Maximization Position Cost and Revenue $200 P > ATC MC 150 MR ATC AVC $131. 00 100 $97. 78 50 0 1 2 3 4 5 6 7 8 9 10 Copyright Mc. Graw-Hill/Irwin, 2002

MARGINAL REVENUE-MARGINAL COST APPROACH Profit Maximization Position Cost and Revenue $200 P > ATC MARGINAL REVENUE-MARGINAL COST APPROACH Profit Maximization Position Cost and Revenue $200 P > ATC MC 150 $131. 00 P > ATC Economic 100 Profits $97. 78 50 0 1 2 3 4 5 6 7 8 9 10 Copyright Mc. Graw-Hill/Irwin, 2002 MR ATC AVC

MARGINAL REVENUE-MARGINAL COST APPROACH Loss Minimization Position If the price is lowered from $131 MARGINAL REVENUE-MARGINAL COST APPROACH Loss Minimization Position If the price is lowered from $131 to $81 The MR=MC rule still applies …But the MR = MC point changes Copyright Mc. Graw-Hill/Irwin, 2002

MARGINAL REVENUE-MARGINAL COST APPROACH Loss Minimization Position Cost and Revenue $200 Economic Loss MC MARGINAL REVENUE-MARGINAL COST APPROACH Loss Minimization Position Cost and Revenue $200 Economic Loss MC 150 ATC AVC MR 100 $91. 67 $81. 00 50 0 1 2 3 4 5 6 7 8 9 10 Copyright Mc. Graw-Hill/Irwin, 2002

MARGINAL REVENUE-MARGINAL COST APPROACH Short-Run Shut Down Point Cost and Revenue $200 MC 150 MARGINAL REVENUE-MARGINAL COST APPROACH Short-Run Shut Down Point Cost and Revenue $200 MC 150 ATC AVC 100 MR $71. 00 50 0 Minimum AVC is the Shut-Down Point 1 2 3 4 5 6 7 8 9 10 Copyright Mc. Graw-Hill/Irwin, 2002

Profit maximization Rule P (or MR) =MC If and only if: P ≥ AVCmin Profit maximization Rule P (or MR) =MC If and only if: P ≥ AVCmin Otherwise: Shut-Down point Copyright Mc. Graw-Hill/Irwin, 2002

MARGINAL REVENUE-MARGINAL COST APPROACH Marginal Cost & Short-Run Supply Observe the impact upon profitability MARGINAL REVENUE-MARGINAL COST APPROACH Marginal Cost & Short-Run Supply Observe the impact upon profitability as price is changed: Price Quantity Supplied Maximum Profit (+) Or Minimum Loss (-) $151 131 111 91 81 71 61 10 9 8 7 6 0 0 $+480 +299 +138 -3 -64 -100 Copyright Mc. Graw-Hill/Irwin, 2002

MARGINAL REVENUE-MARGINAL COST APPROACH Cost and Revenue, (dollars) Marginal Cost & Short-Run Supply MC MARGINAL REVENUE-MARGINAL COST APPROACH Cost and Revenue, (dollars) Marginal Cost & Short-Run Supply MC MR 5 P 5 ATC MR 4 P 4 AVC MR 3 MR 2 MR 1 P 3 P 2 P 1 Do not Produce – Below AVC Q 2 Q 3 Q 4 Copyright Mc. Graw-Hill/Irwin, 2002 Q 5 Quantity Supplied

MARGINAL REVENUE-MARGINAL COST APPROACH Cost and Revenue, (dollars) Marginal Cost & Short-Run Supply P MARGINAL REVENUE-MARGINAL COST APPROACH Cost and Revenue, (dollars) Marginal Cost & Short-Run Supply P 5 Yields the Short-Run Supply Curve Supply MC MR 5 P 4 MR 4 P 3 MR 2 MR 1 P 2 P 1 No Production Below AVC Q 2 Q 3 Q 4 Copyright Mc. Graw-Hill/Irwin, 2002 Q 5 Quantity Supplied

MARGINAL REVENUE-MARGINAL COST APPROACH Cost and Revenue, (dollars) Marginal Cost & Short-Run Supply Copyright MARGINAL REVENUE-MARGINAL COST APPROACH Cost and Revenue, (dollars) Marginal Cost & Short-Run Supply Copyright Mc. Graw-Hill/Irwin, 2002 MC 2 S 2 MC 1 S 1 AVC 2 AVC 1 Higher Costs Move the Supply Curve to the Left Quantity Supplied

MARGINAL REVENUE-MARGINAL COST APPROACH Cost and Revenue, (dollars) Marginal Cost & Short-Run Supply Lower MARGINAL REVENUE-MARGINAL COST APPROACH Cost and Revenue, (dollars) Marginal Cost & Short-Run Supply Lower Costs Move the Supply Curve to the Right Copyright Mc. Graw-Hill/Irwin, 2002 MC 1 S 1 MC 2 S 2 AVC 1 AVC 2 Quantity Supplied

SHORT RUN COMPETITIVE EQUILIBRIUM The Competitive Firm “Takes” it’s Price from the Industry Equilibrium SHORT RUN COMPETITIVE EQUILIBRIUM The Competitive Firm “Takes” it’s Price from the Industry Equilibrium P Economic ATC Profit S=MC D $111 P S= MC’s $111 AVC D Firm 8 (price taker) Copyright Mc. Graw-Hill/Irwin, 2002 Q 8000 Industry Q

SHORT RUN COMPETITIVE EQUILIBRIUM The Competitive Firm “Takes” it’s Price from the Industry Equilibrium SHORT RUN COMPETITIVE EQUILIBRIUM The Competitive Firm “Takes” it’s Price from the Industry Equilibrium P $111 Economic ATC Profit S=MC S= MC’s P How about the D long-run? AVC $111 D Firm 8 (price taker) Copyright Mc. Graw-Hill/Irwin, 2002 Q 8000 Industry Q

Profit maximization in the LR • Recall: • In the LR, all production factors Profit maximization in the LR • Recall: • In the LR, all production factors are variable. • No fixed inputs No fixed costs Copyright Mc. Graw-Hill/Irwin, 2002

PROFIT MAXIMIZATION IN THE LONG-RUN Assumptions. . . • Entry and Exit Only • PROFIT MAXIMIZATION IN THE LONG-RUN Assumptions. . . • Entry and Exit Only • Identical Costs • Constant-Cost Industry (entry and exit does not affect resource prices) Goal. . . Price = Minimum ATC Zero Economic Profit Model Copyright Mc. Graw-Hill/Irwin, 2002

PROFIT MAXIMIZATION IN THE LONG-RUN Temporary Profits and the Reestablishment Of Long-Run Equilibrium P PROFIT MAXIMIZATION IN THE LONG-RUN Temporary Profits and the Reestablishment Of Long-Run Equilibrium P S 1 P MC ATC $60 50 40 MR D 1 100 Firm (price taker) Copyright Mc. Graw-Hill/Irwin, 2002 Q 100, 000 Industry Q

PROFIT MAXIMIZATION IN THE LONG-RUN An increase in demand increases profits… P Economic Profits PROFIT MAXIMIZATION IN THE LONG-RUN An increase in demand increases profits… P Economic Profits ATC S 1 P MC $60 50 40 MR D 2 D 1 100 Firm (price taker) Copyright Mc. Graw-Hill/Irwin, 2002 Q 100, 000 Industry Q

PROFIT MAXIMIZATION IN THE LONG-RUN New Competitors increase supply and lower Prices decrease economic PROFIT MAXIMIZATION IN THE LONG-RUN New Competitors increase supply and lower Prices decrease economic profits P Zero Economic Profits S 1 P S 2 MC ATC $60 50 40 MR D 2 D 1 100 Firm (price taker) Copyright Mc. Graw-Hill/Irwin, 2002 Q 100, 000 Industry Q

PROFIT MAXIMIZATION IN THE LONG-RUN Decreases in demand, Losses and the demand Reestablishment of PROFIT MAXIMIZATION IN THE LONG-RUN Decreases in demand, Losses and the demand Reestablishment of Long-Run Equilibrium P S 1 P MC ATC $60 MR $60 50 50 40 40 D 1 100 Firm (price taker) Copyright Mc. Graw-Hill/Irwin, 2002 Q 100, 000 Industry Q

PROFIT MAXIMIZATION IN THE LONG-RUN A decrease in demand creates losses… P Economic Losses PROFIT MAXIMIZATION IN THE LONG-RUN A decrease in demand creates losses… P Economic Losses ATC S 1 P MC $60 MR $60 50 50 40 40 D 1 D 2 100 Firm (price taker) Copyright Mc. Graw-Hill/Irwin, 2002 Q 100, 000 Industry Q

PROFIT MAXIMIZATION IN THE LONG-RUN Competitors with losses decrease supply and prices return to PROFIT MAXIMIZATION IN THE LONG-RUN Competitors with losses decrease supply and prices return to zero economic profits S 3 Return to Zero P Economic Profits S 1 P MC ATC $60 MR $60 50 50 40 40 D 1 D 2 100 Firm (price taker) Copyright Mc. Graw-Hill/Irwin, 2002 Q 100, 000 Industry Q

LONG-RUN EQUILIBRIUM FOR A COMPETITIVE FIRM Price MC ATC MR P Price = MC LONG-RUN EQUILIBRIUM FOR A COMPETITIVE FIRM Price MC ATC MR P Price = MC = Minimum ATC (normal profit) Q Quantity Copyright Mc. Graw-Hill/Irwin, 2002