Ch7 Competition¶

7.1 The Competitive Firm¶

marginal revenue = price a firm's output: where price = MC (marginal cost)

U-shaped MC curve¶

if lost in [0,Q₁] < profit in [Q₁,Q₂] → produce Q₂
else → shut down

short run: can shutdown
long run: can exit

shut down or not ?¶

operate profit: TR(total revenue) - TC(total cost)
shut down profit: -FC (fixed cost)
TC = FC + VC (variable cost)
operate if operate profit > shut down profit i.e. TR > VC
(bc fixed cost is there whether shut down or not, so only variable cost matters)
TR = P×Q > VC
→ ==P > AVC== i.e. price > average variable cost then a firm operate

bold part = supply curve
(only produce when P=MC>AVC) produce nothing at price < P₀

MC intersect AVC & AC at min point

原因：marginal < average 時，會讓 average 減少；> average 時，會讓 average 增加，又 fixed cost 不變

elasticity of supply¶

elasticity = $\(\frac{△Q/Q}{△P/P}$\) (the flatter the higher)

7.2 The Competitive Industry in the Short Run¶

industry supply curve

changes in variable costs¶

a firm:

marginal cost rises → supply curve shifts upward/leftward
in industry, price = P₀ → P₂, so d→d' in a firm, q₂ not necessarily < q₀

an industry:

the sum of firms' supply curves → shifts upward/leftward
Q₂ < Q₀

a change in demand¶

changes in variable costs¶

a firm:

marginal cost rises → supply curve shifts upward/leftward
in industry, price = P₀ → P₂, so d→d' in a firm, q₂ not necessarily < q₀

an industry:

the sum of firms' supply curves → shifts upward/leftward
Q₂ < Q₀

a change in demand¶

7.3 The Competitive Firm in the Long Run¶

min AC point = equilibrium quantity q&p (horizontal demand i.e. price is the tangent of min AC)

if p > AC, the firm is earning positive economic profits, so more firms will come in, making p decreases
if p < AC, the firm is earning negative economic profits, so it will quit

i.e. in long run, price = min AC

P₀→P₁ short run: S
long run: LRS, S' p.183