Download Micro Ch 21-Presentation 3 Price Determination

Micro Chapter 21-Presentation 3
Efficiency
 Productive Efficiency: Price = Minimum
ATC
Allocative Efficiency: Price = MC
 Pure Competition Has Both in its Long-Run
Equilibrium
Short-Run Supply Curve
 Firms will supply the product at prices
above its AVC curve
 MC curve above AVC is the SR S curve
Marginal Cost and ShortRun Supply
Cost and Revenues (Dollars)
Generalizing the MR=MC Relationship
and its Use
e
P5
P3
P2
P1
MR5
d
P4
ATC
c
AVC
b
a
This Price is Below AVC
And Will Not Be Produced
0
Q2
Q3
MC
Q4
Quantity Supplied
Q5
MR4
MR3
MR2
MR1
LR Equilibrium
 In the LR, equilibrium is where MR = MC
and Price and Minimum ATC are =
 At this point there is no incentive to leave
the industry or for more firms to join
Entry of New Firms
 When consumer demand increases,
existing firms receive economic profits
 This entices new firms to enter, driving
P down back to equilibrium and ending
profits
Increasing-Cost Industry
 An industry with a positively-sloped long-run supply
curve.
 average cost of production increases as industry grows.
 With rapidly increasing average cost, a relatively large
increase in price is needed to get firms to produce
more output.
Long-Run Supply Curve
Increasing-Cost Industry
P
S
P2
$55
P1
$50
Y2
Y1
P3
$40
Y3
D2
D1
D3
0
Q3
90,000
Q1
100,000
Q2
110,000
Q
Decreasing Cost Industry
 In a decreasing cost industry, the long-run supply
curve for that industry is downward sloping.
 Over time, the price of the good to the consumer is
decreasing (increased productivity)
 Examples: Over time, the price of personal computers has
fallen for quality and features. Televisions, DVD, MP3,
computer software