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Firms in Competitive Markets Copyright © 2011 Cengage Learning 14 Table 1 Total, Average and Marginal Revenue for a Competitive Firm Copyright © 2011 Cengage Learning Table 2 Profit Maximization: A Numerical Example Copyright © 2011 Cengage Learning Figure 1 Profit Maximization for a Competitive Firm Costs and revenue The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue. MC MC2 ATC P = MR1 = MR2 P = AR = MR AVC MC1 0 Q1 QMAX Q2 Quantity Copyright © 2011 Cengage Learning Figure 2 Marginal Cost as the Competitive Firm’s Supply Curve Price P2 This section of the firm’s MC curve is also the firm’s supply curve. MC ATC P1 AVC 0 Q1 Q2 Quantity Copyright © 2011 Cengage Learning Figure 3 The Competitive Firm’s Short-Run Supply Curve Costs If P > ATC, the firm will continue to produce at a profit. Firm’s short-run supply curve MC ATC If P > AVC, firm will continue to produce in the short run. AVC Firm shuts down if P < AVC 0 Quantity Copyright © 2011 Cengage Learning Figure 4 The Competitive Firm’s Long-Run Supply Curve Costs MC Firm’s long-run supply curve ATC 0 Quantity Copyright © 2011 Cengage Learning Figure 4 The Competitive Firm’s Long-Run Supply Curve Costs Firm’s long-run supply curve Firm enters if P > ATC MC = long-run S ATC Firm exits if P < ATC 0 Quantity Copyright © 2011 Cengage Learning Figure 5 Profit as the Area Between Price and Average Total Cost (1) (a) A firm with profits Price MC ATC Profit P ATC P = AR = MR 0 Quantity Q (profit-maximizing quantity) Copyright © 2011 Cengage Learning Figure 5 Profit as the Area Between Price and Average Total Cost (2) (b) A firm with losses Price MC ATC ATC P P = AR = MR Loss 0 Q (loss-minimizing quantity) Quantity Copyright © 2011 Cengage Learning Figure 6 Market Supply With a Fixed Number of Firms (a) Individual firm supply (b) Market supply Price Price MC Supply € 2.00 € 2.00 1.00 1.00 0 100 200 Quantity (firm) 0 100,000 200,000 Quantity (market) Copyright © 2011 Cengage Learning Figure 7 Market Supply with Entry and Exit (a) Firm’s zero-profit condition (b) Market supply Price Price MC ATC P = minimum ATC 0 Supply Quantity (firm) 0 Quantity (market) Copyright © 2011 Cengage Learning Figure 8 An Increase in Demand in the Short Run and Long Run (1) (a) Initial condition Market Firm Price Price MC ATC Short-run supply, S1 A P1 Long-run supply P1 Demand, D1 0 Quantity (firm) 0 Q1 Quantity (market) Copyright © 2011 Cengage Learning Figure 8 An Increase in Demand in the Short Run and Long Run (2) (b) Short-run response Market Firm Price Price Profit MC ATC P2 B P2 S1 A P1 P1 D2 Long-run supply D1 0 Quantity (firm) 0 Q1 Q2 Quantity (market) Copyright © 2011 Cengage Learning Figure 8 An Increase in Demand in the Short Run and Long Run (3) (c) Long-run response Market Firm Price Price MC ATC B P2 S1 S2 C A P1 Long-run supply P1 D2 D1 0 Quantity (firm) 0 Q1 Q2 Q3 Quantity (market) Copyright © 2011 Cengage Learning
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