Perfect competition in the short run

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Intros
Lessons
  1. Perfect Competition in the Short Run Overview:
  2. Short-Run Market Supply Curve
    • Quantities supplied by all firms
    • Profit maximized supply curve for each firm
    • Vertical, Horizontal, & Curves Up
    • Every firm has the same output
  3. Short-Run: Equilibrium, & Market Demand Changes
    • Demand curve is a downward sloping line
    • Intersection of Demand & Supply  \, →  \, equilibrium
    • Increase in Demand  \, →  \, Output  ↑ \, \uparrow \, Market Price  ↑ \, \uparrow \,
    • Decrease in Demand  \, →  \, Output  ↓ \, \downarrow \, Market Price  ↓ \, \downarrow \,
  4. Short Run: Economic Profit & Loss
    • Case 1: Break-even (p = ATC)
    • Case 2: Economic Profit (p > ATC)
    • Case 3: Economic Loss (p < ATC)
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Examples
Lessons
  1. Understanding Market Changes
    Suppose you have the following information for the costs of 1 firm. There are a total of 1000 firms.

    Output

    Total Cost

    0

    4

    1

    6

    2

    7

    3

    9

    4

    13

    5

    19


    You also have information about the market demand

    Price

    Quantity Demanded (in thousands)

    2

    30

    3

    25

    4

    20

    5

    15

    6

    10

    7

    5

    1. Derive the supply curve
    2. Find the market equilibrium in the short run
    3. If the demand increases, what happens to the output and price?
  2. In the short run, if the market demand _____________, then both the market equilibrium price & quantity will ____________.
    1. Increase, Increase
    2. Decrease, Decrease
    3. Both a and b
    4. Increase, Decrease
    5. Decrease, Increase
    6. Both d and e
  3. Understanding Economic Profit and Loss
    Which of the following graphs shows an economic profit? Calculate the economic profit.
    Short run economic profit & loss
    1. Use a graph to explain why a firm may incur economic loss in the short run if the average total curve is increased.
      Topic Notes
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      Short-Run Market Supply Curve

      The short-run market supply curve shows the quantity supplied by all  \, the firms in the market as price varies.


      Short-run market supply curve

      The firms will do one of 3 things in the supply curve:

      1. At the shutdown price, firms will choose to either choose to shutdown, or produce the shutdown quantity.
      2. When the price is below the shutdown price, firms will shutdown and not produce.
      3. When the price is above the shutdown price, firms will produce at the given output.

      Short-Run: Equilibrium, & Market Demand Changes

      The short-run supply curve and the market demand curve determines the equilibrium price and quantity.


      Short-run: equilibrium, & market demand changes

      Note: The equilibrium is found at the intersection.


      Recall that the market demand curve can change in 2 ways.


      Case 1: The demand increases, causing the curve to shift rightward. The result would be an increase to both the market price and the output.


      Case 2: The demand decreases, causing the curve to shift leftward. The result would be a decrease to both the market price and the output.


      Short-run: equilibrium, & market demand changes

      Short Run: Economic Profit & Loss

      There are 3 possible outcomes in the short run for firms who are perfectly competitive.


      Case 1: Suppose the demand curve is in D1D_1. Then the firm breaks even and does not gain any profit or loss. This is because p = ATC  \, at the profit-maximizing output.


      Short run economic profit & loss

      Case 2: Suppose the demand curve is in D2D_2. Then the firm gains economic profit. This is because p > ATC  \, at the profit-maximizing output.


      Short run economic profit & loss

      Case 3: Suppose the demand curve is in D3D_3. Then the firm has economic loss. This is because p < ATC  \, at the profit-maximizing output.


      Short run economic profit & loss