Micro Chapter 21-Presentation 3

EfficiencyProductive Efficiency: Price = Minimum ATC

Allocative Efficiency: Price = MC

Pure Competition Has Both in its Long-Run Equilibrium

Short-Run Supply CurveFirms will supply the product at prices above its AVC curve

MC curve above AVC is the SR S curve

Marginal Cost and Short-Run Supply

Generalizing the MR=MC Relationship and its Use

P1

0

Co

st a

nd

Rev

enu

es (

Do

llars

)

Quantity Supplied

MR1

P2 MR2

P3 MR3

P4 MR4

P5 MR5

MC

AVC

ATC

Q2 Q3 Q4 Q5

This Price is Below AVCAnd Will Not Be Produced

ab

c

d

e

LR EquilibriumIn 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 FirmsWhen 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 IndustryAn 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.

P

0 Q

Long-Run Supply Curve

Increasing-Cost Industry

90,000 100,000 110,000Q3 Q1 Q2

$50P1

S

Y1

Y2

Y3

D3

D1

D2

$40

$55P2

P3

Decreasing Cost IndustryIn 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