EconH200L11

EconH200L11 - Equilibrium in Perfectly Competitive Markets...

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Equilibrium in Perfectly Competitive Markets (Assume for simplicity that all firms have access to the same technology and input markets, so they all have the same cost curves.) Market Supply in the Short Run To derive the market supply curve from the supply curves of the individual firms, we add up the quantities supplied by all the firms at any price. Thus, horizontally sum the marginal cost curves of all the firms in the market. To find the market equilibrium, find the intersection of the market supply curve and the market demand curve.
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Market Supply in the Long Run In the long run, with free entry and exit, how many individual firm supply curves do we add up? If the price is below min(ATC), then the quantity supplied is zero. Any firms that are in the industry would exit if the price stayed that low. If we have P = min(ATC), then firms are indifferent between: (i) staying out of the market and (ii) entering, and producing the quantity at which P = min(ATC). Thus, any and all quantities are on the market supply curve at that price. If we have P > min(ATC), then entry by new firms is profitable. An infinite quantity would be supplied if the price stayed that high.
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Market Equilibrium in the Long Run In the long run, the market price is determined solely by cost considerations, P = min(ATC).
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This note was uploaded on 07/17/2008 for the course H 200 taught by Professor Fleisher during the Fall '08 term at Ohio State.

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EconH200L11 - Equilibrium in Perfectly Competitive Markets...

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