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Unformatted text preview: Predictions: Increase in price results in increase in Q, decrease in MC (say caused by declines in prices of inputs or changes in technology) lead to increase in Q. Perfect Competition-Competitive Industry
V. I. Short-Run ort Run Competitive Industry Sh Supply, Supply & Competitive Industry A. If prices of inputs do not change as the output of the industry expands or contracts, the short-run supply curve of the industry is the horizontal sum of the short-run supply curves of individual firms. If prices of inputs do change as the output of the industry expands or contracts, then the industry supply curve will be steeper than the horizontal sum of the short-run supply curves of individual firms. B. If the industry is large relative to the size of the economy, then prices of inputs will increase as the industry expands. Thus, the true short-run supply curve to the industry is steeper than the simple sum of the firm’s marginal cost curves. 5 VI. Long-Run Price & Output Decisions, Competitive Firm. II. Long Run SupplyandOutput Decisions, Competitive Industry In the long-run, no inputs are fixed. The firm can vary all inputs and there are no fixed costs. Price: Charge the market price (as in the short-run). Output: Rule: 1. Produce up to the point where long-run MC = MR = (P) 2. Check to see whether the firm's long-run profits are equal to or greater than zero (that is, check to see if TR > LRTC, or alternatively, if P > LRAC). If the firm has a loss, doing the best it can do, in the long-run, it should exit the industry. This part of the rule is like the one in the shortrun, since in the long-run all costs are variable costs. Note: An implication of the above analysis is that the long-run supply curve of the competitive firm is its LRMC above minimum LRAC. competitive firm is its LRMC above minimum LRAC. Rearrange Equation (1) as: (3) or, maximum output, given expenditures, is obtained when the marginal product of an input per dollar spent on the input is the same. © Bryan L. Boulier, 2011. All rights reserved. ...
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