{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Perfect Competition-SR

Perfect Competition-SR - Perfect Competition I Short Run...

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Perfect Competition I. Short Run Firm Price and Output Decisions Price: Charge the market price. Output: Rule: 1. To maximize profits, produce Q up to the point where short-run MC = MR (= P) IV. Short-Run Firm Price and Output Decisions 3 Logic:. If P > MC, profits rise if another unit is produced. If P < MC, then profits would fall by producing another unit. Put another way, the marginal benefit of producing another unit of the good is Marginal Revenue (MR), which equals P in the perfectly competitive case. Thus, the rule is expand output as long as marginal benefit (= MR = P) is greater than MC. 2. Check to see whether profits would be greater if the firm shut down. If TR > TVC, the firm should operate. If TR < TVC, the firm should shutdown. Reason: Profit = TR - TC = TR - TVC - TFC. If the firm shuts down, Profit = - TFC Hence, profits would be greater (or losses smaller) only if TR > TVC. (Note: this part of the rule could be expressed: Operate if P > AVC; shut down if P < AVC. This follows form the previous relation. Since TR = P x Q > TVC = Q x AVC, dividing both sides by Q yields P > AVC.) Example 7 What happens if the price of an input changes? (Say the price of labor falls.) 4 This set ofApplication:TAllocation of Production among Multiple Plants rules implies: he supply curve of the competitive firm in the short-run equals MC above minimum AVC. Yet another approach. Maximize output for each level expenditures. 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. 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. V. Short-Run 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. © Bryan L. Boulier, 2011. All rights reserved. ...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern