microbook_3e-page87 - 1 How much of each input to demand 2...

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What does it mean to be a price taker? Households x Each firm has an upward sloping supply curve, but: o price is determined by market supply and demand o so shifts of one household’s demand curve do not affect the market price x Each household faces infinitely elastic (horizontal) supply Firms x Each household has a downward sloping demand curve, but: o price is determined by market supply and demand o so shifts of one firms’s supply curve do not affect the market price x Each firm faces infinitely elastic (horizontal) demand household’s view q p S D market-level view q p S D firm’s view q p S D Firms’ Basic Decisions
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Unformatted text preview: 1. How much of each input to demand 2. Which production technology to use 3. How much supply Short-Run vs. Long-Run In the short-run , two conditions hold: 1. firm is operating under a fixed scale of production – i.e. at least one input is held fixed (ex. it may be optimal for a firm to buy new machinery, but it can’t do so overnight) 2. firms can neither enter nor exit an industry In the long-run : x there are no fixed factors of production, so firms can freely increase or decrease scale operation x new firms can enter and existing firms can exit the industry Page 87...
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