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microbook_3e-page117 - the current scale of plant(factory...

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Short-Run Supply Curve of a Perfectly Competitive Firm x In Lecture 3, I wrote that the marginal cost curve is the firm’s supply curve when MC > AC. That simplification is not strictly correct. x The short -run supply curve of a competitive firm is the part of its MC curve that lies above its AVC curve. x In the lon g-run , MC must exceed AC or firm will exit the industry. Entry and Exit from the Industry x In the long run, firms can enter and exit. x They enter the industry in response to profit opportunities: o shifting out the market supply curve o and lowering the market price. x They exit when they make losses: o contracting the market supply curve o and raising the market price. Q p D M S M entry exit Long-Run Costs: Returns to Scale x In the short run, firms have to decide how much to produce in
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Unformatted text preview: the current scale of plant (factory size is fixed) . x In the long run firms, have to choose among many potential scales of plant (they can expand the factory) . x Increasing returns to scale (or economies of scale) , refers to an increase in a firm’s scale of production, which leads to lower average costs per unit produced. x Constant returns to scale refers to an increase in a firm’s scale of production, which has no effect on average costs per unit produced. x Decreasing returns to scale (or diseconomies of scale) refers to an increase in a firm’s scale of production, which leads to higher average costs per unit produced. Page 117...
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