srmkts - COMPETITIVE SUPPLY IN THIS SECTION WE WILL DERIVE...

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Competitive markets slide 1 COMPETITIVE SUPPLY COMPETITIVE SUPPLY IN THIS SECTION WE WILL DERIVE THE COMPETITIVE FIRM’S SUPPLY CURVE. THEN WE’LL ADD TOGETHER THE SUPPLY CURVES OF THE FIRMS TO GET THE MARKET SUPPLY CURVE OF A GOOD. FINALLY, WE’LL SHOW HOW MARKET PRICES ARE DETERMINED IN COMPETITIVE MARKETS.
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Competitive markets slide 2 THE SUPPLY CURVE OF A COMPETITIVE FIRM CORRESPONDS ALMOST EXACTLY TO ITS MARGINAL COST CURVE. [Recall that a supply curve tells you how much will be desired to be sold at each price. The game here is to choose several prices, then and see how much the firm wants to sell at each price.]
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Competitive markets slide 3 To find a firm's supply curve we need to review the ideas of AVERAGE COST, and AVERAGE VARIABLE COST. What do the AC and AVC curves look like for a competitive firm?
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Competitive markets slide 4 We can show Average and Total Fixed Costs on the diagram. The next slide shows how. $/Q AC AVC MC Q AFC = AC - AVC
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Competitive markets slide 5 Total fixed cost (FC) can be shown on the graph, and is, of course, that same at every output. FC if output is small FC if output is larger $/Q AC AVC MC Q Q AVC MC AC $/Q Equal areas at any output
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Competitive markets slide 6 If price is greater than AVC, then the firm should produce where MC = MR. Loss at MC=MR FC: Loss if Q = 0 $/Q AC AVC MC Q Q AVC MC AC $/Q
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Competitive markets slide 7 If price is less than AVC, then the firm should produce nothing and take a loss equal to FC. $/Q AC AVC MC Q Q AVC MC AC $/Q Loss at MC=MR FC: Loss if Q = 0
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slide 8 If a firm cannot cover its variable costs, it should shut down, and take a loss equal to fixed cost. If a firm’s revenue is greater than variable costs, it
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srmkts - COMPETITIVE SUPPLY IN THIS SECTION WE WILL DERIVE...

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