Chapter 8(23)

Chapter 8(23) - Chapter 8 (23): Competitive Markets The...

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Chapter 8 (23): Competitive Markets The Market Supply Curve We know that individual firm ’s supply curve under perfect competition in the short run is the MC curve above the min AVC . How about the market or industry supply curve under perfect competition? It is the sum of the individual firms’ supply curves above their min AVC curves. Suppose we have 3 farmers: A , B and C . For each price, determine where the price P equals MC for each farmer. Then add up horizontally the output levels for all farmers. This makes one point on the market supply. Repeat this process for each price. Then connect the aggregate output points. This will make up the market supply. Market Entry Since entry barriers are low, if positive economic profit exists in the market then new firms will enter the market. This will shift the market supply curve to the right and in the Market supply/demand framework the market price will drop. The end result is that the individual firm’s profit will shrink . This process of market entry will continue until
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Chapter 8(23) - Chapter 8 (23): Competitive Markets The...

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