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# 5 price and cost dollars per sweater a perfectly

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Unformatted text preview: ost (dollars per sweater) A perfectly competitive firm’s supply curve shows how its profit-maximizing output varies as the market price varies, other things remaining the same. The supply curve is derived from the firm’s marginal cost curve and average variable cost curves. Figure 10.5 illustrates the derivation of the supply curve. When the price exceeds minimum average variable cost (more than \$17), the firm maximizes profit by producing the output at which marginal cost equals price. If the price rises, the firm increases its output—it moves up along its marginal cost curve. When the price is less than minimum average variable cost (less than \$17 a sweater), the firm maximizes profit by temporarily shutting down and producing no output. The firm produces zero output at all prices below minimum average variable cost. When the price equals minimum average variable cost, the firm maximizes profit either by temporarily shutting down and producing no output or by producing the output at which average variable cost is a minimum—the shutdown point, T. The firm never produces a quantity between zero and the quantity at the shutdown point T (a quantity greater than zero and less than 7 sweaters a day). The firm’s supply curve in Fig. 10.5(b) runs along the y-axis from a price of zero to a price equal to minimum average variable cost, jumps to point T, and then, as the price rises above minimum average variable cost, follows the marginal cost curve. A Firm’s Supply Curve MC 31 MR 2 25 MR 1 AVC Shutdown point T 17 0 MR 0 9 10 7 Quantity (sweaters per day) (a) Marginal cost and average variable cost Price (dollars per sweater) The Firm’s Supply Curve 201 S 31 25 T 17 0 9 10 7 Quantity (sweaters per day) (b) Campus Sweaters’ short-run supply curve Part (a) shows the firm’s profit-maximizing output at various market prices. At \$25 a sweater, it produces 9 sweaters, and at \$17 a sweater, it produces 7 sweaters. At all prices below \$17 a sweater, Campus Sweaters produces nothing. Its shutdown point is T. Part (b) shows the firm’s supply curve—the quantity of sweaters it produces at each price. Its supply curve is made up of the marginal cost curve at all prices above minimum average variable cost and the vertical axis at all prices below minimum average variable cost. animation 000200010270728684_CH10_p195-220.qxd 202 6/23/11 4:13 PM Page 202 CHAPTER 10 Perfect Competition x Output, Price, and Profit FIGURE 10.6 Short-Run Market Supply Curve To determine the price and quantity in a perfectly competitive market, we need to know how market demand and market supply interact. We start by studying a perfectly competitive market in the short run. The short run is a situation in which the number of firms is fixed. Price (dollars per sweater) in the Short Run Market Supply in the Short Run The short-run market supply curve shows the quantity supplied by all the firms in the market at each price when each firm’s plant and the number of firms remain the same. You’ve seen how an individual firm’s supply curve is determined. The market supply curve is derived from the individual supply curves. The quantity supplied by the market at a given price is the sum of the quantities supplied by all the firms in the market at that price. Figure 10.6 shows the supply curve for the competitive sweater market. In this example, the market consists of 1,000 firms exactly like Campus Sweaters. At each price, the quantity supplied by the market is 1,000 times the quantity supplied by a single firm. The table in Fig. 10.6 shows the firm’s and the market’s supply schedules and how the market supply curve is constructed. At prices below \$17 a sweater, every firm in the market shuts down; the quantity supplied by the market is zero. At \$17 a sweater, each firm is indifferent between shutting down and producing nothing or operating and producing 7 sweaters a day. Some firms will shut down, and others will supply 7 sweaters a day. The quantity supplied by each firm is either 0 or 7 sweaters, and the quantity supplied by the market is between 0 (all firms shut down) and 7,000 (all firms produce 7 sweaters a day each). The market supply curve is a graph of the market supply schedules and the points on the supply curve A through D represent the rows of the table. To construct the market supply curve, we sum the quantities supplied by all the firms at each price. Each of the 1,000 firms in the market has a supply schedule like Campus Sweaters. At prices below \$17 a sweater, the market supply curve runs along the y-axis. At \$17 a sweater, the market supply curve is horizontal—supply is perfectly elastic. As the price SM D 31 C 25 B 20 A 17 0 7 8 9 10 Quantity (thousands of sweaters per day) Price Quantity supplied by market (dollars per sweater) A Quantity supplied by Campus Sweaters (sweaters per day) (sweaters per day) 17 0 or 7 0 to 7,000 B 20 8 8,000 C 25 9 9,000 D 31 10 10,000 The market supply schedule is the sum of the supply schedules of all the individual firms. A market that consists of 1,000...
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## This note was uploaded on 01/10/2013 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue.

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