# Firms will operate without making a profit in the

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Firms will operate without making a profit in the short run. But they will shut down if they are not making any producer surplus. 8 Perfect Competition in the Short Run FC VC TR = π VC TR PS = FC PS =
8.3 8-40 8 Perfect Competition in the Short Run Quantity Demand Price Supply P Producer surplus Q Figure 8.11: Industry Producer Surplus Producer surplus for an entire industry is the sum of individual firms’ surplus.
8-41 figure it out Flour Tortilla Industry Assume that the industry for flour tortillas in Denver is perfectly competitive. There are 200 firms: 75 “high-cost” firms with short-run supply curves Q HC = 5 125 “low-cost” firms with short-run supply curves Q LC = 8 Quantities are measured in dozens of tortillas and prices in dollars. Answer the following questions: a. Derive the short-run industry supply curve for tortillas. b. Assume the market demand curve for tortillas is given by Q D 10,000 – 625 P . Find the market equilibrium price and quantity. c. At this price, how many dozens of tortillas are produced by the high- and low-cost firms, respectively? d. Determine total industry surplus at the equilibrium. P P =
8-42 figure it out Flour Tortilla Industry a. The short-run industry supply curve is found by summing the firms’ supply curves: b. The market equilibrium occurs where Q S = Q D P P Q Q D S 625 000 , 10 1375 = = ) # ( ) # ( LC LC HC HC S Q Firms Q Firms Q + = ) 8 25 1 ( ) 5 5 7 ( P P Q S + = P Q S ,375 1 = 000 , 10 000 , 2 = P 5 \$ = P 5 ,375 1 = S Q ,875 6 = Q
8-43 figure it out Flour Tortilla Industry c. To determine how many dozens of tortillas are produced by the high- and low-cost firms, respectively, plug P = \$5 into each type of producers’ supply curve d. Producer surplus ( PS ) is the area between the price line and the industry supply curve (Note: No intercept in this example.) 5 25 HC Q P = = 8 40 LC Q P = = Demand Price Supply 5 PS 6,825 Quantity 5 875 , 6 2 1 × × = 50 . 187 , 17 \$ =
8.4 8-44 The long run differs from the short run in a number of ways. Short Run: Some inputs and costs are fixed. The number of firms is fixed – each one makes it optimal choice of Q. The short-run supply curve is the portion of the short-run marginal cost curve above the short-run average variable cost curve. Long Run: All inputs— and fixed-costs—may be adjusted. Firms can enter and exit the market. Firms will not stay in business unless all costs can be covered by revenue. The long-run supply curve is the portion of the long-run marginal cost curve above the long-run average total cost curve. 8 Perfectly Competitive Industries in the Long Run
8.4 8-45 Entry Firms decide to enter or exit based on whether it is profitable. Perfectly competitive markets are characterized by free entry . Free entry does not mean costs = 0. Free entry means there are no legal or technical barriers stopping you from incurring the costs to start producing. Free Entry drives down profits in the Long Run.
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