Profit P ATC x Q Firm maximized profit by producing the quantity at which price

# Profit p atc x q firm maximized profit by producing

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Profit = (P – ATC) x Q Firm maximized profit by producing the quantity at which price equals marginal cost o Maximize Profits: P = MC Height of Rectangle is P – ATC Width is Q Area of rectangle is (P- ATC) x Q = Firm’s Profit Supply Curve ina Competitive Market
o Over Short periods of time, it is often difficult for firms to enter and exit, so the assumption of a fixed number of firms is appropriate o Over long periods of time, the number of firms can adjust to changing market conditions o Short Run: Market Supply with a fixed number of firms A market with 1000 identical firms MC = P Q = sum of 1000 individual firms individual Q o The Long Run: Market Supply with Entry and Exit Firms are able to enter or exit the market all firms and all potential firms have the same cost curves Decisions about entry and exit in a market depend on the incentives facing he owners of existing firms and the entrepreneurs whoc could start new firms If firms already in the market are profitable, then new firms will have an incentive to enter the market Expand the number of firms increase Q and drive down Prices and Profits At the end of this process of entry and exit, firms that remain in the market must be making 0 economic profit Operating firm has 0 profit if the price of the good equals the ATC of producing that good Process of entry and exit ends only when price and ATC are driven to equality Free entry and exit force price to equal ATC MC and ATC are equal only when the firm is operating at the minimum of ATC Level of production with lowest ATC is called the firm’s EFFICIENT SCALE In the LR equilibrium of a competitive market with free entry and exit, firms must be operating at their efficient scale A market with free entry and exit, there is only one price consistent with 0 profit = minimum of ATC

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