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Copyright © 2011 Cengage Learning
1414Firms in Competitive Markets
Table 1 Total, Average and Marginal Revenue for a Competitive Firm
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Table 2 Profit Maximization: A Numerical Example
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Figure 1 Profit Maximization for a Competitive Firm
Quantity0
Costsand
revenue
MC
ATC
AVC
MC1
Q1
MC2
Q2
The firm maximizesprofit by producing the quantity at whichmarginal cost equalsmarginal revenue.
QMAX
P = MR1 = MR2 P = AR = MR
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Figure 2 Marginal Cost as the Competitive Firm’s Supply Curve
Quantity0
Price
MC
ATC
AVC
P1
Q1
P2
Q2
This section of thefirm’s MC curve isalso the firm’s supplycurve.
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Figure 3 The Competitive Firm’s Short-Run Supply Curve
MC
Quantity
ATC
AVC
0
Costs
Firmshutsdown ifP< AVC
Firm’s short-runsupply curve
If P > AVC, firm will continue to produce in the short run.
If P > ATC, the firm will continue to produce at a profit.
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Figure 4 The Competitive Firm’s Long-Run Supply Curve
MC
Quantity
ATC
0
Costs
Firm’s long-runsupply curve
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Figure 4 The Competitive Firm’s Long-Run Supply Curve
MC = long-run S
Firmexits ifP < ATC
Quantity
ATC
0
CostsFirm’s long-runsupply curve
Firmenters ifP > ATC
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Figure 5 Profit as the Area Between Price and Average Total Cost (1)
(a) A firm with profits
Quantity0
Price
P = AR = MR
ATCMC
P
ATC
Q(profit-maximizing quantity)
Profit
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Figure 5 Profit as the Area Between Price and Average Total Cost (2)
(b) A firm with losses
Quantity0
Price
ATCMC
(loss-minimizing quantity)
P = AR = MRP
ATC
Q
Loss
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Figure 6 Market Supply With a Fixed Number of Firms
(a) Individual firm supply
Quantity (firm)0
Price
MC
1.00
100
€ 2.00
200
(b) Market supply
Quantity (market)0
Price
Supply
1.00
100,000
€ 2.00
200,000
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Figure 7 Market Supply with Entry and Exit
(a) Firm’ s zero-profit condition
Quantity (firm)0
Price
(b) Market supply
Quantity (market)
Price
0
P = minimumATC
Supply
MC
ATC
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Figure 8 An Increase in Demand in the Short Run and Long Run (1)
Firm
(a) Initial condition
Quantity (firm)0
Price
Market
Quantity (market)
Price
0
DDemand, 1
SShort-run supply, 1
P1
ATC
Long-runsupply
P1
1Q
A
MC
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Figure 8 An Increase in Demand in the Short Run and Long Run (2)
MarketFirm
(b) Short-run response
Quantity (firm)0
Price
MC ATCProfit
P1
Quantity (market)
Long-runsupply
Price
0
D1
D2
P1
S1
P2
Q1
A
Q2
P2
B
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Figure 8 An Increase in Demand in the Short Run and Long Run (3)
P1
Firm
(c) Long-run response
Quantity (firm)0
Price
MC ATC
Market
Quantity (market)
Price
0
P1
P2
Q1 Q2
Long-runsupply
B
D1
D2
S1
A
S2
Q3
C
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