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MC. ATC. Short-run supply,. S. 1. A. P. P. 1. 1. Demand,. D. 1. Q. 1. AVC. COMPETITIVE MARKETS REVIEW. All Firms maximize profit by setting MR = MC SHORT RUN: Firms Shutdown if: P < AVC Firms remain open if: P ≥ AVC LONG RUN: Firms Enter market if: P > ATC

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1-Individual Firm

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  1. MC ATC Short-run supply, S 1 A P P 1 1 Demand, D 1 Q 1 AVC COMPETITIVE MARKETS REVIEW • All Firms maximize profit by setting MR = MC SHORT RUN: • Firms Shutdown if: P < AVC • Firms remain open if: P ≥ AVC LONG RUN: • Firms Enter market if: P > ATC • Firms Exit market if: P < ATC Entire Market 1-Individual Firm Price Price D = MR Quantity (firm) Quantity (market) 0 0

  2. MC ATC Short-run supply, S 1 A P P 1 1 Demand, D 1 Q 1 Long Run Equilibrium Entire Market One Individual Firm Price Price AVC Long-run supply, D = MR Quantity (firm) Quantity (market) 0 0 Must produce at Efficient Scale (min of ATC) Economic profit = ZERO P = MC = ATC = MR

  3. ATC S MC 1 B P P 2 2 B A A P 1 D 2 D 1 Q2 Q Q Q 2 1 1 This is not a long run equilibrium! ShortRun Increase in Demand Increase in market demand=> ↑ price & quantity Firms produce more & earn a short run profit Entire Market 1- Individual Firm Price Price D2 = MR2 profit D1 = MR1 P1 0 0 Quantity (market) Quantity (firm)

  4. MC P S 2 2 A C Long-run Market supply D 2 Q 1 Q 3 Long Run Equilibrium Economic Profit induces new firms to enter market => supply increases Entire Market 1 Firm Price Price S1 ATC B B P2 D2 = MR2 A C D1=MR1 D3=MR3 P P 1 1 D1 Q1 Q2 Quantity (market) 0 Quantity (firm) 0 In the long run market price is restored to min. of ATC! But total market supply is greater Q3 as more firms are in market

  5. Last Details…. • Market long run supply curve is perfectly elastic because of unlimited entry/exit into the marketplace at minimum of ATC • Short Run firm supply curve is upward sloping • Above AVC curve

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