Fig. 1 The Competitive Industry and Firm

Ounces of Gold per Day

Price per Ounce

D

$400

S

Market

Demand Curve Facing

the Firm

$400

Firm

1. The intersection of the market supply and the market demand curve…

3. The typical firm can sell all it wants at the market price…

Ounces of Gold per Day

Price per Ounce

2. determine the equilibrium market price

4. so it faces a horizontal demand curve

Fig. 2a Profit Maximization in Perfect Competition

TR

550

$2,800

2,100

TC

Slope = 400

Ounces of Gold per Day

Dollars

1 2 3 4 5 6 7 8 9 10

Maximum Profit per Day = $700

Fig. 2b Profit Maximization in Perfect Competition

MC

$400 D = MR

Ounces of Gold per Day

Dollars

1 2 3 4 5 6 7 8 9 10

Fig 3a Measuring Profit or Loss

$400300

Profit per Ounce ($100)

d = MR

MC

ATC

Economic Profit

Ounces of Gold per Day

Dollars

1 2 3 4 5 6 7 8

Fig 3b Measuring Profit or Loss

MC

ATC

d = MR$300

200

Loss per Ounce ($100)

Economic Loss

Ounces of Gold per Day

Dollars

1 2 3 4 5 6 7 8

Fig. 4 Short-Run Supply Under Perfect Competition

0.50

1,0002,000

4,0005,000

7,000

1.00

2.00

$3.50

2.50

MCATC

d1=MR1

AVC

(a)

Firm's Supply Curve

0.50

2,0004,0005,000

7,000

1.00

2.00

$3.50

2.50

(b)

d2=MR2

d3=MR3

d4=MR4

d5=MR5

Bushels per Year

Dollars Price per Bushel

Bushels per Year

Fig. 5 Deriving the Market Supply Curve

0.501.00

2.00

$3.50

2.50

Market Supply Curve

200,000400,000

500,000700,000

Firm's Supply Curve

0.50

2,000 4,0005,000

7,000

1.00

2.00

$3.50

2.50

1. At each price . . .3.The total supplied by all firms at different

prices is the market supply curve.

Firm Market

Bushels per Year

Price per Bushel

Price per Bushel

Bushels per Year

2. the typical firm supplies the profit-maximizing quantity.

Fig. 6 Perfect Competition

Quantity Demanded at

Different Prices

Quantity Supplied at

Different Prices

Quantity Supplied by Each Firm

Quantity Demanded by

Each Consumer

Individual Demand

Curve

Individual Supply Curve

Quantity Demanded by All Consumers at

Different Prices

Quantity Supplied by All Firms at Different

Prices

Market Demand

Curve

Market Supply Curve

P S

DQ

Market Equilibrium

Added together Added together

Fig. 7 Short-Run Equilibrium in Perfect Competition

400,000 700,000

2.00

$3.50

S

D1

D2

MC

d1

d2

ATC

7,0004,000

2.00

$3.50

3. If the demand curve shifts to D2 and the market equilibrium moves here . . .

4. the typical firm operates here and suffers a short-run loss.

2. the typical firm operates here, earning economic profit in the short run.

1. When the demand curve is D1 and market equilibrium is here . . .

Profit per Bushel at p = $3.50

Price per Bushel

Market

Bushels per Year

DollarsFirm

Bushels per Year

Loss per Bushel at p = $2

Fig. 8a/b From Short-Run Profit to Long-Run Equilibrium

S1

d1ATC

MC

$4.50

With initial supply curve S1, market price is $4.50…

$4.50

900,000 9,000

So each firm earns an economic profit.A

A

Price per Bushel

Market

Bushels per Year

Dollars

Firm

Bushels per Year

D

Fig. 8c/d From Short-Run Profit to Long-Run Equilibrium

S1

d1ATC

MC

$4.50

Profit attracts entry, shifting the supply curve rightward…

$4.50

900,000 9,0005,000until market price falls to $2.50 and each firm earns zero economic profit.

S2

d1

AA

2.502.50EE

Market Firm

Price per Bushel

Bushels per Year

Dollars

Bushels per Year

D

1,200,000

Fig. 9 Perfect Competition and Plant Size

P1

q1

d1 = MR1

LRATCMC1 ATC1

E

d2 = MR2

LRATC

MC2ATC2

P*

q*4. and all firms earn zero economic profit and produce at minimum LRATC.

.

Dollars Dollars

Output per Period

Output per Period

3. As all firms increase plant size and output, market price falls to its lowest possible level . . .

1. With its current plant and ATC curve, this firm earns zero economic profit.

2. The firm could earn positive profit with a larger plant, producing here.

Fig. 10a/b Increasing-Cost IndustryINITIAL EQUILIBRIUM

D1

S1

AP1

Q1

P1

q1

MC

A

ATC1

d1 = MR1

Output per Period

MarketDollars

Firm

Output per Period

Price per Unit

Fig. 10a/b Increasing-Cost IndustryNEW EQUILIBRIUM

MC

ATC1

DollarsFirm

P1

q1

Ad1 = MR1

Output per Period

Market

S1

Output per Period

Price per Unit

D1

AP1

Q1

dSR = MRSR

d2 = MR2P2

PSR

P2

PSR ATC2C

BB

C

QSR Q2q1 q1

S2

SLR

D2

Fig. 11 Technological Change in Perfect Competition

$3

Q1

S1

2

Q2

A

B

D

S2

1000

ATC1

ATC2

d1 = MR1

d2= MR

$3

2

Bushels per Day

Price per Bushel

MarketDollars per

Bushel

Firm

Bushels per Day