1. Chapter 7 Perfect Competition

9. Figure 1: The Competitive Industry and Firm D $400 S Market Demand Curve Facing the Firm $400 Firm Ounces of Gold per Day Price per Ounce 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

14. Figure 2(a): Profit Maximization in Perfect Competition TR 550 $2,800 2,100 TC Slope = 400 Maximum Profit per Day = $700 Ounces of Gold per Day Dollars 1 2 3 4 5 6 7 8 9 10

15. Figure 2(b): 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

19. Figure 3(a): Measuring Profit or Loss $400 300 Profit per Ounce ($100) d = MR MC ATC Economic Profit Ounces of Gold per Day Dollars 1 2 3 4 5 6 7 8

20. Figure 3(a): 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

22. Figure 4: Short-Run Supply Under Perfect Competition 0.50 1,000 2,000 4,000 5,000 7,000 1.00 2.00 $3.50 2.50 MC ATC d 1 =MR 1 AVC (a) Firm's Supply Curve 0.50 2,000 4,000 5,000 7,000 1.00 2.00 $3.50 2.50 (b) d 2 =MR 2 d 3 =MR 3 d 4 =MR 4 d 5 =MR 5 Bushels per Year Dollars Price per Bushel Bushels per Year

27. Figure 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 D Q Market Equilibrium Added together Added together

28. Figure 7: Short-Run Equilibrium in Perfect Competition 400,000 700,000 2.00 $3.50 S D 1 D 2 MC d 1 d 2 ATC 7,000 4,000 2.00 $3.50 Profit per Bushel at p = $3.50 Loss per Bushel at p = $2 3. If the demand curve shifts to D 2 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 D 1 and market equilibrium is here . . . Price per Bushel Market Bushels per Year Dollars Firm Bushels per Year

32. Figure 8(a/b): From Short-Run Profit To Long-Run Equilibrium S 1 d 1 ATC MC $4.50 $4.50 900,000 9,000 A A D With initial supply curve S 1 , market price is $4.50… So each firm earns an economic profit. Price per Bushel Market Bushels per Year Dollars Firm Bushels per Year

33. Figure 8(c/d): From Short-Run Profit To Long-Run Equilibrium S 1 d 1 ATC MC $4.50 $4.50 900,000 9,000 5,000 S 2 d 1 A A 2.50 2.50 E E D 1,200,000 Profit attracts entry, shifting the supply curve rightward… until market price falls to $2.50 and each firm earns zero economic profit. Market Firm Price per Bushel Bushels per Year Dollars Bushels per Year

38. Figure 9: Perfect Competition and Plant Size P 1 q 1 d 1 = MR 1 LRATC MC 1 ATC 1 E d 2 = MR 2 LRATC MC 2 ATC 2 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.

41. Figure 10: An Increasing-Cost Industry INITIAL EQUILIBRIUM D 1 S 1 A P 1 Q 1 P 1 q 1 MC A ATC 1 d 1 = MR 1 Output per Period Market Dollars Firm Output per Period Price per Unit

42. Figure 10: An Increasing-Cost Industry NEW EQUILIBRIUM d SR = MR SR d 2 = MR 2 P 2 P SR P 2 P SR ATC 2 C B B C Q SR Q 2 q 1 q 1 S 2 S LR D 2 MC ATC 1 Dollars Firm P 1 q 1 A d 1 = MR 1 Output per Period Market S 1 Output per Period Price per Unit D 1 A P 1 Q 1