Outline for Tuesday, August 5
 Remember
  Last homework due Friday
  Last quiz on Monday
 Review Monday
 Welfare
Price-taking            Perfect Competition
 We assume that the firm is a price-taker
   Buyers and sellers see and trade ...
Profit maximization
 In the long run…
   If P > minimum AC, the firm will set q where P=MC
   If P  minimum AC, the firm w...
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aug5

  1. 1. Outline for Tuesday, August 5 Remember Last homework due Friday Last quiz on Monday Review Monday Welfare
  2. 2. Price-taking Perfect Competition We assume that the firm is a price-taker Buyers and sellers see and trade at the same price Firms cannot differentiate themselves Firms freely enter and exit the market These assumptions make up the model of perfect competition A firm only chooses how much to produce We have not assumed that firms are identical
  3. 3. Profit maximization In the long run… If P > minimum AC, the firm will set q where P=MC If P minimum AC, the firm will shut down In the short run… The shutdown rule is determined by VC because F cannot be changed If P > minimum AVC, the firm will set q where P=MC If P minimum AVC, the firm will shut down In both cases, MC is the firm’s supply curve above the shutdown price

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