The document discusses the characteristics and behavior of firms in a perfectly competitive market. It explains that in the short run, a competitive firm will shut down if price is below average variable cost, while in the long run it will exit the market if price is below average total cost. The firm's marginal cost curve represents its supply curve. The market supply curve is determined by the summation of individual firms' supply. In the long run, free entry and exit will drive profits to zero.

1. 14 Firms in Competitive Markets

11. Table 1 Total, Average, and Marginal Revenue for a Competitive Firm Copyright©2004 South-Western

13. Table 2 Profit Maximization: A Numerical Example Copyright©2004 South-Western

14. Figure 1 Profit Maximization for a Competitive Firm Copyright © 2004 South-Western Quantity 0 Costs and Revenue MC ATC AVC MC 1 Q 1 MC 2 Q 2 The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue. Q MAX P = MR 1 = MR 2 P = AR = MR

17. Figure 2 Marginal Cost as the Competitive Firm’s Supply Curve Copyright © 2004 South-Western Quantity 0 Price MC ATC AVC P 1 Q 1 P 2 Q 2 This section of the firm’s MC curve is also the firm’s supply curve.

21. Figure 3 The Competitive Firm’s Short Run Supply Curve Copyright © 2004 South-Western Quantity 0 Costs MC ATC AVC Firm shuts down if P < AVC Firm ’ s short-run supply 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.

25. Figure 4 The Competitive Firm’s Long-Run Supply Curve Copyright © 2004 South-Western Quantity 0 Costs MC = long-run S Firm exits if P < ATC ATC Firm ’ s long-run supply curve Firm enters if P > ATC

27. Figure 4 The Competitive Firm’s Long-Run Supply Curve Copyright © 2004 South-Western Quantity 0 Costs MC ATC Firm ’ s long-run supply curve

29. Figure 5 Profit as the Area between Price and Average Total Cost Copyright © 2004 South-Western (a) A Firm with Profits Quantity 0 Price (profit-maximizing quantity) P = AR = MR ATC MC P ATC Q Profit

30. Figure 5 Profit as the Area between Price and Average Total Cost Copyright © 2004 South-Western (b) A Firm with Losses Quantity 0 Price (loss-minimizing quantity) ATC MC P = AR = MR P ATC Q Loss

33. Figure 6 Market Supply with a Fixed Number of Firms Copyright © 2004 South-Western (a) Individual Firm Supply Quantity (firm) 0 Price (b) Market Supply Quantity (market) 0 Price MC 1.00 100 $2.00 200 Supply 1.00 100,000 $2.00 200,000

35. Figure 7 Market Supply with Entry and Exit Copyright © 2004 South-Western (a) Firm ’ s Zero-Profit Condition Quantity (firm) 0 Price (b) Market Supply Quantity (market) Price 0 P = minimum ATC Supply MC ATC

39. Figure 8 An Increase in Demand in the Short Run and Long Run Firm (a) Initial Condition Quantity (firm) 0 Price Market Quantity (market) Price 0 D Demand, 1 S Short-run supply, 1 P 1 ATC Long-run supply P 1 1 Q A MC

40. Figure 8 An Increase in Demand in the Short Run and Long Run Copyright © 2004 South-Western Market Firm (b) Short-Run Response Quantity (firm) 0 Price Quantity (market) Long-run supply Price 0 P 1 MC ATC Profit P 1 D 1 D 2 S 1 P 2 Q 1 A Q 2 P 2 B

41. Figure 8 An Increase in Demand in the Short Run and Long Run Copyright © 2004 South-Western P 1 Firm (c) Long-Run Response Quantity (firm) 0 Price MC ATC Market Quantity (market) Price 0 P 1 P 2 Q 1 Q 2 Long-run supply B D 1 S 1 A D 2 S 2 Q 3 C