9 Modelling Competitive Supply Flashcards
Characteristics of competitive markets
Large number of firms with homogeneous products.
Price takers: cannot influence the market price.
Determine an equation for a price taking firm
When can firms stay in business? When can they not?
If price is higher than minimum AVC, then they can cover variable costs and make some contributions to fixed costs. Therefore it is worth them staying in business in the short term.
If price is lower than minimum AVC, they must close- the shutdown condition.
Competitive supply curve for an individual firm
Show total revenue, total costs and total profit diagrammatically
Show total profit and total producer surplus diagrammatically
Three equations linking producer surplus, revenue, profit and costs
Producer surplus = revenue - variable costs
Profit = revenue - total costs
Profit = producer surplus - fixed costs
Two characteristics of the long run
- There are no fixed costs so AVC = AC so the shutdown condition depends on AC
- Entry and exit are possible
Long run cost curves
What does entry into the market cause?
Supernormal profits → attracts entrants.
More entrants → more supply.
Supply curve shifts outwards and flattens (more substitutes → more elastic)
Profits in long run equilibrium? Implication?
Long run equilibrium: all profit opportunities have been exploited; a state in which there is neither net exit nor entry. All firms make zero profits.
What is the long run price equal to in competitive markets?
What is the market supply function?
What is the market price and quantity in the short run?
