Chapter-FirmsinCompetitiveMarkets.ppt

* Students that didn’t figure out the answer to the previous exercise should be able to get this one. If this exercise is too easy for your students, you can replace it with lecture slides that appear at the end of this file. Note that the statement “assuming AVC $3” is needed to prevent shut-down, i.e. to insure that the firm produces Q=30 instead of Q=0. * The height of the rectangle is ATC – P, loss per unit. The width of the rectangle is Q, the number of units. The area of the rectangle = height x width = (loss per unit) x (number of units) = total loss. * * In the real world, there are many markets in which assumptions (1) and (2) do not hold. We make them here for simplicity. Later in the chapter, we will see how our results change if we drop either of these assumptions. Assumption (3) is more reasonable: In the real world, it is much easier for firms to enter or exit in the long run than in the short run. * * * * “Identical” means all firms have the same cost curves. Note: P1 is minimum AVC. At any price below P1, each firm will shut down, and market quantity supplied will equal zero. Hence, the market supply curve begins at price = P1 and Q = 10,000. * * * * * * Students often wonder why firms bother to stay in business if they make zero profit. The textbook gives a nice discussion of this, briefly summarized on this slide. * * That the LR market supply curve is horizontal at P = min ATC will become more clear shortly, when students see the SR and LR effects of an increase in demand. * * This slide replicates Figure 8 from the textbook. In edit mode, the text boxes in the top part of the slide appear to be on top of each other. But in slide-show mode, the text boxes display one at a time. If students did not previously understand why the LR market supply curve is horizontal, this slide may help. * * Here are two of the assumptions we made previously, when we began the process of deriving the LR market su