# At Q 1 - My LIUC

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```					Extremely Competitive Markets
Part 1: Closed Economies
Characteristics of
Extremely Competitive Markets

 Many buyers and sellers, or
 “Easy” entry and exit in the presence of
significant extranormal profits
 Little or no product differentiation

Price takers
Profit Maximization for a Firm in an
Extremely Competitive Market

Price

MC

P = AR = MR

0                Qc               Quantity
Why Qc is the Profit Maximizing Output Level

Price

MC

MC(Q2)
At Q2: MC(Q2) > MR(Q2)

Pc                                     P = AR = MR

At Q1: MC(Q1) < MR(Q1)
MC(Q1)

0            Qc      Q2         Quantity
Q
The Marginal Cost Curve is the Competitive Firm’s Supply Curve
Because it shows how much the firm is willing to produce at any given price

Price

MC
P2=MR2

P1=MR1

0                        Q1        Q2       Quantity
Measuring Profit for the Competitive Firm

Price
MC
Profit              ATC

Pc                            P = AR = MR
ATC

0                  Qc        Quantity
The Firm’s Short Run Supply Decision

Price

If P > ATC,          MC
keep producing
In the longer run,
at a profit
ATC
If P > AVC,
keep producing                              AVC
in the short run

If P < AVC,
shut down

0                         Quantity
The Firm’s Short Run & Long Run Supply Curves

Price

The firm’s LR supply curve
MC

ATC

AVC

The firm’s SR supply curve

0                                          Quantity
Individual Firm and Industry Supply

Firm Type A            Firm Type B                     Firms Types A and B together

P/Q                           P/Q            MCB
MCA                                          P/Q

\$20                                                              \$20

\$15                                                             \$15

\$10
\$10

4 6 8       Q/t               2 3 4              Q/t             6   9   12   Q/t

Total Industry Supply
Total industry =          P/Q

50 firms type A         \$20
50 firms type B         \$15

\$10

300 400 500 600          Q/t
Extremely Competitive Market Outcome

Price

Industry supply

\$20

\$15

\$10

Market demand

100 200 300 450 500 600      Quantity
Industry LR Supply, all firms identical

Individual identical firms                        Industry

\$/Q                         MC   AC    \$/Q   Industry Demand

LR Supply

q                Q/t                 Q=nq        Q/t
Industry LR Supply, all firms not identical

Individual non-identical firms         Industry

P/Q                   MC         AC2
LR Supply

AC1

D1       D2     D3

q1 q2           Q/t             Q1     Q2         Q/t
Strategy: What Size Plant to Build

Avg. total cost
ATC with        ATC with          ATC with
small plant     medium plant      large plant

0          Small plant Medium plant   Large plant     Output/day
Strategy: Identifying Economies of Scale
Average
total cost

Economies   Constant Returns   Diseconomies
of scale       to scale          of scale

0                                     Output per day
Strategy: Identifying Economies of Scope

Cost of producing x alone = C(x)

Cost of producing y alone = C(y)

Cost of producing 2 goods together = C(x,y)

Economies of scope are present if:
C(x,y) < C(x) + C(y)

Measure or degree of economies of scope:
[C(x) + C(y)] – C(x,y)
C(x,y)

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