Chapter 14

Slides

VNP-Econ-Chapter 14
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14-4 Conclusion: Behind the Supply Curve

We have been discussing the behavior of profit-maximizing firms that supply goods in perfectly competitive markets. You may recall from Chapter 1 that one of the Ten Principles of Economics is that rational people think at the margin. This chapter has applied this idea to the competitive firm. Marginal analysis has given us a theory […]

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14-3e Why the Long-Run Supply Curve Might Slope Upward

So far, we have seen that entry and exit can cause the long-run market supply curve to be perfectly elastic. The essence of our analysis is that there are a large number of potential entrants, each of which faces the same costs. As a result, the long-run market supply curve is horizontal at the minimum […]

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14-3c Why Do Competitive Firms Stay in Business If They Make Zero Profit?

At first, it might seem odd that competitive firms earn zero profit in the long run. After all, people start businesses to make a profit. If entry eventually drives profit to zero, there might seem to be little reason to stay in business. To understand the zero-profit condition more fully, recall that profit equals total […]

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14-3b The Long Run: Market Supply with Entry and Exit

Now consider what happens if firms are able to enter or exit the market. Let’s suppose that everyone has access to the same technology for producing the good and access to the same markets to buy the inputs for production. Therefore, all current and potential firms have the same cost curves. Decisions about entry and […]

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14-3a The Short Run: Market Supply with a Fixed Number of Firms

Consider first a market with 1,000 identical firms. For any given price, each firm supplies a quantity of output so that its marginal cost equals the price, as shown in panel (a) of Figure 6. That is, as long as price is above average variable cost, each firm’s marginal-cost curve is its supply curve. The […]

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14-3 The Supply Curve in a Competitive Market

Now that we have examined the supply decision of a single firm, we can discuss the supply curve for a market. There are two cases to consider. First, we examine a market with a fixed number of firms. Second, we examine a market in which the number of firms can change as old firms exit […]

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14-2f Measuring Profit in Our Graph for the Competitive Firm

As we study exit and entry, it is useful to analyze the firm’s profit in more detail. Recall that profit equals total revenue (TR) minus total cost (TC): Profit = TR – TC We can rewrite this definition by multiplying and dividing the right side by Q: Profit = (TR/Q – TC/Q) x Q But […]

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Case Study: Near-Empty Restaurants and Off-Season Miniature Golf

Have you ever walked into a restaurant for lunch and found it almost empty? Why, you might have asked, does the restaurant even bother to stay open? It might seem that the revenue from so few customers could not possibly cover the cost of running the restaurant. In making the decision of whether to open […]

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