Authors libby rittenberg 492
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generate a market supply curve that reflects marginal cost. Provided there
are no external benefits or costs in producing a good or service, a perfectly
competitive market satisfies the efficiency condition.
KEY TAKEAWAYS
Price in a perfectly competitive industry is determined by the
interaction of demand and supply.
In a perfectly competitive industry, a firm’s total revenue curve is a
straight, upward-sloping line whose slope is the market price.
Economic profit is maximized at the output level at which the slopes
of the total revenue and total cost curves are equal, provided that the
firm is covering its variable cost.
To use the marginal decision rule in profit maximization, the firm
produces the output at which marginal cost equals marginal revenue.
Economic profit per unit is price minus average total cost; total
economic profit equals economic profit per unit times quantity.
If price falls below average total cost, but remains above average
variable cost, the firm will continue to operate in the short run,
producing the quantity where MR = MC doing so minimizes its losses.
If price falls below average variable cost, the firm will shut down in the
short run, reducing output to zero. The lowest point on the average
variable cost curve is called the shutdown point.
The firm’s supply curve in the short run is its marginal cost curve for
prices greater than the minimum average variable cost.
TRY IT!
Assume that Acme Clothing, the firm introduced in the chapter on
production and cost, produces jackets in a perfectly competitive
market. Suppose the demand and supply curves for jackets intersect
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
492
