Economics · Ch 10 — The Theory of the Firm under Perfect Competition

Summary

In a perfectly competitive market, firms are price-takers — each firm is too small to influence the market price and simply accepts it as given.
The total revenue of a firm is the market price of the good multiplied by the firm's output: $TR = p \times q$ .
For a price-taking firm, average revenue equals the market price: $AR = p$ .
For a price-taking firm, marginal revenue also equals the market price: $MR = p$ .
The demand curve facing a firm in a perfectly competitive market is perfectly elastic — a horizontal straight line at the market price.
The profit of a firm is the difference between the total revenue it earns and the total cost it incurs: $\pi = TR - TC$ .
If a firm's profit is maximised at a positive level of output in the short run, three conditions hold at that output: (i) $p = SMC$ ; (ii) $SMC$ is non-decreasing; (iii) $p \geq AVC$ .
If a firm's profit is maximised at a positive level of output in the long run, three conditions hold at that output: (i) $p = LRMC$ ; (ii) $LRMC$ is non-decreasing; (iii) $p \geq LRAC$ .
The short-run supply curve of a firm is the rising part of the $SMC$ curve from and above the minimum $AVC$ , together with zero output for all prices below the minimum $AVC$ .
The long-run supply curve of a firm is the rising part of the $LRMC$ curve from and above the minimum $LRAC$ , together with zero output for all prices below the minimum $LRAC$ .
Technological progress is expected to shift a firm's supply curve to the right.
An increase (decrease) in input prices is expected to shift a firm's supply curve to the left (right). …

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