Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 5   Firm Behavior and the Organization of Industry

Chapter 14 of 36 – Firms In Competitive Markets

Section 16 of 24

…

Figure 4 here

…

Figure 4 - The Competitive Firm's Long-Run Supply Curve

In the long run for the competitive firm

· supply curve is its marginal cost (MC) curve above average total cost (ATC) curve

· if the price falls below ATC, the firm is better off exiting the market

…

If the firm’s product price falls and stays below ATC, the firm exits the market

This exit is caused by

· fall in price including due to competition

· increase in ATC including due to rising labor costs

If the firm permanently closes down and exits the market

· it will lose all revenue from the sale of its product

· it will save fixed costs as well variable costs of production

…

The firm exits the market in the long run if

· the total revenue TR it gets from producing

· is less than its total costs TC

· TR < TC

By dividing both sides by quantity Q

· TR / quantity Q = price P

· TC / Q = ATC

· exit when P < ATC

…

A firm chooses to exit if in the long run

· the P of its good

· stays less than the ATC of production

A similar analysis applies to an entrepreneur who is considering starting a firm and entering a market.

The firm will enter the market

· if the investor believes it would be profitable in the long run

· which occurs when the P of the good > ATC of production

… …

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