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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