ECON1101: Macroeconomics 1

Chapter 6: Perfectly competitive

supply
Market supply curve
A markets supply curve is the horizontal summation of individual sellers
supply curves.

Profit
Profit is the difference between total revenue and total (explicit and implicit)
costs.

Perfectly competitive markets

A perfectly competitive market is one in which all buyers and sellers are price
takers (they cannot influence the market price). It has the following
characteristics:
1. Standardised product
2. Many small buyers and sellers Buyers and sellers cannot influence the
market price
3. Perfect mobility Sellers can enter and leave freely.
4. Perfect information Buyers and sellers are well informed.

Price taker
A price taker is a firm that cannot influence the market price.

Imperfectly competitive firm

An imperfectly competitive firm has some control over the market
price.

The demand curve for a perfectly competitive firm

The demand curve for a perfectly competitive firm is perfectly elastic
at the market price.

Production in the short-run

Factors of production
A factor of production is an input used in the production of a good or
service (e.g. machinery, labour, materials).

Short-run vs. long-run

The short-run is a period of time sufficiently short that at least one of the
firms factors of production are fixed.

The long-run is a period of time of sufficient length that all the firms
factions of production are variable.

The law of diminishing returns

The law of diminishing returns states that, in the short run, when at
least one factor of production is fixed, successive increases in the input of
a variable factor eventually yield smaller and smaller increments in
output.

The law of supply

The law of supply states that the quantity supplied and the price are
positively correlated because the law of diminishing returns states that, as
the quantity supplied increases, the marginal cost increases. Since the
price must cover the marginal cost, the price will also increase.

Fixed vs. variable factors of production

A fixed factor of production is an input whose quantity does not change
as the output of a particular good or service produced in a given period of
time changes (e.g. machinery).
A variable factor of production is an input whose quantity varies as the
output of a particular good or service produced in a given period of time
changes (e.g. workers).

Costs in the short-run

The fixed cost (FC) is the sum of all payments made to the firms fixed
factors of production (e.g. lease payments on machinery).
The variable cost (VC) is the sum of all payments made to the firms
variable factors of production (e.g. workers wages).
The total cost (TC) is the sum of all payments made to the firms fixed
and variable factors of production.
The marginal cost (MC) is the change in total cost divided by the
corresponding change in output

( TCQ )

The average variable cost (AVC) is the variable cost divided by total

( VCQ )

output

The average total cost (ATC) is the total cost divided by total output

( TCQ )

Short-run shutdown condition

The short-run shutdown condition states that a firm should shut down
and produce nothing in the short run if:

P Q<VC ( for all real Q )

P< AVC (for all real Q)

Profit maximisation
Profit maximisation occurs when price

( P) equals marginal cost

(MC) .
P=MC

Revenue, total cost and profit

Revenue=P Q

Total cost ( TC ) =ATC Q

Profit=[ P Q ATC Q ]= [Q ( PATC ) ]

What causes shifts in the supply curve?

1.
2.
3.
4.
5.

Technology
Input prices (e.g. petrol)
Expectations of future price changes
Changes in the number of suppliers (e.g. skilled migrants)
Changes in the price of other products (e.g. if the price of gold rises, some
may stop looking for silver and look for gold instead)

Producers surplus
Producers surplus (or sellers surplus) is the difference between the amount
actually received by the seller of a good and the sellers reservation price,
defined as the area above the market price and below the supply curve.