Chapter 5: Perfectly Competitive Supply1. Identify the firms demand curve, and explain its. . Describe how the firm employs fixed and. variable inputs to produce . Determine why price equals marginal cost at the. profit-maximizing output . Construct the industry supply curve from the. supply curves of individual . Define and calculate price elasticity of . Define and calculate producer surplus. McGrawHill/Irwin Copyright © 2011 by The McGrawHill Companies, Inc. All rights Competitive Firms. 52 Perfectly Competitive Market.• Market supply and market demand set the price. – Buyers and sellers take price (P) as given.• Perfectly competitive firm can sell all it wants at. the market price. – Since the firm is small, its output decision will not. change market price. – Each firm must decide how much to supply (Q).• Imperfectly competitive firms have some. control over price. – Some similarities to perfectly competitive firms. 53Perfectly Competitive Firms. Demand. 54 Production Ideas.• Production converts inputs into outputs. – Many different ways to produce the same product. – Technology is a recipe for production.• A factor of production is an input used in the. production of a good or a service. – Examples are land, labor, capital, and. entrepreneurship.• The short run is the period of time when at least. one of the firms factors of production is fixed.• The long run is the period of time in which all. inputs are variable. 55 Production in the Short Run.• A perfectly competitive firm has to decide how. much to produce.• The firm produces a single product (glass. bottles) using two inputs (workers and a bottle-. making machine). – Labor is a variable factor – it can be changed in. the short run. – Bottle-making machine is a fixed factor – it cannot. be changed in the short run.• Determine the profit maximizing level of output 56 Law of Diminishing Returns.• At low levels of production, the law of diminishing returns may. not hold. – Gains from specialization.• Diminishing returns eventually sets in and is often caused by. congestion. • Only so many people can fit into the office. • Only one worker can use the machine at a time. When some factors of production are fixed, increased production of the good eventually requires ever larger. increases in the variable factor. 57 Cost Concepts.• Fixed cost is the sum of all payments for fixed. inputs. – The $40 per day for the bottle machine. – Often referred to as the capital cost.• Variable cost is the sum of all payments for. variable inputs. – The total labor cost. – Wage rate of $10 per hour.• Total cost is the sum of all payments for all. inputs. – Fixed cost plus variable cost. 58 Find the Output Level that. Maximizes = total revenue – total cost.• Since Total cost = fixed cost + variable cost. – Profit = Total revenue – variable cost – fixed cost.• The firm must know about both revenues and. costs in order to maximize profits – Increase output if marginal benefit is at least as. great and marginal cost – Decrease output if marginal benefit is greater than. marginal cost 59 The Seller’s Supply Rule.• The profit maximizing quantity does not depend on. fixed cost.• A firm should increase output only if the extra benefit. exceeds the extra cost (cost-benefit princ
