Ten Principles of Economics - Part 30. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 301 Exit if P ATC. That is a firm chooses to exit if the price of the good is less than the average total cost of production. A parallel analysis applies to an entrepreneur who is considering starting a firm. The firm will enter the market if such an action would be profitable which occurs if the price of the good exceeds the average total cost of production. The entry criterion is Enter if P ATC. The criterion for entry is exactly the opposite of the criterion for exit. We can now describe a competitive firm s long-run profit-maximizing strategy. If the firm is in the market it produces the quantity at which marginal cost equals the price of the good. Yet if the price is less than average total cost at that quantity the firm chooses to exit or not enter the market. These results are illustrated in Figure 14-4. The competitive firm s long-run supply curve is the portion of its marginal cost curve that lies above average total cost. MEASURING PROFIT IN OUR GRAPH FOR THE COMPETITIVE FIRM As we analyze exit and entry it is useful to be able to analyze the firm s profit in more detail. Recall that profit equals total revenue TR minus total cost TC Profit TR - TC. Figure 14-4 The Competitive Firm s Long-Run Supply Curve. In the long run the competitive firm s supply curve is its marginal-cost curve MC above average total cost ATC . If the price falls below average total cost the firm is better off exiting the market. 0 Quantity 302 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY IN THE NEWS Entry and Exit in Transition Economies In TEH 1990s many countries that had previously relied on communist theories of central planning tried to make the transition to free-market capitalism. According to this article Poland succeeded because it encouraged free entry and exit and Russia failed because it didn t. Russia Is Not Poland and That s Too Bad By Michael M. Weinstein Put aside for a moment the frightening crash of the ruble and
