1. Outline for Tuesday, August 5
Remember
Last homework due Friday
Last quiz on Monday
Review Monday
Welfare
2. Price-taking Perfect Competition
We assume that the firm is a price-taker
Buyers and sellers see and trade at the same price
Firms cannot differentiate themselves
Firms freely enter and exit the market
These assumptions make up the model of perfect
competition
A firm only chooses how much to produce
We have not assumed that firms are identical
3. Profit maximization
In the long run…
If P > minimum AC, the firm will set q where P=MC
If P minimum AC, the firm will shut down
In the short run…
The shutdown rule is determined by VC because F
cannot be changed
If P > minimum AVC, the firm will set q where P=MC
If P minimum AVC, the firm will shut down
In both cases, MC is the firm’s supply curve above
the shutdown price