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Add notes from senior year
2022-08-14 14:00:25 -04:00
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</style></head><body><article id="a39f217f-3404-425b-844e-4d74236e2acd" class="page sans"><header><h1 class="page-title">Unit 3: Production, Cost, and the Perfect Competition Model</h1><table class="properties"><tbody><tr class="property-row property-row-created_time"><th><span class="icon property-icon"><svg viewBox="0 0 14 14" style="width:14px;height:14px;display:block;fill:rgba(55, 53, 47, 0.45);flex-shrink:0;-webkit-backface-visibility:hidden" class="typesCreatedAt"><path d="M7.01356 14.0001C8.8042 14.0001 10.5958 13.3107 11.9575 11.9324C14.681 9.21201 14.6808 4.7603 11.9571 2.04013C9.23336 -0.680043 4.77573 -0.680043 2.05199 2.04013C0.727519 3.36277 0 5.13301 0 6.99553C0 8.8764 0.727811 10.6285 2.05199 11.9509C3.43207 13.3106 5.22243 14.0001 7.01356 14.0001ZM3.72947 7.00914V8.461V8.65543H3.92382H5.34563H8.2794H8.4738V8.461V5.52541V3.37947V3.18502H8.2794H6.82747H6.63307V3.37947V6.81467H3.92382H3.72947V7.00914ZM1.83985 6.99553C1.83985 5.61698 2.38099 4.32597 3.36061 3.3477C5.36746 1.34337 8.64803 1.34062 10.6585 3.33944C10.6613 3.34219 10.6639 3.34494 10.6668 3.3477C12.676 5.3546 12.6763 8.63642 10.6668 10.6434C8.65705 12.6504 5.37031 12.6504 3.36061 10.6434C2.38099 9.66506 1.83985 8.37408 1.83985 6.99553Z"></path></svg></span>Created</th><td><time>@November 11, 2021 10:39 AM</time></td></tr><tr class="property-row property-row-multi_select"><th><span class="icon property-icon"><svg viewBox="0 0 14 14" style="width:14px;height:14px;display:block;fill:rgba(55, 53, 47, 0.45);flex-shrink:0;-webkit-backface-visibility:hidden" class="typesMultipleSelect"><path d="M4,3 C4,2.447715 4.447715,2 5,2 L12,2 C12.5523,2 13,2.447716 13,3 C13,3.55228 12.5523,4 12,4 L5,4 C4.447715,4 4,3.55228 4,3 Z M4,7 C4,6.447715 4.447715,6 5,6 L12,6 C12.5523,6 13,6.447716 13,7 C13,7.55228 12.5523,8 12,8 L5,8 C4.447715,8 4,7.55228 4,7 Z M4,11 C4,10.447715 4.447715,10 5,10 L12,10 C12.5523,10 13,10.447716 13,11 C13,11.55228 12.5523,12 12,12 L5,12 C4.447715,12 4,11.55228 4,11 Z M2,4 C1.44771525,4 1,3.55228475 1,3 C1,2.44771525 1.44771525,2 2,2 C2.55228475,2 3,2.44771525 3,3 C3,3.55228475 2.55228475,4 2,4 Z M2,8 C1.44771525,8 1,7.55228475 1,7 C1,6.44771525 1.44771525,6 2,6 C2.55228475,6 3,6.44771525 3,7 C3,7.55228475 2.55228475,8 2,8 Z M2,12 C1.44771525,12 1,11.5522847 1,11 C1,10.4477153 1.44771525,10 2,10 C2.55228475,10 3,10.4477153 3,11 C3,11.5522847 2.55228475,12 2,12 Z"></path></svg></span>Tags</th><td><span class="selected-value select-value-color-orange">In Class</span></td></tr></tbody></table></header><div class="page-body"><h1 id="a677b9c9-960d-4b3a-8d13-8c446e6c9227" class="">3.0 - Overview &amp; Market Structures</h1><h2 id="09392dca-c2e2-40a2-9df1-b47cb5acfda6" class="">Perfect Competition</h2><ul id="1b0c8a5f-bd72-4288-9ecc-fa0905c40f87" class="bulleted-list"><li style="list-style-type:disc">Many firms in competition with each other</li></ul><ul id="addaa97d-4ce2-4a24-8bf9-679df0d605e9" class="bulleted-list"><li style="list-style-type:disc">Goods being sold are <strong>identical</strong>, with no product differentiation</li></ul><ul id="7947d9a2-eba9-4975-a98d-6f90377da5dc" class="bulleted-list"><li style="list-style-type:disc">Individual firms have no control over prices, they are called &quot;price takers&quot;</li></ul><ul id="b015acd4-63d2-46ea-a105-253e34545e63" class="bulleted-list"><li style="list-style-type:disc">Low barrier to entry (solely startup cost)</li></ul><ul id="9c17b1bb-6bc6-4ffd-bac2-cc12939010c0" class="bulleted-list"><li style="list-style-type:disc">Well informed buyers and sellers</li></ul><h2 id="613d9790-bfc4-404e-b75e-a708a26efd28" class="">Monopolistic Competition</h2><ul id="f2cf6a6f-bd5e-4cb8-bd9e-d2a6262bf8de" class="bulleted-list"><li style="list-style-type:disc">Many firms in competition with each other</li></ul><ul id="6dd72bfd-d4e7-4c06-8755-6a3e4d0c8f0f" class="bulleted-list"><li style="list-style-type:disc">There is some amount of differentiation between products</li></ul><ul id="ecf5c1c3-4905-4bf5-a0c2-7cace6ee9f46" class="bulleted-list"><li style="list-style-type:disc">Individual firms have no control
fixed inputs. TP increases at an increasing rate.</p><p id="b4027403-1cfb-4f65-9841-c40fcc08de7a" class=""><strong>Decreasing Marginal Returns</strong>—Each additional variable input is less productive than the last. MP and AP decrease as specialization decreases, and there are not enough fixed inputs. TP increases, but at a slower rate.</p><p id="ca2c5133-2b94-49a7-bcb9-70b59a771936" class=""><strong>Negative Marginal Returns</strong>—Each additional variable input gets in the way of production. AP decreases and MP becomes negative, as specialization is impossible with too many
variable inputs. TP decreases.</p><p id="2fd8346b-3b9f-4208-bd84-4f69543a6432" class="">The <strong>Law of Diminishing Marginal Returns</strong> dictates that, as variable resources are added to fixed resources, the additional output produced from each new input will eventually fall. Basically, at some point, each additional worker used in the production process becomes less productive.</p><h3 id="fb33d995-7ec6-4e43-927b-b80b296c89cc" class="">Stages of Marginal Returns</h3><ul id="446d523f-7130-46d3-ab44-f645e6f8cd0e" class="bulleted-list"><li style="list-style-type:disc"><strong>Stage 1:</strong> Increasing Marginal Returns. Both TP and MP are <strong>increasing</strong>.</li></ul><ul id="1c27c041-1324-4bef-a296-3660d828240b" class="bulleted-list"><li style="list-style-type:disc"><strong>Stage 2: </strong>Diminishing Marginal Returns. TP is still <strong>increasing</strong>, but MP is <strong>decreasing.</strong></li></ul><ul id="119667a0-c126-48e5-9479-25c2bbc173a8" class="bulleted-list"><li style="list-style-type:disc"><strong>Stage 3:</strong> Negative Marginal Returns. Both TP and MP are <strong>decreasing.</strong></li></ul><h2 id="89133881-433e-4659-8f3a-accf907d0d24" class="">Graphs of the Production Function</h2><figure id="278051f6-5b90-4747-8df0-fa22174ca9d0" class="image"><a href="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled.png"><img style="width:922px" src="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled.png"/></a><figcaption>Table calculating the marginal returns of adding additional workers (inputs).</figcaption></figure><figure id="c6d9abce-ccc1-4dfc-80e3-2d29d78a0b43" class="image"><a href="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%201.png"><img style="width:1110px" src="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%201.png"/></a><figcaption>Total, average, and marginal products depicted on a graph.</figcaption></figure><h2 id="4f64eb57-c814-44aa-8dfb-1203445802ab" class="">Relating Total, Average, and Marginal Products</h2><h3 id="726d6d6f-84e1-43c4-9b86-0bfac57ec511" class="">Relationship between Marginal Product and Total Product</h3><p id="27976c45-3f06-4609-90c3-6dd8ef89bcd9" class="">The <strong>law of variable proportions </strong>explains the relationship between Total Product and Marginal Product. It states that when only one variable factor input is allowed to increase and all other inputs are kept constant, the following can be observed:</p><ul id="673c32da-741d-435a-a9d4-343c498cb310" class="bulleted-list"><li style="list-style-type:disc">When the Marginal Product (MP) increases, the Total Product is also increasing at an increasing rate. This gives the Total product curve a convex shape in the beginning as variable factor inputs increase. This continues to the point where the MP curve reaches its maximum.</li></ul><ul id="73814c86-5921-4dcd-a6a1-39d84efd19ac" class="bulleted-list"><li style="list-style-type:disc">When the MP declines but remains positive, the Total Product is increasing but at a decreasing rate. This gives the Total product curve a concave shape after the <strong>point of inflection</strong>. This continues until the Total product curve reaches its maximum.</li></ul><ul id="b89e387c-238d-4416-90d3-ee9eeceb7313" class="bulleted-list"><li style="list-style-type:disc">When the MP is declining and negative, the Total Product declines.</li></ul><ul id="3a065684-60e7-491b-aee0-d24c4d8026db" class="bulleted-list"><li style="list-style-type:disc">When the MP becomes zero, Total Product reaches its maximum.</li></ul><h3 id="7061d2ca-7083-4feb-86fc-4e307d520128" class="">Relationship between Average Product and Marginal Product</h3><p id="687cec22-e44f-4683-adda-d5cc72e9eb8e" class="">There exists an interesting relationship between Average Product and Marginal Product:</p><ul id="91e8afd9-3fbe-4a99-8cb5-d47b58358333" class="bullet
costs do not change with the amount of output produced. Ex: rent, salaries, insurance.</p><p id="2cbd588d-8394-4a59-be33-20d0d66c5317" class=""><strong>Variable Cost (VC)</strong>—The costs of variable resources used during the production process. These
costs do change with the amount of output produced. The more output produced, the higher the variable costs are and vice versa. Ex: electricity, hourly wages, shipping costs.</p><p id="bdba6d31-da94-486c-ab2e-2adda79d99d4" class=""><strong>Total Cost (TC)</strong>—The sum of variable costs and fixed costs.</p><p id="01c1fc7d-50bf-437e-8ba5-5b7b9a42c97a" class=""><strong>Marginal Cost (MC)</strong>—The additional cost of producing each additional unit of output. (<style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MC</mtext><mo>=</mo><mfrac><mrow><mi mathvariant="normal">Δ</mi><mi>T</mi><mi>C</mi></mrow><mrow><mi mathvariant="normal">Δ</mi><mi>Q</mi></mrow></mfrac></mrow><annotation encoding="application/x-tex">\textrm{MC} = \frac{\Delta TC}{\Delta Q}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:1.3534389999999998em;vertical-align:-0.481108em;"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist" style="height:0.872331em;"><span style="top:-2.6550000000000002em;"><span class="pstrut" style="height:3em;"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord mtight">Δ</span><span class="mord mathnormal mtight">Q</span></span></span></span><span style="top:-3.23em;"><span class="pstrut" style="height:3em;"></span><span class="frac-line" style="border-bottom-width:0.04em;"></span></span><span style="top:-3.394em;"><span class="pstrut" style="height:3em;"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord mtight">Δ</span><span class="mord mathnormal mtight" style="margin-right:0.07153em;">TC</span></span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist" style="height:0.481108em;"><span></span></span></span></span></span><span class="mclose nulldelimiter"></span></span></span></span></span></span><span></span></span>)<div class="indented"><ul id="e1c9bfb9-6687-4762-b267-f81cffa5f264" class="bulleted-list"><li style="list-style-type:disc">Profit is maximized when <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MC</mtext><mo>=</mo><mtext>MR</mtext></mrow><annotation encoding="application/x-tex">\textrm{MC} = \textrm{MR}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MR</span></span></span></span></span></span><span></span></span>, so you will continue to produce more output until these two qua
of production. These costs include both the &quot;out of pocket&quot; payments paid by firms and the opportunity costs of using resources during the production process.</p><p id="3b221a56-6a80-47c2-89dd-a5c68845577e" class=""><strong>Accounting profits</strong>—The profits earned by the firm when the revenue earned by the firm is
greater than the explicit (accounting) costs of production (Total Revenue - Accounting Costs).</p><p id="6452af6d-1618-478d-b0d6-f942ea93cbc9" class=""><strong>Economic profits</strong>—The profits earned by the firm when the revenue earned by the firm is
greater than the sum of the explicit (accounting) costs and the implicit (opportunity cost) costs of production (Total Revenue - Economic Costs).</p><p id="671e4c88-042f-4529-ad83-f924afec9511" class="">Accounting profits ignore the implicit costs, and therefore will always appear higher than economic profit. </p><h2 id="3f4b68e1-1176-4b94-9b94-ef390fa1d490" class="">Graphical Depictions of Fixed, Variable, and Total Cost</h2><figure id="d4704d1b-bcb5-4412-94a2-c31e1b8e76ca" class="image"><a href="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%202.png"><img style="width:1171px" src="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%202.png"/></a></figure><p id="9370976d-3515-4f48-b680-257f06fd6b4e" class="">Example table of a firm&#x27;s FC, VC, and TC, and how those are related to the firm&#x27;s output.</p><figure id="da1c2bca-86ab-436d-aa7d-9f26dc694604" class="image"><a href="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%203.png"><img style="width:1025px" src="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%203.png"/></a><figcaption>What FC, VC, and TC look like on a graph. Notice the fixed costs just move the graph of VC upwards to reach TC.</figcaption></figure><figure id="355e71a5-b54c-4168-a8d8-2bb759975224" class="image"><a href="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%204.png"><img style="width:1186px" src="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%204.png"/></a><figcaption>Graph of marginal cost (MC), average fixed cost (AFC), average variable cost (AVC), and average total cost (ATC).</figcaption></figure><p id="a0387074-3fe8-4bb5-9702-5de11481bdba" class="">MC always crosses both AVC and ATC at their lowest point. If fixed costs increase, then both the AFC and ATC would shift up and vice versa. If variable costs increase, then both AVC and ATC will shift upward and vice versa. The MC curve only shifts when variable costs change. It will shift upward for an increase in variable costs and downward for a decrease in variable costs.</p><figure id="0e62c89b-f19f-44a8-9700-cbf2ba6cf1e4" class="image"><a href="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%205.png"><img style="width:1212px" src="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%205.png"/></a><figcaption>Graphs shifting upward with a change in variable cost.</figcaption></figure><h1 id="8a74e2d9-6415-4bc9-9a70-8878ad833870" class="">3.3 - Long-Run Production Costs</h1><p id="636f0fad-513c-43f5-828f-87ddb59149f4" class="">In the long-run, all resources are flexible, so firms can change both their plant capacity and output level. This allows firms to analyze and compare the average total cost of production at each plant capacity in the short-run, and find the optimal plant capacity that allows them to product output at the lowest possible ATC.</p><p id="343eadd1-4040-449b-8098-f5381fc9b11b" class="">This the LRATC curve is merely the combination of several SRATC curves for different facilities.</p><figure id="86e5ea3d-d8bc-44b7-b90c-c25488e2b431" class="image"><a href="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%206.png"><img style="width:1162px" src="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%206.png"/></a></figure><p id="ee5257b8-0b9e-49c9-976c-7e6c72feee3c" class="">The U-shape of the long-run ATC (LRATC) curve is a result of economies of scale and diseconomies of scale that are experienced by the firm.</p><ul id="88ee1907-97a2-4c20-afab-7deac28a7bd3" class="bulleted-list"><li style="list-style-type:disc"><strong>Economies of s
output in order to lower their per-unit costs.</li></ul><ul id="6e708123-decb-407c-b13f-6537731ffeda" class="bulleted-list"><li style="list-style-type:disc">In between these two phases is what we refer to as <strong>constant returns to scale</strong>. When the firm increases production, costs stay the same. The ATC is at its lowest here.</li></ul><figure id="e0bc9fea-4600-44f4-a6ed-3b584d281c80" class="image"><a href="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%207.png"><img style="width:1162px" src="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%207.png"/></a></figure><p id="4205d673-3715-404a-9d66-17a894a17f9a" class="">The light blue area represents economies of scale because as output is increasing, costs are decreasing. The light yellow area represents a constant return to scales because as output continues to increase, costs remain constant. The light green area represents diseconomies of scale because as output increases, costs rise.</p><h1 id="df8f0798-589a-4891-bf56-97fcd977427a" class="">3.4 - Types of Profit</h1><p id="a3a27fe9-0cb9-4e0e-a0e6-b67d42fea0c3" class="">In economics, there are a variety of different ways to represent profits. These different methods of calculating profits vary based on what type of costs are being considered in each situation. Profit, in general, is the difference between total revenue and total costs (provided total revenue is greater than total costs). </p><ul id="1868440e-cd54-423b-9549-e716d97ba2a7" class="bulleted-list"><li style="list-style-type:disc"><strong>Accounting profit</strong> represents a firm&#x27;s total revenue minus the firm&#x27;s explicit costs. </li></ul><ul id="83837dd6-5bc2-4811-8313-cd28038710ba" class="bulleted-list"><li style="list-style-type:disc"><strong>Economic profit</strong> represents a firm&#x27;s accounting profits minus the firm&#x27;s explicit <em>and</em> implicit costs. While accounting profit factors in only the explicit costs, economic profit includes implicit costs, and therefore factors in the opportunity costs lost by not pursuing other opportunities.</li></ul><ul id="dbe9f945-1c4b-44d6-b50f-7891d53cff50" class="bulleted-list"><li style="list-style-type:disc"><strong>Normal profit</strong> occurs when a firm&#x27;s <em>economic profit</em> is zero. So for example, if a firm&#x27;s total revenue is $100,000 and the total of that firm&#x27;s explicit and implicit costs is $100,000, then the firm&#x27;s economic profit is zero, and it is experiencing normal profit. When a firm is experiencing normal profit, its accounting profit is still positive. Normal profit is also referred to as &quot;breaking even.&quot;</li></ul><p id="51cbf80a-7715-4dd9-a0aa-5dfb03ead2aa" class="">If revenue is less than costs, a firm may experience <strong>economic losses</strong>. For example, if the total revenue is $80 and the total cost is $97, we have an economic loss of $17.</p><p id="bb94cddf-9c31-463e-89d2-ae6d6ad81c3e" class="">When a firm is experiencing an economic profit, they can increase their production. If a firm is earning an economic loss, they will most likely respond by decreasing their output.</p><h1 id="e863df8b-34ef-418d-88f1-7417c64052ae" class="">3.5 - Profit Maximization</h1><figure id="470430eb-5c42-488e-b357-d85b69a02261" class="equation"><style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><div class="equation-container"><span class="katex-display"><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML" display="block"><semantics><mrow><mtext>MR</mtext><mo>=</mo><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">\textrm{MR} = \textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MR</span></span><span class="mspace" style="margin-righ
Recall that economic profit is revenue minus <span style="border-bottom:0.05em solid">all</span> costs, including implicit costs like the opportunity cost of the owner&#x27;s time and money. In zero-profit equilibrium, firms earn enough revenue to cover these costs. Thus, accounting profit is still positive, and firms still have a strong incentive to produce. </div></figure><h2 id="1d56d4a7-b73a-46ca-9b0b-85c05b0e9743" class="">Shift from Long-Run to Short-Run back to Long-Run</h2><p id="877ff503-5e27-46c6-8239-047a5c45e58e" class="">A market may be in long-run equilibrium, and then experience a change in demand in the market. This shift of demand moves the market into short-run, and then it has to readjust back to long-run. </p><p id="579a51a2-6428-406e-a6f5-c51131d58749" class="">Let&#x27;s show how this occurs when there is a scenario that increases demand.
We&#x27;ll use the market for apples.</p><h3 id="f864055b-85bf-42d3-b816-b358f686abae" class=""><strong>Step 1</strong></h3><p id="9ca71476-a9cc-4280-a7a0-393eecad0c22" class="">A market is in long-run equilibrium, when a change in market demand causes the price of the good to increase. We show this on the firm graph by shifting the price line up and identifying the new profit-maximizing point for the firm (<style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MR</mtext><mo>=</mo><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">\textrm{MR} = \textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MR</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span>). This causes the firm to go from long-run
equilibrium to short-run profit since the price line is above the ATC curve.</p><figure id="2990cb8d-1170-4807-b376-bf240e3c8666" class="image"><a href="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%2017.png"><img style="width:1290px" src="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%2017.png"/></a></figure><h3 id="a451b6a9-9fbd-4f56-974e-8be15b7e9429" class=""><strong>Step 2</strong></h3><p id="71b6dfb0-93f9-4b22-bd87-a411c515023c" class="">Now that the perfectly competitive market is earning a short-run profit, individual firms are incentivized to enter the market. This makes the supply curve shift right, causing the equilibrium price to decrease. This will cause the price line to drop on the firm graph and cause the
profit-maximizing quantity to return to the original one in the firm.</p><figure id="5fa6e03a-979c-4aee-ba5a-56d44e020bde" class="image"><a href="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%2018.png"><img style="width:1290px" src="Unit%203%20Production,%20Cost,%20and%20the%20Perfect%20Competiti%20a39f217f3404425b844e4d74236e2acd/Untitled%2018.png"/></a></figure><p id="4c41e0ec-c21b-4b07-a498-d5b81c642033" class="">This can happen anytime a perfectly competitive market starts in long-run equilibrium and gets moved to short-run. The market always has to readjust to long-run equilibrium.</p><h2 id="690fb8e0-b7b0-46dc-ba69-3ac156387ea4" class="">Changes Due to the Assumptions of the Perfect Competition Model</h2><ol type="1" id="353fd873-8deb-49c2-92fb-19e09270cdbb" class="numbered-list" start="1"><li><strong>Firms have different costs</strong><ul id="90de91fa-1baf-4bfa-bcf2-6909910f0ef6" class="bulleted-list"><li style="list-style-type:disc">A <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span> rises, firms with lower costs enter the market before those with higher costs.</li></ul><ul id="f2dd8c5e-9e5a-499b-a4b0-82dbdd43672c" class="bulleted-list"><li style="list-style-type:disc">Further increases in <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span> make it worthwhile for higher-cost firms to enter the market, which increases market quantity supplied. </li></ul><ul id="960c1a7c-af1f-4675-a04b-d6d5d6db4b82" class="bulleted-list"><li style="list-style-type:disc">Hence, the <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>LR</mtext></mrow><annotation encoding="application/x-tex">\textrm{LR}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">LR</span></span></span></span></span></span><span></span></span> market supply curve slopes upward.</li></ul><ul id="2e1cff50-f42f-411f-ad31-a704408111a1" class="bulleted-list"><li style="list-style-type:disc">At any <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span>
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