Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 8] PRICE AND OUTPUT UNDER PERFECT COMPETITION 189
TVC exceeds TR. Therefore, the firm minimizes its total losses (at the level of its TFC of $2800) by shutting down
altogether.
8.6 SHORT-RUN SUPPLY CURVE
Since, in a perfectly competitive market, we can read from the MC curve how much the firm will produce
and sell at various prices, the firm’s short-run supply curve is given by the rising portion of its MC curve (over
and above its AVC curve). If factor prices remain constant, the competitive industry short-run supply curve is
obtained by summing horizontally the SMC curves (over and above their respective AVC curves) of all the
firms in the industry.
EXAMPLE 8. Panel A of Fig. 8-6 gives the short-run supply curve of the firm in Example 7 and Fig. 8-5. The industry or
market short-run supply curve shown in panel B is obtained on the assumption that there are 100 identical firms in the industry
and factor prices remain constant to this industry regardless of the amount of inputs it uses. (The “ P ” sign refers to the
“summation of.”) Note that no output of the commodity is produced at prices below $7 per unit.
Fig. 8-6
8.7 LONG-RUN EQUILIBRIUM OF THE FIRM
In the long run, all factors of production and all costs are variable. Therefore, a firm will remain in
business in the long run only if (by constructing the most appropriate plant to produce the best level of
output) its TR equals or is greater than its TC. The best, or optimum, level of output for a perfectly competitive
firm in the long run is given by the point where P or MR equals LMC and LMC is rising. If, at this level of
output, the firm is making a profit, more firms will enter the perfectly competitive industry until all profits are
squeezed out.
EXAMPLE 9. In Fig. 8-7, at the market price of $16, the perfectly competitive firm is in long-run equilibrium at point A,
where P or MR ¼ SMC ¼ LMC . SAC ¼ LAC. The firm produces and sells 700 units of output per time period, utilizing
the most appropriate scale of plant (represented by SAC 2 ) at point B. The firm makes a profit of $5 per unit (AB) and a total
profit of $3500.
EXAMPLE 10. Since the firm of Example 9 and Fig. 8-7 is making profits, in the long run more firms will enter the industry,
attracted by those profits. The market supply of the commodity will increase, causing the market equilibrium price to