In this lecture, we continue to learn about competition, and its implications for the supply curve for different goods. We can use this to construct the market supply curve from firms’ supply curves. Now we have all the ingredients for fully understanding the basic supply and demand diagrams that launched our study of economics.
In this lecture, we will learn about the factors that influence a firm’s shutdown decision. Image courtesy of johnthurm on Flickr.
Keywords: Shutdown decisions; market supply curves; short-run market equilibrium; long-run market equilibrium.
Read the recitation notes, which cover new content that adds to and supplements the material covered in lecture.
Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:
- [R&T] Chapter 9, “Competitive Markets for Goods and Services.”
- [Perloff] Chapter 8, “Competitive Firms and Markets.” (optional)
This concept quiz covers key vocabulary terms and also tests your intuitive understanding of the material covered in this session. Complete this quiz before moving on to the next session to make sure you understand the concepts required to solve the mathematical and graphical problems that are the basis of this course.
If you compare the elasticity of short-run supply in the markets for two different goods and one market has more firms than the other, which will have a more elastic supply curve?
The supply curve becomes flatter (more elastic) with more firms in the market, because a given increase in price calls forth more production when there are many firms rather than one.
In the long run, firms should decide to shut down if what condition holds?
In the long run, all costs are variable, and thus average variable cost and average cost are equivalent. The firm will shut down if price is less than average cost. Average fixed cost is not a relevant concept in the long-run, because all costs are considered to be variable.
In the long run, what cost measure is minimized?
In the long-run, average cost is minimized and the equilibrium is found where price equals minimum average costs.
In recent years, the American automobile manufacturing industry has struggled; assume that some companies are earning negative profits (i.e., they are losing money). In the long-run, what changes will we expect to see in this market?
If profits are negative, firms should exit.
Which of the following is a reason that the long-run supply curve may not be flat and may instead be upward-sloping?
All of these factors will contribute to a failure of the mechanism by which competition leads to cost minimization in the long-run, and thus will generate an upward-sloping supply curve.