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As discussed in the chapter on Demand and Supply , many of the reasons that supply curves shift relate to underlying changes in costs. For example, a lower price of key inputs or new technologies that reduce production costs cause supply to shift to the right; in contrast, bad weather or added government regulations can add to costs of certain goods in a way that causes supply to shift to the left. These shifts in the firm’s supply curve can also be interpreted as shifts of the marginal cost curve. A shift in costs of production that increases marginal costs at all levels of output—and shifts MC to the left—will cause a perfectly competitive firm to produce less at any given market price. Conversely, a shift in costs of production that decreases marginal costs at all levels of output will shift MC to the right and as a result, a competitive firm will choose to expand its level of output at any given price. The following Work It Out feature will walk you through an example.

At what price should the firm continue producing in the short run?

To determine the short-run economic condition of a firm in perfect competition, follow the steps outlined below. Use the data shown in [link] .

Q P TFC TVC TC AVC ATC MC TR Profits
0 $28 $20 $0 - - - - - -
1 $28 $20 $20 - - - - - -
2 $28 $20 $25 - - - - - -
3 $28 $20 $35 - - - - - -
4 $28 $20 $52 - - - - - -
5 $28 $20 $80 - - - - - -

Step 1. Determine the cost structure for the firm. For a given total fixed costs and variable costs, calculate total cost, average variable cost, average total cost, and marginal cost. Follow the formulas given in the Cost and Industry Structure chapter. These calculations are shown in [link] .

Q P TFC TVC TC
(TFC+TVC)
AVC
(TVC/Q)
ATC
(TC/Q)
MC
(TC 2 −TC 1 )/
(Q 2 −Q 1 )
0 $28 $20 $0 $20+$0=$20 - - -
1 $28 $20 $20 $20+$20=$40 $20/1=$20.00 $40/1=$40.00 ($40−$20)/
(1−0)= $20
2 $28 $20 $25 $20+$25=$45 $25/2=$12.50 $45/2=$22.50 ($45−$40)/
(2−1)= $5
3 $28 $20 $35 $20+$35=$55 $35/3=$11.67 $55/3=$18.33 ($55−$45)/
(3−2)= $10
4 $28 $20 $52 $20+$52=$72 $52/4=$13.00 $72/4=$18.00 ($72−$55)/
(4−3)= $17
5 $28 $20 $80 $20+$80=$100 $80/5=$16.00 $100/5=$20.00 ($100−$72)/
(5−4)= $28

Step 2. Determine the market price that the firm receives for its product. This should be given information, as the firm in perfect competition is a price taker. With the given price, calculate total revenue as equal to price multiplied by quantity for all output levels produced. In this example, the given price is $30. You can see that in the second column of [link] .

Quantity Price Total Revenue (P × Q)
0 $28 $28×0=$0
1 $28 $28×1=$28
2 $28 $28×2=$56
3 $28 $28×3=$84
4 $28 $28×4=$112
5 $28 $28×5=$140

Step 3. Calculate profits as total cost subtracted from total revenue, as shown in [link] .

Quantity Total Revenue Total Cost Profits (TR−TC)
0 $0 $20 $0−$20=−$20
1 $28 $40 $28−$40=−$12
2 $56 $45 $56−$45=$11
3 $84 $55 $84−$55=$29
4 $112 $72 $112−$72=$40
5 $140 $100 $140−$100=$40

Step 4. To find the profit-maximizing output level, look at the Marginal Cost column (at every output level produced), as shown in [link] , and determine where it is equal to the market price. The output level where price equals the marginal cost is the output level that maximizes profits.

Questions & Answers

current economic plans (MDGS) needs
Ajijola Reply
I don't know what is happening
surajkumar
What is economic
Joeali Reply
What is the importance of study economics
Wilma
Economic is the study of how humans make decisions in face of sacristy
Wilma
economics is the study of how humans makes decision in the face of scarcity
Kpienta
economics is the study of human behaviour when faced with difficult situation example when goods and services are scarcity.
Sydney
what is Economic
Dauda Reply
what is 4ps of economic?
thomas Reply
production place Price product
Benedict
Criticism of elasticity
Siddikur Reply
what is unemployment
Gyamfi Reply
ohk thanks
Gyamfi
why is unemployment rapid in the country
Gyamfi
I need more explanation
Odo
what is unemployment
Munanag Reply
not working
Bethel
some one who is willing qualified to work but can't find job
jackie
Bethel...explain? please
Abubakar
some one who is willing to work but can't find job
Hawa
Yes true
Brian
which one please
Hawa
unemployment refers to the ability for someone who is capable and willing to work but could not find a job..
Mnoko
some one who not able to find a job
Dennis
please what is the secret of learning?
thomas
What is stock market?
JOHN Reply
explain the various types of cost curve
Ruth Reply
Short-run average fixed cost (SRAFC) Short-run average total cost (SRAC or SRATC) Short-run average variable cost (AVC or SRAVC) Short-run fixed cost (FC or SRFC) Short-run marginal cost (SRMC) Short-run total cost (SRTC)
Romy
what's economic development and growth
Popoola Reply
what do you understand by Ceteris Paribus?
Gabriel Reply
the external factor will remained constant, except the price
Hasib
explain the uses of microeconomics
Nikita Reply
uses of microeconomics
Nikita
Adam Smith's definition of economics
Sylvia Reply
what is economic deficit
Amjad
this is a situation whereby a nation's outcome or available resources are not enough to the people thereby causing scarcity
Ariel
prices of Quality demanded is equal to Quality supplied
NABUBOLO Reply
it's quantity demand and quantity supplied that's called equilibrium
Romy
no
NABUBOLO
they deal With prices
NABUBOLO
define the elasticity
NABUBOLO
explain different types of elasticity
NABUBOLO
oops 😬 you are right you talk about quality I tell about quantity
Romy
elasticity is the measurement of the percentage change of one economic variable in response to a change in another
Romy
Cross Elasticity of Demand (XED) Income Elasticity of Demand (YED) Price Elasticity of Supply (PES)
Romy
anything else?
Romy
I need to know everything about theory of consumer behavior
Grace
Romy, what is microeconomic?
thomas
What is Economic please
Dauda
Thomas, microeconomics is the study of how consumers, workers, and firms interact to generate outcomes in specific markets
Kieran
Dauda, economics is the study of people and choices. it is on one side the study of wealth and on the more important side, a part of the study if man
Kieran
How does one analyze a market where both demand and supply shift?
Gabriel Reply
That's equilibrium market
Ramon
but an equlibrum can appear twice on the same market... both in Movement along the Demand/supply curve of shift in the Curve
Gabriel
I Mean on the same curve..
Gabriel
how can consumer surplus be calculated
Franklyn

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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