Chapter 12

Discussion in 'CT7' started by rinishj28, Jan 26, 2014.

  1. rinishj28

    rinishj28 Member

    External Costs from Production:

    Why is MC=S in a perfectly competitive market?
     
  2. Gresham Arnold

    Gresham Arnold ActEd Tutor Staff Member

    Hi

    Recall the equilibrium diagram for a firm in a perfectly competitive industry. (The MR line is horizontal and the same as the AR line and both are equal to the market price of the good, since the firm is a price taker.)

    Each individual firm will produce the level of output where MR = MC.

    If the market price of the good rises, an individual firm's MR line will also rise and move up the MC curve. An individual firm's output level will increase. If you were to draw a line showing the firm's output level as the market price increases, it would be the same as the firm's MC curve.

    So the supply curve for the industry as a whole will be the horizontal sum of the individual firm's supply curves or marginal cost curves.

    (We're assuming here that the price does at least cover the average variable costs of the firm, otherwise the firm would be better off shutting down for a while than producing anything).

    Hope this helps
     
  3. rinishj28

    rinishj28 Member

    Thank you very much
     

Share This Page