Production- Perfeet Cornpetition The diagrams can be used to illustrate the firms total profits. The price per unit is pand the cost per unit is Ae Hence the area in the box bounded by price abowe and AC(y)below is profit. MC AC Avc y The first graph shows profit, T. The second shows producer surplus, P. Producer surplus. the area behind the supply curve, is also given by the area of the box between price and AVC. It is profits excluding the fixed costs-revenue minus variable costs letion-Perfeer Competition Long Run Supply The long run supply curve is given by the upward sloping part of the long run marginal cost In the long run all factors are variable- the firm can shut down if it is unprofitable Hence long pply is long run marginal cost where it is above the long run average cost curve. Supply= LRMC Short run supply LRAC The long run supply curve is likely to be fatter- more elastic -than in the short run. Why?Production — Perfect Competition 5 Profits • The diagrams can be used to illustrate the firms total profits. The price per unit is p ∗ and the cost per unit is AC. Hence the area in the box bounded by price above and AC(y ∗ ) below is profit. .................. . ...... .. ............................ ............................ ................................................................................................................................................................................................................................................................................ .................................................................................................................................................................................................................................................................................. .......................................................................................................................................................... .......................................................................................................................................................... ........................................................................................................................................................... ........................................................................................................................................................... . . . . . . . . . 0 p y 0 y MC AC MC AV C p π P p ∗ p ∗ y ∗ y ∗ • The first graph shows profit, π. The second shows producer surplus, P. • Producer surplus, the area behind the supply curve, is also given by the area of the box between price and AV C. It is profits excluding the fixed costs — revenue minus variable costs. Production — Perfect Competition 6 Long Run Supply • The long run supply curve is given by the upward sloping part of the long run marginal cost curve. • In the long run all factors are variable — the firm can shut down if it is unprofitable. • Hence long run supply is long run marginal cost where it is above the long run average cost curve. .. ............................ ................................................................................................................................................................................................................................................................................ .................................................................................................................................................................................................................................................................................. ........................................................................................................................................ ................................................................................................................................................................................................................................ . . . . . . 0 p y 0 y Supply = LRMC LRAC p y ∗ Short run supply Long run supply • The long run supply curve is likely to be flatter — more elastic — than in the short run. Why?