ECOS2001 · Intermediate Microeconomics
Costs, Perfect Competition & Partial Equilibrium
This chapter turns the cost function into the firm's supply decision and aggregates it into a competitive market. Total cost splits into fixed and variable parts; average curves (AFC, AVC, ATC) and marginal cost MC make up the cost-curve family, and MC cuts both AVC and ATC at their minima. A competitive firm produces where P = MC on the rising part of MC above minimum AVC, and shuts down if P < min AVC. In the long run free entry drives price to minimum ATC, where economic profit is zero and each firm operates at its efficient scale; the number of firms is total market output divided by the firm's output. Market supply, surplus and deadweight loss (including from a per-unit tax) round out partial equilibrium.
What this chapter covers
- 01Total, fixed and variable cost; AFC, AVC, ATC and MC
- 02MC cuts AVC and ATC at their minima (the key cost graph)
- 03Competitive firm: P = MC above min AVC; shut down if P < min AVC
- 04Long-run equilibrium: P = min ATC = MC, zero economic profit, efficient scale
- 05Number of firms N = total output / firm output
- 06Market supply, consumer and producer surplus, deadweight loss; per-unit tax
Long-run competitive equilibrium: price and number of firms
- 2 marksLong-run price equals minimum ATC, where MC = ATC. MC = dC/dq = 2q + 4; ATC = C/q = q + 4 + 100/q.
- 2 marksSet MC = ATC: 2q + 4 = q + 4 + 100/q → q = 100/q → q² = 100 → q* = 10 (the efficient scale).
- 2 marksLong-run price = MC at q* = 10: P = 2·10 + 4 = 24. (Check ATC(10) = 10 + 4 + 100/10 = 24 — equal, so zero profit.)
- 1 markMarket quantity at P = 24: Q = 1000 − 10·24 = 1000 − 240 = 760.
- 1 markNumber of firms: N = Q / q* = 760 / 10 = 76 firms.
Key terms
- Marginal cost (MC)
- The cost of producing one more unit, dTC/dq; it cuts the AVC and ATC curves at their minimum points.
- Shut-down rule
- A competitive firm produces only if price covers average variable cost; if P < min AVC it shuts down in the short run, producing zero.
- Long-run zero-profit condition
- Free entry and exit drive a competitive industry to P = min ATC, where each firm earns zero economic profit at its efficient scale.
- Deadweight loss
- The loss of total surplus from an outcome below the competitive quantity (e.g. from a tax or market power); the triangle between demand and marginal cost over the missing units.
Costs, Perfect Competition & Partial Equilibrium FAQ
Why is the long-run price equal to minimum average total cost?
Because free entry competes away any positive profit and exit eliminates losses, the only sustainable price is the one giving zero economic profit, which is min ATC. At that price each surviving firm produces at its most efficient scale, where MC also equals ATC.
How is this chapter different from intro-micro supply and demand?
Intro micro takes supply curves as given; here you derive the firm's supply from its own cost curves (P = MC above min AVC), pin down the long-run price from min ATC, and solve for the number of firms — a fuller, derivation-based treatment that recurs on the final.
Exam move
Make the min-ATC routine reflexive: MC = ATC gives the efficient scale, MC at that scale gives the long-run price, then N = market quantity / firm output. Be able to draw the cost-curve family with MC through both minima from memory.
