[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

output where that distance is greatest. This occurs at Q 1 . Below Q 1 , price (the slope
of the revenue curve), exceeds marginal costs (the slope of the total cost curve), so
profits increase as output increases; above Q 1 , price is less than marginal cost,
so profits decrease as output increases.
Wrap-Up
EQUILIBRIUM OUTPUT FOR
COMPETITIVE FIRMS
In competitive markets, firms produce at the level where price equals
marginal cost.
Entry, Exit, and Market Supply
We are now in a position to tackle the market supply curve. To do so, we need to
know a little more about each firm’s decision to produce. First, let’s consider a firm
that is currently not producing. Under what circumstances should it incur the fixed
costs of entering the industry? This is a relatively easy problem: the company simply
looks at the average cost curve and the price. If price exceeds minimum average costs,
it pays for the firm to enter. A company that enters the industry can sell the goods for
more than the cost of producing them, thus making a profit.
Book publishing and the restaurant business are two industries that are easy to
enter. If book prices are above minimum average costs, new publishers will enter
the market, as it is relatively easy to produce a book. Similarly, if prices of restaurant
meals in an area exceed minimum average cost, new restaurants will open up or
restaurant chains will expand with branches in new locations.
Figure 7.4A shows the U-shaped average cost curve. Minimum average cost is
c min . If the price is less than c min , then there is no level of output at which the firm could
produce and make a profit. If the price is above c min , then the firm will produce at Q * ,
the level of output at which price ( p) equals marginal cost. At Q * , marginal costs
exceeds average costs. (This is always true at output levels greater than that at
which average costs are minimal.) Profit per unit is the difference between price
and average costs. Total profits are the product of profit per unit and the level of
output (the shaded area in the figure).
Different companies may have different average cost curves. Some will have
better management. Some will have a better location. Accordingly, firms will differ
in their minimum average cost. As prices rise, additional firms will find it attractive
to enter the market. Figure 7.4B shows the U-shaped average cost curves for three
different firms. Firm 1’s minimum average cost is AC 1 , firm 2’s minimum average
cost is AC 2 , and firm 3’s minimum average cost is AC 3 . Thus, firm 1 enters at the
price p 1 , firm 2 at the price p 2 , and firm 3 at the price p 3 .
160 ∂ CHAPTER 7 THE COMPETITIVE FIRM