Week 4 — Competitive markets: stay, shut down, enter, exit

How much should a price taker produce, when should it close, and why does profit not last?

← Course map

This week you will

  • Find a price taker’s best output from a cost table.
  • Tell whether a firm should keep operating, shut down for now, or leave the industry.
  • Explain why profit in an open market does not last.

1. Watch

Work through the three concept pages in this order. Each page has a short video at the bottom.

# Concept page Textbook
1 How much to produce: price = marginal cost P&B 8.1, 8.2
2 The shutdown rule: keep going, close for now, or leave P&B 8.2
3 Long-run competitive equilibrium: why profit does not last P&B 8.3; 8.4 intuition only (consumer and producer surplus in words; skip the welfare-triangle geometry and the deadweight-loss calculations)

2. Try

On each concept page, do the “Try it” box. Then try this company version: shut down or get out?

Almost every large company has closed something. A coffee chain closes weak stores. An airline drops a route for the winter. A retailer leaves a country. A carmaker ends a model. Which kind was your company’s decision?

  • A temporary closing, while leases and loans keep running, is a short-run shutdown. The price stopped covering variable cost (hours, ingredients, fuel).
  • A permanent exit — leases ended, assets sold, a restructuring or impairment line in the 10-K — means the price was not expected to cover average total cost again.

Then do four steps:

  1. Open the shutdown-rule judge in Part B of the shutdown-rule page.
  2. Press Use my numbers. Type the segment’s revenue and costs (or the best estimate you can defend).
  3. Write what you had to assume in the box under the chart. Press Export PNG.
  4. Write one sentence on entry: if your product earns more than a normal return, who is coming in, and what is your company doing to slow them down?

That is Playbook P4 in four steps.

Class experiment

Anonymous and not graded. The whole class answers one short question; the results appear when it closes.

3. Check yourself

Answer the “Check yourself” questions at the end of each concept page. They are not graded. They tell you if you are ready for the homework.

4. Do in Moodle

  1. Practice Homework U4 — Part A concept questions, plus Part B Excel Lab items with Lab_U4.xlsx (the Prairie Gold wheat farm; each Lab question states its own market price).
  2. Playbook Page P4 Stay or Go.
  3. Two peer comments.
  4. Read the Final Pricing Memo template once.
This week’s formulas
  • Price taker: MR = P · produce the largest q with MC ≤ P on the rising part of MC
  • Profit = P × q − TC = (P − ATC) × q
  • Shut down if P < min AVC (revenue < variable cost) · operate at a loss if min AVC ≤ P < min ATC · profit if P ≥ min ATC
  • Long run: P = min ATC, economic profit = 0 · number of firms = quantity demanded at min ATC ÷ output per firm

Due dates and points are in Moodle.