FORMATIVE WORK FOR ECONOMICS
In this article, we will consider how a price-taking profit maximising business in perfect competition changes according to the change of the fixed factor cost-capital. A
i) The short-run marginal cost (MC) curve of each business remains the same, but the short run AC curve of each business shifts downwards.
Perfect competition is an industrial structure that includes many firms selling an identical product to many buyers and has no restrictions for new firms to entry or quit. We suppose that the market is in equilibrium and each business in this industry is operating at its optimal plant size which is making normal profit. Because there is an exogenous change in this market, that is, the interest rate falls. This change will cause the price of capital decreases. For fixed factor is an input that cannot be increased in supply within a given time period, the price of capital is the fixed factor cost. In the short-run, the marginal cost, MC, will remain unchanged, the average cost, AC, however, do change, therefore the short-run MC curve does not shift and the short-run AC curve shifts downward. The reason why there is no change in marginal cost(MC) is that the variable cost(VC) remains the same. For the decrease of interest rate just influences the price of fixed cost , the variable cost will still at the same level, that means, the change in total cost on each unit is the same with before. Marginal cost is the cost of producing one more unit of output.(Sloman, 2004,p.90.) Therefore we can find that a one-unit change in the cost of different outputs equals to that before the interest rate changes. Hence，marginal cost keep unchanged and MC curve does not shift. At the meantime, because AC equals fixed cost ,AFC, plus variable cost ,AVC ,and the price of fixed cost decreases , the AC curve will shift downward.(graphA.1)
ii ) Each business makes profits and there is no obvious change to the market supply in the immediate...
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