ASSIGNMENT: Complete the table below for the general case of an Increase in the four categories and do it again for the case of a Decrease in the four categories. Draw a graph for the representative firm in a perfectly competitive market and to the right of that graph draw the corresponding market graph. Identify the starting conditions: Market Price and Market Demand, Firms quantity supplied. Draw the graph assuming normal economic profits.

BACKGROUND: There are thousands of different CHANGES — taxes and regulations and situations (e.g. bad luck) that impact Producer Choice. It would be IMPOSSIBLE to memorize a perfectly competitive diagram for EACH change to understand the short-run and long run impact of that change on Price and Quantity. Thankfully, you do not have to memorize each idiosyncratic “Change.” Each “Change,” no matter how complex or graphically described, boils down to impacting Variable Costs, Fixed Costs, Sunk Costs, or Market Demand. Memorize how an increase or decrease in these four categories influences the Producer’s short-run decisions and long-run decisions.

When you complete the table below you will be able to follow these there steps to provide a reasoned, graphical response to ANY “Change” impacting a producer’s choice.

STEP 1. What is the “Change” in your story? If there is more than one change then, do the analysis for each change sequentially.

STEP 2. Determine if the “Change” impacts Variable Costs, Fixed Costs, Sunk Costs, or Market Demand. You will have to argue why you think the “Change” impacts the category you selected – but you MUST make the “Change” fit into one of these four categories.

STEP 3. Use the Table Below to see how firms react to a change in each of the four categories.