Econ 103 Lab 10. Topic 7. - Producer theory. - Brief review then group work on assigned. - iclicker questions in the last mins.

Transcription

1 Econ 103 Lab 10 Topic 7. - Producer theory. - Brief review then group work on assigned - iclicker questions in the last mins. 1

2 Cost curves Make sure you understand the u-shaped cost curves illustrated below. 2

3 Optimal choice of q Given any price P, comp. firm. chooses optimal production level where MB = MC. MB = price, which we now call marginal revenue (MR). P MR = MB = P q* 3

4 Optimal choice of q q* maximizes profit (Π) AND producer surplus (PS). P MR = MB = P q* 4

5 Optimal choice of q Π = Total Revenue (TR) Total Costs (TC) = (P q) + (ATC q) = (P ATC) q P MR = MB = P ATC(q*) q* 5

6 Optimal choice of q Note that Π > 0 (economic profits) if P > ATC. P MR = MB = P ATC(q*) q* 6

7 Optimal choice of q PS = Amount producer was paid, minus the minimum amount the producer needed to be paid. P MR = MB = P ATC(q*) q* 7

8 Optimal choice of q PS = Total Revenue (TR) Variable Costs (VC) = (P q) + (AVC q) = (P AVTC) q P MR = MB = P ATC(q*) AVC(q*) q* 8

9 Optimal choice of q Note that PS > 0 if P > AVC. P MR = MB = P ATC(q*) AVC(q*) q* 9

10 Optimal choice of q Note that the difference between PS & Π = FC. P MR = MB = P ATC(q*) AVC(q*) q* 10

11 Optimal choice of q In the short run (SR), firm will only operate if P > AVC MIN, since this means PS > 0 (even if Π < 0). P AVC MIN 11

12 Optimal choice of q We call P = AVC MIN the firm s shut-down price. P AVC MIN 12

13 Optimal choice of q In the long run (LR), firm will only operate if P > ATC ATC. P ATC MIN 13

14 Optimal choice of q We call P = ATC MIN the firm s break-even price. P ATC MIN 14

15 Most of the equilibria we looked at in Topic 3 were (implicitly) short-run equilibria. - We just didn t understand production enough to know this, at the time. Three conditions for a short run equilibrium: 1. Each firm is maximizing Π. - Means MR (P) = MC for each firm in the industry. 2. P is such that Q S = Q D at the market level. 3. P > AVC MIN. SR v LR equilibrium 15

16 SR v LR equilibrium The difference between the SR and the LR is that the capital stock is fixed in the SR, but not the LR. - Means the number of firms in any industry is fixed in the SR, but not the LR. If in the LR, firms move into an industry, we call that entry. - Entry occurs in an industry if Π > 0 in that industry. If in the LR, firms move out of an industry, we call that exit. - Entry occurs in an industry if Π < 0 in that industry. Entry and exit shift the industry supply curve, and thus change P. - Entry means more firms in an industry an increase in S which causes P to decrease. - Exit means fewer firms in the industry an decrease in S which causes P to increase. Entry and exit ensure that Π = 0 in any long-run competitive equilibrium. 16

17 SR v LR equilibrium Three conditions for a long run equilibrium: 1. Each firm is maximizing Π. - Means MR (P) = MC for each firm in the industry. 2. P is such that Q S = Q D at the market level. 3. P = ATC MIN. - Means Π = 0 in the LR. 17

18 iclickers 1. You have 15 seconds. Are you here in lab today? a) Yes. b) No. c) Don t know. d) All of the above. 18

19 Group work Work in your groups on the assigned questions. Time permitting, we will reconvene for iclicker questions in the last few minutes of lab. Insufficient time to go through all answers in lab this week. Answers will be posted at the end of the week. Ask TAs questions during your group-work. 19

20 iclickers 2. You have 45 seconds. Given the initial long run equilibrium E 1, how many firms were operating in this industry? a) 10. b) 20. c) 30. d)

21 iclickers 3. You have 45 seconds. Following the decrease in demand, how much will each firm produce in the short run? a) 0 b) 40. c) 60. d)

22 iclickers 4. You have 45 seconds. What are each firm s profits in the short run, following the decrease in demand? a) Each firm is losing $1620. b) Each firm is losing $900. c) Each firm is making $600. d) Each firm is losing $

23 iclickers 5. You have 45 seconds. In the new long run equilibrium (following the exit that will result from the losses, given Q3), how many firms will remain in this industry? a) 6. b) 7. c) 8. d) 9. 23

24 iclickers 5. You have 90 seconds. Feel free to discuss this question will your group members or those around you during the polling period. What do fixed costs equal, for firms in this industry? a) $1620. b) $600. c) $900. d) There is insufficient information to determine fixed costs. 24