QuesEon and answer sessions next week in Blegen 10

Transcription

1 Announcements Work on Consumer theory and Supply worksheet. Midterm is coming up (Nov, -pm) Can start looking at pracece midterms (posted with solueon guides at week on Moodle) Sign up for makeup midterm by Nov th, pm. (follow instruceons on Moodle makeup reuest form) QuesEon and answer sessions next week in Blegen Wed Nov, -:pm, Anderson Wed Nov, :-pm, Blegen Thurs Nov, :-pm, Anderson

2 Order of business Theory of the firm Short-run Supply of a Firm Long run supply of firm Long run supply of compeeeve industry Short run supply of compeeeve industry

3 Supply of a Competitive Firm A compeeeve firm takes P (price) as given. Supply of S? (Back in our old Econland framework) Easy. P> then Q = P< then Q = Supply of S? Harder to figure out Suppose P =. What do we do to see how much S produces? Start by making a table Profit = Revenues minus Total Cost Pick Q to maximize profit

4 When price= Q Revenue= P Q Total Cost Profit maximizing uanety = Profit= Revenue-TC (Marginal Cost) - MR (Marginal Revenue) Shortcut to figuring this out (so don t need to make a table) Look at Marginal Revenue (change in revenue from producing one more. For compeeeve firm, MR=P. Compare with Marginal Cost ()

5 So the uanety at which =MR is opemal! The uanety at which =MR is the profit maximizing uanety. Why? What is the intuieon? What if: >MR? <MR?

6 If MR> produce more to raise profit If MR< produce less If MR=? Just right. Rule for profit maximizing output for a compeeeve firm: If they produce, set Q where Marginal Revenue = Marginal Cost But check whether worth being open at all. When doing this we make a disenceon between short run and long run.

7 In the short run: Fixed cost can t be avoided have to pay the rent. (For S, FC = ) However, S can avoid hiring labor, and also avoid buying materials When S picks output, forget (in short run) about the rent, since that can t be avoided in the short run. Produce as long as P AVC (When price is higher than average variable cost, what does that mean intuievely?) In the long run: Can exit the industry (not renew lease), so fixed cost can be avoided Produce as long as P (Since fixed cost can be avoided, we now compare with average TOTAL cost instead of just average VARIABLE cost)

8 Short-Run Supply of Competitive Firm Supply curve- give me a price, I ll give you a uanety supplied For the firm, we want to have a price and see how many units this firm will supply A firm will supply what maximizes their profits at the given price Rule: Find uanety such that P = Check that P AVC at that uanety and produce there. Otherwise: Shut down.

9 Short Run Supply Curve FC = (rent) To figure out the supply curve: AVC What happens when P =? P = at Q = (Remember that for a compeeeve firm, P=MR, so here, MR=P=) AVC = at Q =, so P > AVC Profit = R TC = P Q FC VC = - - = - Wait, what?! NegaEve profit? Would they want to produce in the short run with negaeve profit?

10 FC = (rent) AVC What happens at P=.?

11 FC = (rent) AVC So punng the two together, we get our short run supply curve (in green/glowing yellow)

12 Long Run Supply of Firm In long-run, there are no fixed costs, just variable costs (now, even rent is a variable cost since firms can decide to renew or not renew a lease) Note that there is only now (=AVC), all the costs a firm faces in the long run are variable costs. Supply is uanety where P>, otherwise shutdown and produce.

13 Long run cost

14 Long Run Supply of Industry With Free Entry Suppose: Same Technology is available for all No barriers to entry Input prices to industry do not go up as the industry expands Then in long-run euilibrium: Price euals P* = Min Each firm produces uanety * where is minimized Number of firms N* is Demand at P* divided by *. In the long run euilibrium, compeeeve firms make zero economic profit

15 Variable P LR Q LR LR N LR DefiniKon long-run price long-run uankty output per firm number of firms S Cost Structure AVC. P LR =min = Industry Demand D Q Reasoning? If price is higher than min, what happens? If price if lower than min, what happens? (Hint: look at the profit of a firm)

16 S Cost Structure AVC Industry Demand D Q. P LR =min =. LR =*= Small denotes a single firm s produceon, big Q is uanety of the industry How did we find *?

17 S Cost Structure AVC Industry Demand D Q. P LR =min =. LR =*=. Q LR = First, what must the price of the good be in the long run? Then, what uanety does that correspond to on the industry demand curve?

18 S Cost Structure AVC Industry Demand D Q. P LR =min =. LR =*=. Q LR =. N LR = If there total uanety, Q=, and each firm produces.

19 LR Industry Supply S Cost Structure AVC Demand D D D P LR Q LR LR N LR Industry Demand & Long Run Supply D D S LR D

20 LR Industry Supply Demand D D D P LR Q LR LR N LR With different demand curves, we see that it does not affect how much each individual firm will produce. They will sell produce. What does change is the number of firms. Because P= min in the long run euilibrium (remember, if P > min, then that means firms are making profits and more firms will enter, driving the price down. Eventually we hit P=min.) First Welfare Theorem at work here In long-run compeeeve euilibrium, Q LR is produced in the minimum cost way (efficient produceon)

21 Short Run Industry Supply Short Run Number of firms is fixed. Suppose we start in long-run euilibrium where demand is D (so N = ) What is Short-Run Supply Curve?

22 Cost Structure Price Firm SR supply. Industry SR supply (N=)

23 Cost Structure Suppose we are at D to start with D D D Price Firm SR supply Industry SR supply (N=) *=..*= *= *= How do we find short run industry supply curve? Do we have all the informaeon we need? How much do each firm produce at each price? How many firms are there?

24 For reference in the next two slides, some points on For midterm (and pracece problem), we will either give a table like this or you find this informaeon on the graph.

25 S SR S LR D D D Suppose start at D in long-run e. Suppose we shiu to D. In short run: P firm profit = [P ] =[.]* =

26 S SR S LR D D D In the LR, firms enter the market since an individual firm is making profits. As more firms enter, the amount of profit an individual firm makes falls unel it hits. This is when P=. We are now at a long run euilibrium of and Q=. (Where LR Supply intersects D)

27 S SR S LR D D D Suppose start at D in long-run e. Suppose we shiu to D. In short run: P firm profit = [P ] =[.]*. = -.

28 S SR S LR D D D In the LR, firms exit since an individual firm is losing money. As more firms exit, the amount of profit an individual firm makes goes up unel it hits. This is when P=. We are now at a long run euilibrium of and Q=. (Where LR Supply intersects D)