1 Perfect competition with real firms

Transcription

1 Page 1 1 Perfect competition with real firms Topic 3 Topic 4 Topic 5 Isolate entry/exit Isolate quantity Combine entry/exit & quantity How Fix size of a firm, Fix which firms are in the market, Firms decide both whether to enter only decision is whether to enter only decision is how much to prod. and how much to produce Individual Entry break-even price uantity MC Entry AC firm (economic cost) uantity MC Re-interpret unit supply from Sessions 1 & 2 as entry 40 MCi Supplyi AC u MC AC i u Aggregate Supply goes up via Supply goes up via expansion Supply goes up via entry supply entry of new firms of output by firms in market and expansion of firms in market $ MC supply 40 MC Supply P (100MW) This picture always holds $ Consumer surplus MC Supply P 35 Producer surplus MV Demand 50

2 Page Applications of Perfect Competition 1. Market dynamics. 2. Simulation results. 3. Bagels and Cranberries ( Growth and Profitability ). 4 Long-run dynamics $ 50 S long P 2 P D D 1

3 Page 3 5 Firms short-run responses to price changes $ 50 S long 40 P D 1 6 Short-run vs. long-run price adjustment $ 50 S short S long D D 1

4 Page 4 7 Bottom line Whatever the source of adjustment delays and costs: Adjustment delays and costs imply that supply adjusts less in the short run than in the long run hence, prices are more volatile in the short run than in the long run. 8 Interpreted as delays for entry $ S short 50 S long D D 1

5 Page 5 9 Price and capacity dynamics in a competitive industry (Courtesy of David Besanko.) 10 Bulk shipping Bulk shipping: vessels designed to carry a homogeneous unpacked dry or liquid cargo, for individual shippers on non-scheduled routes. Common cargo: iron ore, grain, coal, bauxite, phosphates, steel, cement, sugar, wood chips. Taxis, not buses. (Entire cargo belongs to one shipper.) 72% of world seaborn trade (by weight). (Data is thanks to Myrto Kaloupsidi.)

6 Page 6 11 Market structure 12 Shipping prices

7 Page 7 13 Demand volatility Maarket is characterized by demand volatility due to changing export patterns, macroeconomic cycles. 14 Elasticity 1. Transportation costs are a small portion of total cost for most goods (e.g. for gasoline $0.07 per gallon). 2. Few short-run substitutes. 3. Disruptions are costly: Just-in-time inventory models Continuous-flow refining So what?

8 Page 8 15 Demand volatility Demand: inelastic and volatile + Supply: inelastic Volatile prices Applications of Perfect Competition Market dynamics. Simulation results. 3. Bagels and Cranberries ( Growth and Profitability ).

9 Page Applications of Perfect Competition Market dynamics. Simulation results. Bagels and Cranberries ( Growth and Profitability ) Applications of Perfect Competition Market dynamics. Simulation results. 3. Bagels and Cranberries ( Growth and Profitability ).

10 Page This week (Wed) Session 7: Elasticity of demand Prep Guide 8. FPM Ch. 8. A demand estimation exercise to hand in. (Fri) Session 8: Pricing with Market Power Prep Guide 7. FPM Ch. 7. Reminder: Next week you have optional review and quiz. Monday Tuesday Wednesday Thursday Friday Session 9 Review uiz Session 10 uiz covers only up through Session 8.

11 One way to approach your task in rounds 1 and 2: 1. Predict a market price P. 2. Decide how much to produce at this price: s i (P). 3. Back out inputs needed to produce this amount Total cost: c() Supply curve? Cost curve? Derive from cost curve. Derive from production function Individual firm: Marginal cost / Supply: Production function: f (L, M) = L 1/3 M 1/3 Derive cost curve: c() = 2 3/2 Marginal cost: mc() = 3 1/2 90 mc(), s i (P) Inverse is supply curve: s i (P) = P 2 /

12 Higher level question how to predict P? Forecasts Individual supply Market price Aggregate supply Equilibrium: s(p) = d(p). Equilibrium: Total supply: 39 s i (P) s(p) = 39 9 P2 90 Supply / Demand / Equilibrium: Equil. solves: s(p) = d(p) P = Back to you: You choose: i = s i (P ) i = 83.5 s(p) Back out inputs: from f L = M = d(p)

13 Following the shift in demand Short-run problem (Round 3): Machines are fixed at their round-2 level. Long-run problem (Rounds 4, 5): Both inputs are adjustable. Long-run adjustment: New demand: d new (P) = P Equilibrium: s(p) = d new (P) P new = Back to you: You choose: i = s i (P new ) i = 54 Back out inputs: from f L 4 = M 4 = New Long-run Equilibrium: d(p) New long-run equilibrium s(p) d new (P)

14 Short-run production (round 3): Total cost: Stuck with: M curr = ĉ() c() Short-run prod. function = L 1/3 M 1/3 curr }{{} invert 5000 Labor requirements: L = 3 M curr Short-run costs (round 3): ( =short-runvalues) Marginal cost / Supply: Total cost: ĉ() = M curr + 3 M curr short-run fixed cost Marginal cost: mc() = 3 M curr 2 (Invert P = MC) short-run variable cost 90 mc s (), ŝ i (P) mc(), s i (P) Supply: ŝ i () = Mcurr 3 P

15 Short-run equilibrium (round 3): Total supply: ŝ(p) = 39 ŝ i (P) Equilibrium: ŝ(p) = d new (P) P = Back to you: You choose: i = ŝ i ( P) i = Short-run equilibrium: ŝ(p) Short-run equilibrium Back out inputs: from f L 3 = 1715 d(p) d new (P) Short-run and Long-run Equilibria: 90 ŝ(p) s(p) d(p) d new (P)

16 Short-run and Long-run Equilibria: Short-run and Long-run Equilibria: 90 ŝ(p) Round P i L i M i 1, , s(p) d(p) d new (P) What Actually Happened: What Actually Happened: 90 ŝ(p) Round P i R2 R1 R3 R4 R5 d(p) s(p) d new (P)