Chapter 8 I-Micro. Supply in a Competitive Market
Define economic rent
returns to specialized inputs above what firms paid for them.
firms should remain open and operating at a loss in the short run as long as
revenue can cover variable costs, even if net profit is negative.
The analysis so far describes the case in which long-run average cost is constant, no matter the amount of total production. What does this imply and what is it called
Implies a horizontal long-run supply curve Called a constant-cost industry
Describe a graph that shows Profit Maximization for a Perfectly Competitive Firm and where does in occur
d= MR and its a horizontal perfectly elastic line. MC starts low and increases in Price as Quantity increases. the spot were MC and MR cross is profit maximization Occurs Where MR = P = MC
Marginal revenue is _______ to price under perfect competition.
equal
When should a firm shut down in the short run
if TR<VC or Price< AVC (at profit maximizing (or minimizing quantity)
When should a firm continue operating in the short run
if TR> or equal to VC or Price> or equal to AVC (at profit maximizing (or minimizing quantity)
Firms will operate without ____________, but they will shut down if they are not making any
making a profit producer surplus.
Describe the number of firms types of products sold barriers to entry in Monopolistic competition
number of firms: Many types of products sold: Differentiated barriers to entry in Perfect competition: None
A Firm's Short-Run Supply Curve in a Perfectly Competitive Market Individual firms will choose to produce where __________=________; the short-run supply curve is equal to the short-run marginal cost curve.
price=MC
What three major primary characteristics broadly define market structure.
Number of firms Differentiation of Products Barriers to Entry
List one caveat about A Firm's Short-Run Supply Curve in a Perfectly Competitive Market why does this occur
Only the portion of the short-run marginal cost curve above the average variable cost (AVC) curve will be on the firm's supply curve The firm won't produce (or will shutdown) if P < AVC.
Producer surplus is closely related to profit, but they are not the same thing give the equation for it and profit
PS==TR-VC Profit = TR-VC-FC = PS-FC
Cardboard boxes are produced in a perfectly competitive market. Each identical firm has a short-run total cost curve of TC= 6Q^3-36Q^2+60Q+50 where quantity is measured in thousands of boxes per week. The marginal cost of production is given by 18Q^2-72Q+60 Calculate the price below which a firm in the market will not produce any output (the shut-down price).
(work on phone date March 27 if confused) 1. Find VC and AVC set AVC=MC solve for Q, Q=3 Plug Q into MC to get price, P=6 the firm should stop production and shutdown when the market price falls below $6
List three ways the long run differers from the short run
1. In the short run, some costs are fixed; in the long run, there are not everything can be adjusted 2. In the long run, firms can enter and exit freely in response to market conditions. 3. The short-run supply curve is the portion of the short-run MC curve above the short-run aVC curve. In the long run, firms will not stay in business unless all costs can be covered by revenue, therefore The long-run supply curve is the portion of the MC curve above the long-run ATC curve.
Assume that consumers view hair cuts as undifferentiated among producers, and that there are hundreds of barbers in a given market. The current market equilibrium price for a haircut is $15. Bob's Barbershop has a daily, short-run total cost given by TC= .5Q^2 MC=Q 1. How many haircuts should Bob prepare each day if his goal is to maximize profits? 2. How much will he earn in profit each day?
1. Profits are maximized @ P=MC so P=15=Mc so Bob should give 15 Haircuts 2. Profit= rev-cost Profit = (P*Q)- cost plug in numbers Profit= (15*15) - (.5(15^2))= 112.5
Assume that the industry for pickles is perfectly competitive. There are 150 producers. 100 of the firms are "high-cost," with short-run supply curves Qhc = 4P, while the others are "low-cost," with short-run supply curves Qlc = 6P. Quantities are measured in jars and prices in dollars. 1. Derive the short-run industry supply curve for tortillas. 2. Assume the market demand curve for tortillas is given by Qd = 6,000 - 300P. Find the market equilibrium price and quantity. 3. At this price, how many pickles are produced by the individual high- and low-cost firm, respectively? 4. Determine total producer surplus at the equilibrium.
1. Qs= Qhc+ Qlc= (# of firms x Qhc)+(# of firms x Qlc) = 100*4p + 50*6p= 700p 2. Market equilibirum occurs when Qs=Qd ->700p=6,000-30p solve for P, p=6 Plug 6 into either Qs or Qd to get equilibirum, = 4,200 jars 3. Plug P=6 into each type of producer's supply curve, Qhc=4p=24 jars Qlc= 6p=36 jars 4. Draw a supply and demand graph and plug in quantity and price and find PS (bottom triangle) PS= (1/2)*4200*6= 12,600
Cardboard boxes are produced in a perfectly competitive market. Each identical firm has a short-run total cost curve of TC=3Q^3-18Q^2+30Q+50 where quantity is measured in thousands of boxes per week. The marginal cost of production is given by MC= 9Q^2-36Q+30 Calculate the price below which a firm in the market will not produce any output (the shut-down price) in short run.
1. Shutdown if P<AVC so find AVC to find AVC divide VC by Q AVC= (3Q^3-18Q^2+30Q)/Q) = 3Q^2-18Q+30 in perf com P=AVC so set MC=AVC 9Q^2-36Q+30= 3Q^2-18Q+30, solve for Q, Qmin AVC=3 Plug 3 into AVC to find price price =3(3)^2-18(3)+30= 3 The firm should shutdown when market price falls below 3
Assume that consumers view tax preparation services as undifferentiated among producers, and that there are hundreds of companies offering tax preparation in a given market. The current market equilibrium price is $120. Joe Audit's Tax Service has a daily, short-run total cost given by TC= 100+4Q^2 with marginal cost MC=8Q 1. How many tax returns should Joe prepare each day if his goal is to maximize profits? 2. How much will he earn in profit each day?
1. we want P=MC so MC=120 Plug in MC and solve for Q 120=8Q, Q=15 so 2. Profit (pie) = (120*15)-(100+4(15^2))= 800
More efficient firms earn _______, or returns to specialized inputs above what firms paid for them.
Economic Rent
Perfect competition is assumed to be the most "_____" market structure from a welfare perspective. ; firms are _________
Efficient Price Takers
Adjustments Between Long-Run Equilibria Describe the process of adjustment to a new market equilibrium in response to the following: An increase in demand
Existing firms enjoy positive economic profits in the short run because P > LRATC. New firms eventually enter the market, supply shifts out, and price falls to minimum long-run average total cost.
Define Profit Maximization.
Given a price and cost structure, firms choose a quantity of output that maximizes profits (or minimizes losses).
A Firm's Short-Run Supply Curve in a Perfectly Competitive Market Market supply is the __________ _____ of all individual firms' supply curves.
Horizontal Sum
Define Barriers to Entry
If new firms can enter the market easily, the market is more competitive.
Give the equation for MC
MC= (change in total cost) /(by change in quantity)
What is the equation for MR
MR= (change in Total Revenue) /(by change in quantity)
What is the equation for MRpc
MRpc= (change in Total Revenue) /(by change in quantity) = (Change in price) * Change in quantity)/Change in quantity)=Price
Under what type of market is Consumer Surplus Maximized and firms produce at the lowest possible cost
Perfect Competition
List 4 different types of markets from most competitive to least
Perfect Competition, Monopolistic Competition, Oligopoly, Monoply
The demand curve facing a firm in a perfectly competitive market is ___________ at the market equilibrium price.
Perfectly Elastic (horizontal
if the firm continues operating, the equation is
Profit Operating = TR-TC =TR- (FC+VC)
What happens if MC < P ?
Profit could be increased by producing additional units.
what happens if MC > P ?
Profit could be increased by reducing production. Currently additional units will cost you more to produce than you are selling them for
Give the equation for profit shut down
Profit shutdown= TR-TC =TR- (FC+VC) =0 -(FC+0)= -FC
Give the equations for Profit (Pie symbol)
Profit= TR-TC Profit= (PxQ)- (ATC*Q) Profit = (P-ATC) * Q
Adjustments Between Long-Run Equilibria Describe the process of adjustment to a new market equilibrium in response to the following: An increase in production costs:
Some firms will experience negative economic profits in the short run. Eventually these firms will exit the industry and supply will shift inward, driving up the market price until it is equal to long-run average total cost.
TF: Below average variable cost (AVC), the firm will shut down (supply is zero). Above average variable cost, the marginal cost (MC) curve is the short-run supply curve.
T
Describe Increasing-cost industries
characterized by long-run average costs that increase with industry output. Possibly due to competition over a scarce input (e.g., oil production) Results in an upward-sloped long-run supply curve
Describe Decreasing-cost industries
characterized by long-run average costs that fall with industry output. Results in a downward-sloped long-run supply curve
In the long run, there is no potential for _________ in a perfectly competitive industry. Assumes producers have _______ cost curves. However, some firms may be more efficient than others.
economic profit identical
Describe the number of firms types of products sold barriers to entry in an Oligopoly
number of firms: Few types of products sold: Identical or Differentiated barriers to entry in Perfect competition: some
Describe the number of firms types of products sold barriers to entry in Perfect competition
number of firms: Many types of products sold: Identical barriers to entry in Perfect competition: None
Describe the number of firms types of products sold barriers to entry in a monopoly
number of firms: One types of products sold: Unique barriers to entry in Perfect competition: Many
If there are positive economic "______," new firms will enter. When firms enter a market, the supply curve shifts _______. Opposite of entry, exit causes the industry supply curve to shift ______. (Firms will exit (and market price will rise) until ______ equals minimum of the long-run average total cost curve.)
profits outward inward market price
Define Market Structure
refers to the competitive environment in which firms operate;
In a perfectly competitive market consisting of firms with different long-run average cost curves: The long-run market price equals _______________________________ The highest-cost firm makes ______________________
the minimum ATC of the highest-cost firm in the industry. zero profit and zero producer surplus.
Define Number of firms
the more companies in a given market, the more competitive it is.
Where do u want ATC curve to be on a graph?
the point below Price anything above will result in negative profits
Sometimes the expansion of output by all firms occurs at minimum possible average total costs. When does this happen
when output expansion or contraction by the whole industry does not lead to a rise in factor prices. If new firms can have access to the same technology and can buy factors of production at the same price, their costs per unit will be same as those of existing firms. When this happens the industry is said to be a constant cost industry. In this industry the LR supply curve is a horizontal straight line The long-run zero-profit equilibrium of such an industry is re-established only when price returns to its original level.
Define Differentiation of Products
when products from different companies are more difficult to distinguish from one another, a market is more competitive.
When is profit maximized in a perfectly competitive market? Whats the equation?
when the marginal cost of production is equal to the market price P = MC = MR
Under perfect competition to maximize profit a firm will
will produce until the marginal cost of producing one more unit of output is equal to the marginal revenue (in this case, price) Price= MC
