LC8: LearningCurve: Ch. 8: Supply in a Competitive Market
* The graph below shows the supply curves for four firms in a perfectly competitive industry, as well as the industry supply curve. From this graph, we know that: [see graph] - the four firms have identical marginal cost functions. - at a price below P2 but above P1 only firm A will supply output. - at a price of P3, only firm D will supply output. - Sindustry is the horizontal sum of all four firms individual supply curves.
- Sindustry is the horizontal sum of all four firms individual supply curves. > In perfectly competitive markets, the industry supply curve is calculated by the horizontal sum of all the firms' individual supply curves.
Lee has just started a lobster farm in a perfectly competitive market; it costs him $12 per pound to produce medium-sized lobsters. He knows that the farms nearby can produce lobsters at lower costs, $9 to $10 per pound. The market price for lobster in his area is $11 per pound. How much should Lee sell his lobster for assuming he already produced them? 11 9 10 12
11 > Lee should sell at the market price, since he can sell all his lobsters at this price, but if he charges a higher price, he will not be able to sell any lobsters. Sell up to market price!
*** Kermit's Frog Food produces algae and houseflies. The firm is one of 200 identical firms in a perfectly competitive industry. The firm's supply curve is Qs = 0.2P, where Q is the quantity supplied in tons per month and P is the price in dollars per ton. Market demand is Qd = 2,000 − 10P. At the market equilibrium, total market producer surplus will be $_________.
32000.00 Note that you are given Qs of FIRM, QD of MARKET, and # of fims/PC market - NEED to get Qs of MARKET --> 0.2P*200 firms = 40P = Qs - set Qs Mark = Qd Mark 40P = 2000 - 10P 50P = 2000 *P = $40* Plug P = $40 in Qs FIRM --> Qs($40) = 0.2 (40) = 8 PS -- area under market price and above supply curve PS = 0.5 * 40 * 8 = 160 160 x 200 firms = 32,000 (TOTAL MARKET PRODUCER SURPLUS) NOTE: you were GIVEN QS FIRM!!!!! NEED TO CONVERT QS MARKET, Find Pe (QD = QS), Find Qe; PS firm = 0.5 * 40 * 8 = 160 160 x 200 firms to get TOTAL MARKET PS
** literally write down the given info** A firm operating in a perfectly competitive industry has a short-run marginal cost curve given by MC = 9 + 0.01Qs. The market price in the industry is P = 8, while the firm's minimum average variable cost is AVCmin = 9. Identify the firm's producer surplus. 0 100 50 200
NOT 100 Given P < AVCmin, the firm is unable to recover variable cost. Hence, the firm will shut down in the short run. 0 >> The price is below AVCmin. It is in the firm's best interests to shut down.
**Which of these are correct due to the relationship between marginal cost and a firm's short-run supply curve? - Anything that changes marginal cost will have no effect on the supply curve. - Only changes in input prices that affect marginal cost will affect the supply curve. - Anything that changes marginal cost will cause movement along the supply curve. - Anything that changes marginal cost will shift the supply curve.
NOT Anything that changes marginal cost will have no effect on the supply curve. > Firms in perfect competition choose to produce at the quantity where P = MC. Anything that changes marginal cost will shift the supply curve. >> In perfect competition, a firm's short-run supply curve is the portion of the marginal cost curve that is above average variable cost. What happens to one curve will happen to the other.
Which of the following is NOT a characteristic of a monopolistically competitive market? - Each firm's output is similar, but not identical, to the output of every other firm. - Many firms supply the output. - Each firm's output is identical to the output of every other firm. - There are no barriers to entry.
NOT Each firm's output is similar, but not identical, to the output of every other firm. > This is a characteristic of monopolistically competitive markets. Each firm's output is identical to the output of every other firm. >> [this is NOT a characteristic of monop comp] Monopolistic competition has many firms, differentiated products being sold, and no barriers to entry.
** Which of the following statements is true for a firm in a perfectly competitive market? - If the market price is above the minimum of average variable cost but below the minimum of average total cost, we know producer surplus is negative. - If producer surplus is positive, we know the firm is earning a positive economic profit. - If operating implies a firm's producer surplus is negative, the firm is better off shutting down in the short run. - Producer surplus is zero when the market price is equal to the minimum of average total cost.
NOT If the market price is above the minimum of average variable cost but below the minimum of average total cost, we know producer surplus is negative. > Producer surplus does not consider fixed costs. NOT Producer surplus is zero when the market price is equal to the minimum of average total cost. > Producer surplus does not consider fixed costs. If operating implies a firm's producer surplus is negative, the firm is better off shutting down in the short run. >> If a firm in a perfectly competitive market continues to produce with a negative producer surplus, it will always lose money
*** PAY ATTENTION -- The industry demand curve is given by QD = 3,000 - 25P. The industry supply curve is given by QS = 100P - 95. If the industry is perfectly competitive, identify the equation of the inverse demand curve for an individual firm operating in the industry.
NOT P = 120 - 0.04QD > This is the inverse demand curve for the industry. P = 24.76 >> Setting the industry demand equal to industry supply, 3,000 - 25P = 100P - 95, and solving for P gets 3,095/125 = 24.76. Remember: INV DEM CURVE FOR AN INDIV FIRM IN PC INDUSTRY IS A HORIZONTAL LINE WITH NO SLOPE AT MARKET EQUILIBRIUM PRICE
[Review] Which of the following does NOT occur in a perfectly competitive market? - Total surplus is maximized. - Consumer surplus is reduced to increase producer surplus - Input costs are minimized. - Producers sell at their marginal cost.
NOT Producers sell at their marginal cost. > Since producers in perfect competition cannot change price, they must sell at the quantity where marginal cost equals price. KEY WORD IN Q --> "NOT" NOT Total surplus is maximized. > In perfect competition, combined producer and consumer surplus is at its largest. Consumer surplus is reduced to increase producer surplus >> Firms in monopolies are able to do this because of the influence they have over price; since firms in perfect competition have no power over price, this does not happen in perfectly competitive markets.
*************complete whiff -- need to REVIEW ************************** HOW DO YOU SOLVE FOR Q (Q^2 + Q + #) A firm operating in a perfectly competitive industry has a marginal cost curve given by MC = 0.003QS2 - 1.2QS + 40, where QS is the quantity of output the individual firm brings to the market. The firm's average variable cost minimum is AVCmin = 10. The market price for the industry is P = 11. Identify the firm's profit-maximizing output level. QS = 374.16. The firm should shut down in the short run. QS = 25.84374.16. QS = 26.79.
NOT The firm should shut down in the short run. --> As P > AVCmin, the firm does better by operating in the short run. To identify the firm's profit-maximizing output level, set P = 11 = MC = 0.003QS^2 - 1.2QS + 40 and solve for QS. NOT QS = 25.84374.16. --> This is one choice for QS that solves the equation 0.003QS^2 - 1.2QS + 29 = 0. This is not the value that corresponds to profit maximization. NOT QS = 26.79. --> You have set MC = AVCmin; this is not where profit maximization happens. QS = 374.16. >>> Set P = MC leads to 0.003QS2 - 1.2QS + 40 = 11, or 0.003QS2 - 1.2QS + 29 = 0. Solving for QS yields 374.16.
***There are 200 firms operating in a certain perfectly competitive market in the short run. Each firm's marginal cost curve is given by MC = 0.045QS^2 - 6QS + 200. Each firm's average variable cost minimum is AVCmin = 50. Identify the total industry supply of output if the current short-run market price is 75. Total industry supply is 0 units. All firms should shut down in the short run. Total industry supply is 5,168 units. Total industry supply is 107 units. Total industry supply is 21,498 units.
NOT Total industry supply is 107 units. > This is about what each firm is producing; we want the industry supply. Total industry supply is 21,498 units. >> Set MC = 75. Find the optimal quantity of 107.49 and multiply it by the number of firms (200): 107.49(200) = 21,498.
** The producer surplus for an industry is the: - entire industries' surplus from producing units at a lower cost than the market price. - average producer surplus across all firms in the industry. - lowest individual producer surplus in the industry. - highest individual producer surplus in the industry.
NOT highest individual producer surplus in the industry. > Consider how industry supply differs from individual supply. NOT average producer surplus across all firms in the industry. > An industry's producer surplus is the area between price and the industry supply curve. NOT lowest individual producer surplus in the industry. entire industries' surplus from producing units at a lower cost than the market price. >> Producer surplus can be calculated as the area between price and marginal cost. Since industry marginal cost is the horizontal sum of individual marginal costs, producer surplus for an industry is the sum of each producer surplus in that industry.
**The supply curve of a firm in a perfectly competitive market: - does not exist. - is the portion of its marginal cost curve that is at or above ATC plus the vertical axis (quantity supplied equals zero) below minimum ATC. - is the marginal cost curve. - is the portion of its marginal cost curve that is at or above AVC.
NOT is the portion of its marginal cost curve that is at or above ATC plus the vertical axis (quantity supplied equals zero) below minimum ATC. > The firm does better by operating than shutting down even for some output levels in which P < ATC. is the portion of its marginal cost curve that is at or above AVC. >> Firms will only operate in the short run when the market price is above its average variable cost curve AVC.
** When the market price is less than the marginal cost, the perfectly competitive firm should not make any extra unit because: - its total revenue is greater than its total cost. - its total cost is greater than its total revenue. - its revenue would rise faster than its costs. - its costs would rise faster than its revenue.
NOT its total cost is greater than its total revenue. > Unless the firm has already overproduced, total cost is less than total revenue. its costs would rise faster than its revenue. >> Since price is equal to marginal revenue in perfect competition, you know that costs are rising faster than revenue, which means that increased production will result in lower profit.
* [did a lot of practice problems like this] Kermit has hired an economist to help with his decision making. After applying statistical data, the economist reports that the firm's total cost curve is TC = 6Q^3 − 36Q^2 + 90Q + 5,000; MC = 18Q2 − 72Q + 90. What quantity of output (Q) will minimize average variable cost? At that level of output, calculate AVC. Q = 4.5, AVC = $49.50 Q = 9, AVC = $252 Q = 1.5, AVC = $49.50 Q = 3, AVC = $36
Q = 3, AVC = $36 (see work in your notepad) 1. AVC = VC/Q. Setting this equal to marginal cost will find the quantity that minimuzies AVC: 6Q^2 − 36Q + 90 = 18Q^2 − 72Q + 90. Solve to get Q = 3. 2. Plugging Q into the AVC equation yields AVC = $36.
A firm operating in a perfectly competitive industry has a marginal cost curve given by MC = 1 + 0.09QS, where QS is the quantity of output the individual firm brings to the market. The firm's average variable cost minimum is AVCmin = 1. The market price for the industry is P = 10. Identify the firm's profit-maximizing QS = 0. QS = 100. We cannot say how the firm should produce in the short run without more information. The firm should shut down in the short run.
QS = 100. > Solving for QS gets 9/0.09 = 100. ALWAYS NOTE FOR P.C. --> P = MR = MC
* Which of these operate-or-shut-down decisions in the short run is WRONG for firms in perfect competition? Operate if TR < TC. Shut down if TR < VC. Operate if P ≥ AVC. Shut down if P < AVC.
Shut down if P < AVC. > This would mean that marginal revenue is insufficient to cover the average variable cost of production. (P = MR < AVC of production --> shut down) Operate if TR < TC. >> This would mean that profit is negative. so if: TR < VC --> shut down P < AVC --> shut down P >= AVC --> operate
***[GO OVER HOW TO MAKE S-R vs L-R Operate or shut down calculations]*** A firm operating in a perfectly competitive industry has a marginal cost curve given by MC = 0.0225QS2 - 6QS + 400, where QS is the quantity of output the individual firm brings to the market. The firm's average variable cost minimum is AVCmin = 100. The market price for the industry is P = 90. Identify the firm's profit-maximizing output level. QS = 196.58. QS = 200. The firm should shut down in the short run. QS = 70.09.
The firm should shut down in the short run.
Which of these statements is inconsistent with a perfectly competitive market structure? - There are a large number of establishments in the local market that sell alcohol. - Consumers do not have a preference to purchase alcohol from one establishment or another. - The local government must issue a "liquor license" to any establishment that desires to sell alcohol in the local market. - There are a large number of consumers who purchase alcohol in the local market.
The local government must issue a "liquor license" to any establishment that desires to sell alcohol in the local market. > There are no barriers to entry in perfectly competitive markets.
*True or False: The long-run supply curve of a firm in a perfectly competitive market is the portion of its long-run marginal cost curve that is at or above LATC.
True > Since there are no fixed costs, LAVC is the same as LATC.
* Only the portion of a company's marginal cost curve _____ will be on the firm's supply curve. - below the market price - above the market price - below the minimum average variable cost curve - above the minimum average variable cost curve
above the minimum average variable cost curve > This is a result of the fact that it is not profitable for firms to produce output at prices below minimum AVC. (think about P = MR = MC and intersection point; MC get steeper above P which means VC increases faster with each new output)
Perfectly competitive markets are the most efficient markets because: - producer surplus is at its largest. - firms produce at the highest cost possible. - combined producer and consumer surplus is at its smallest. - combined producer and consumer surplus is at its largest.
combined producer and consumer surplus is at its largest. > No other market structure can maximize total surplus the way perfect competition can.
Operate or shut down decisions -- If: TR < VC --> _____ P < AVC --> _____ P >= AVC --> _____
if: TR < VC --> shut down P < AVC --> shut down P >= AVC --> operate
An industry's producer surplus is represented by the shaded triangleabove the ______ and below the _____. - industry demand curve; industry supply curve - market price; industry demand curve - industry supply curve; industry demand curve - industry supply curve; market price
industry supply curve; market price > This is, in fact, the area that represents producer surplus. think: BOTTOM TRIANGLE in graph
* To maximize profit, a perfectly competitive firm should _____ when the market price is more than the marginal cost. - exit the market - shut down - increase the price it is charging - make and sell another unit of output
make and sell another unit of output > Since price is equal to marginal revenue, it is known that marginal revenue is greater than marginal cost. The firm can increase profit by producing another unit. Rationale: we know when P = MR = MC, firms will not shut down or exit; not exactly sure why not increase prices [maybe because in PC they will never set prices so they can't just raise them..?] but we know bc MR > MC, we would produce more
*In a perfectly competitive market, a firm will maximize profits by choosing a quantity of production where the _____ is equal to the market price. - marginal revenue - average total cost - marginal cost - average variable cost
marginal cost > This is a profit-maximizing condition in a perfectly competitive market. >> P = MR = MC
Sophia decides to enter the perfectly competitive olive oil market where current market prices are $2.89/pint. Hoping to recover her start-up costs quickly, she decides to charge $3.19/pint for "Sophia's Select" olive oil. This decision will have _____ effect on market prices, and Sophia will _____ of her product. - no; not sell any - no; sell some - a large; sell all - some; some
no; not sell any > In PC markets, consumers DO NOT SEE any difference in the products being sold, meaning that if Sophia sells her olive oil at a higher price than her competitors, consumers will simply buy another firm's olive oil
The demand curve facing a firm in a perfectly competitive market is ____________ elastic at the market equilibrium price. fill in the blank
perfectly
Priya owns a turkey farm that is growing larger each year. Her industry is a perfectly competitive market, which means she will charge _____ when she produces turkey in a large quantity. the market price a price higher than the market price a price lower than the market price any price she chooses
the market price > Because Priya is in a perfectly competitive market, she must sell at the market price in order to maximize profit.
