Intermediate Microeconomics ECON 100
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This 8 page Class Notes was uploaded by Isidro Stoltenberg on Monday September 7, 2015. The Class Notes belongs to ECON 100 at University of California - Santa Cruz taught by Staff in Fall. Since its upload, it has received 57 views. For similar materials see /class/182319/econ-100-university-of-california-santa-cruz in Economcs at University of California - Santa Cruz.
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Date Created: 09/07/15
ECON100A PERFECTCOMPETITION CORE ASSUIVIPTION REGARDING FIRM BEHAVIOR REGARDLESS OF MARKET STRUCTUREgtgtgtgtgtPROF I T MAXIMIZA T I ON DISCUSSION OF THIS ASSUMPTIONATEND OF THIS SECTION 1 DEFINING PROFITS NORMAL AND ECONOMIC SOIVIETIIVIES CALLED EXCESS OR MONOPOLY PROFITS EXCESS OR MONOPOLY IN THE SENSE THAT THEY WILL NOT EXIST IN OTHER THAN MONOPOLY including oligopoly TYPE SITUATIONS 2 PROFITS REVENUE COST INCLUDING NORMAL PROFIT GETTING AHEAD TO MAXIMIZE PROFIT FUNCTION SET DERIVATIVE TO ZERO see Frank footnote 3 on p 356 IE PR CataMaXimumwhen MR MC0 ORIIRMC THIS CONDITION WILL BE TRUE FOR ALL FIRMS REGARDLESS OFMARKETSTRUCTURE THE COMPETITIVE FIRM 3 SPECIFYING A PARTICULAR ENVIRONIVIENT IN WHICH THE FIRM OPERATES a HOMOGENOUS PRODUCT b FIRM AS PRICE TAKERTOO SMALL A SHARE OF THE MARKET TO HAVE AN IIVIPACT ON PRICE 0 COIVIPLETE MOBILITY OF FACTORS OF PRODUCTION IE EASE OF ENTRY OR EXIT d PERFECT INFORMATION PROFITIWAXIMIZATIONIN THE SHORTRUN 4 STARTING WITH TOTAL COST AND TOTAL REVENUE AND TOTAL PROFIT tc tr A X1 X2 X3 output note a graph of total profits p 354 in Frank would show maximum LOSSES at X1 and maximum PROFITS at X3 ie for profits to be at a maX second derivative must be lt0see fn 3 p 356p0int of in ection at X2 IIVIPORTANT POINT HERE IS THAT IVIR MC IN TWO PLACES ONE ASSURES MAX PROFIT ONE ASSURES MAX LOSSES 5 SAIVIE RESULT USING MARGINAL COST AND MARGINAL REVENUE mC WACWP aVC output X1 X2 Xsr X3 X1 where mc mr and maX losses X2 where marginal costs begin to rise X3 maX profits note aVC and ate fall as long as the marginal cost is less than aVC and ate and these two curves rise when me gt aVC and ate Frank s diagrams are a bit better I admit 6 SHORT RUN OPERATION WITH LOSSES THE SHUTDOWN CONDITION as long as variable costs are covered firm will operate in the short run that is anywhere to the right of Xsr in the above diagram ALL OF THEABOVE ISA REVIEWOFECONI AND WILL BE COVERED VERY OUICKLY IN CLASS SHORTRUN COMPETITIVE EQUILIBRIUM 7 INDUSTRY SUPPLY CURVE AS THE HORIZONTAL SUIVIMATION OF FIRM S MARGINAL COST CURVESUPWARD PORTION BEYOND AVC industry supply sum of three firms 8 FRANK S GRAPH FIGURE 116 p 360 SHOWS TYPICAL FIRM MAKING ECONOIVIIC PROFITS ALL THAT IS REQUIRED IS THAT ALL FIRMS PRODUCING WHERE PRICE MARGINAL COST IE SOIVIE FIRMS MAY BE MAKING EXCESS PROFITS SOIVIE SHORT RUN LOSSES NO NEED TO ASSUIVIE THAT THEY ALL HAVE THE SAIVIE COST CONDITIONS IN THE SHORTRUN mc ate economic pro ts I 9 CONCEPT OF EFFICIENCY IN THE SHORT RUNIE ALL FIRMS PRODUCING AT MARGINAL COSTWITH UPWARD CURVES CAN T ALLOCATE PRODUCTION IN A WAY THAT YIELDS LOWER COST mcl m7 mcn firm 1 firm 2 firm r1 10 CONCEPT OF PRODUCER S SURPLUS AKIN TO CONSUIVIER S SURPLUS for the firm simply the revenue in excess of variable costs ie fixed costs are lost rm would be willing to produce in the short run if it was covering variable costs mc above avc surplus COMPETITIVE LONG RUN EQUILIBRIUM 1 1 FIRM ADJUSTIIENTSIIIPLY MOVES TO MOST EFFICIENT LEVEL OF PRODUCTION WHERE LONGRUN MARGINAL COST MARGINAL REVENUE NOT A PARTICULARLY INTERESTING OUTCOIVIE COIVIPARED TO INDUSTRY ADJUSTIVIENTS IE IT IS POSSIBLE TO FOR THE FIRM TO APPEAR TO HAVE LONGRUN ECONOMIC PROFITS 12 ADJUSTMENT AMONG ALL FIRMS IN THE INDUSTRY THOSE MAKING LOSSES LEAVE THOSE MAKING PROFITS STAY AND ARE JOINED BY OTHERS SO THAT WITH INCREASING SUPPLY AND THUS FALLING PRICES AS WELL AS THE POSSIBILITY OF INCREASING FACTOR PRICES AND THUS RISING COSTS LONGRUN EQUILIBRIUM WHERE a NORMAL PROFITS bPRODUCTIONAT THE MOST EFFICIENT LEVEL OF PROD U CT I ON c and WHERE COSTS PER UNIT OF OUTPUTAREA MINIMUM for example in the diagram below the typical firm is making above normal profits entry will shift the industry supply curve to the right lowering price and reducing pro ts for our typical rm the process continues entry increased supply and falling prices until there are no excess profits exactly the reverse process would occur if the typical firm was making short run losses mc atc 13 LONGRUN INDUSTRY SUPPLY CURVE a WITH NO CHANGE IN FACTOR PRICES AND NO CHANGE IN TECHNOLOGY SUPPLY CURVE IS HORIZONTAL b OTHERWISE DOWNWARD CURVE WHERE THERE ARE EFFICIENCIES OF SCALE PECUNIARY ECONOMIES A LA FRANK 0 OR UPWARD CURVE WHERE INCREASE IN OUTPUT DRAWS ON ENOUGH OF THE FACTOR MARKET TO INCREASE FACTOR PRICES 14 ELASTICITY OF SUPPLY OBVIOUSLY RELATED TO THE ABOVE AL T ERNA T I VES T 0 PROFIT MAXIMIZA T I 0N which leads to monopoly type environment 14 ALTERNATIVE THEORIES FLOW OFTEN FROM OBSERVATION RATHER THAN THEORY a LESTERMACHLUP DEBATES b MARKUP PRICING c SALES MAXIIVIIZATION FULL COST PRICING d XEFFICIENCY EU Cuts Alummum Tantfs 7 W51 eom sponsored by nunxmmum39 THE S mi Tasman g May 8 NEW EU Cuts Aluminum Tariffs WJ quotE5 REP a thsmwtshrmmpersmsl LWE E 33 quot73 Lt39 ff fimso 39 39 Is Step in Mm Srsmltmo moierti eemes Fur Cheaper Impnrts eemsoreosomershsetheomer Repvlmslaal aims h Hy JOHNW mums mete av vlsn May a 20477 Puma Woman BRUSSE see s ample team h PDF LS re 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