End of Perfect Competition Lecture 21 Dr. Jennifer P. Wissink ©2018 John M. Abowd and Jennifer P. Wissink, all rights reserved. April 16, 2018

Announcements: micro Spring 2018 About Prelim 2 See Blackboard for updates and announcements. TAs are busy grading About MEL Remainder of semester quizzes will be posted soon Remember to check Results on MEL to see where you stand vis a vis the magic number of 600 The remaining quizzes (like on Family Feud) will be worth more pints (each) than most of the previous quizzes, so if you are behind on points, no need to worry. About i>clicker points PLEASE check Blackboard! There are a handful of you that have points BUT you are not attached to “us” on Blackboard, so I can’t five them to you. Remember to add the Class Add-On (reported at the top of announcements on Blackboard) to you My Grades number of points in your quest for 24 points. CES event With pre-enroll here, Cornell Economics Society is hosting Courses After the Core, an event where upperclassmen panelists in the Econ major give their take on what electives you should consider depending on your goals and interests. It'll be a great chance to meet some more students in the major and hear some great advice. Check out the details below and visit our Facebook event page to let us know you're coming! When: Monday, April 16th Time: 5-6pm Where: Uris Hall 262 Who: Anyone interested in taking more economics classes

Next: Long Run Firm & Market Conduct First, we are going to examine the long run cost curves of a single business. Next, we will make precise the relation between the firm’s short run and long run supply decisions. Then, we will consider the market in long run equilibrium. So: Consider the following… q = f(K, L) where q is firm output, K is firm capital and L is firm labor and where PK is the unit price of capital and PL is the unit price of labor.

(Only) Three Long Run Cost Curves There are three long run cost curves for the firm: long run total cost (lrtc) lrtc = PLL*(q) + PKK*(q) long run average total cost (lratc) lratc = lrtc/q long run marginal cost (lrmc) lrmc = lrtc/q The one we will see/use most is the lratc curve.

Goldilocks: Getting the Long Run Average Total Cost Curve for Three Different Levels of K Ksmall atc-Ksmall atc-KMedium KMedium atc-KLARGE K LARGE

i>clicker question Given the information in the graph, which size plant should Goldilocks build? small Medium LARGE Don’t know One of each atc-small atc-Medium atc-LARGE

Internal Economies of Scale & Minimum Efficient Scale When the lratc curve is falling it is said to exhibit internal economies of scale. When the lratc curve is rising it is said to exhibit internal diseconomies of scale. MES is the smallest quantity at which the lratc curve attains its minimum value. Internal diseconomies of scale Internal economies of scale q-MES

Ford, GM & Long Run Cost Curves

Internal Economies of Scale & Minimum Efficient Scale

Long Run ATC Curve in Relationship to Short Run ATC Curves When you are optimally designed, short run and long run cost values will coincide. As you deviate from what you planned for in the long run analysis, either producing more OR less than you optimally designed for, your short run costs will exceed your long run costs. $ lratc sratc-Ksmall q=35 q=50 q=150 q in tons

Rules for Profit () Maximization in the Long Run (pretty much the same) If q* maximizes  , then mr(q*) = lrmc(q*)  (q*) is a maximum and not a minimum at q* it is worth operating:  at q*  0 Could get a long run supply curve for the firm, but it’s never used, so let’s not and say we did!

Long Run Equilibrium in Perfectly Competitive Markets All the short run equilibrium properties hold. But also add… no firms wish to exit the market nor do firms want to enter. Given: market demand, factor prices and technology... Get: (P*, Q*, q*, N*) Note: For there to be neither entry or exit, need economic profit to be zero. This is a long run equilibrium requirement. Otherwise the number of firms in the market will still be in flux. Short run profit invites entry. Short run losses suggest exit. If firms ARE NOT identical, then it’s really that the marginal firm has zero profit.

Long Run Equilibrium Position with Identical Firms Each firm is profit maximizing  mr = mc at q* for each firm. (1) Zero profit required  P* = lratc at q* for each firm. (2) Perfectly competitive firm  P* = mr at all values of q. (3) Sub (3) into (1)  P* = mc at q* for each firm. (4) Using (2) and (4)  mc = lratc at q* for each firm. Therefore, q* is at the minimum of the typical firm’s lratc curve. So... q* is at MES. P* must be the price consistent with the minimum value on the typical firm’s lratc curve. N* and Q* get determined by position of market demand.

A Long Run Equilibrium Picture Note: Q* = N* times q* $ $ lratc SRS w/N* A a mr=δ P* P* D Q* Q q* q MARKET typical firm

Steps to Draw the Picture? Doesn’t matter how you draw it, as long as you draw it correctly in the end. Draw-a-person tests.

What’s Not OK...

Finding the Long Run Market Supply Curve (with identical firms) THE MARKET a typical firm $ $ lratc 600 SRS0 w/N0* A a P0* P0* mr0=δ0 DN D0 Q0* Q q0* q 300,000 500 Note: Q0* = N0* times q0*