Short Run Equilibrium In Perfect Competition Lecture 19 Dr. Jennifer P. Wissink ©2018 John M. Abowd and Jennifer P. Wissink, all rights reserved. April 9, 2018

Announcements: micro Spring 2018 MEL Quiz#09due Wednesday night! Don’t forget about it! On this one, you can review right after you submit. Optional Problem Set Offer! Get paper copy here in class today. Or… Go to the link below and download the Excel file and do it all in Excel! https://courses.cit.cornell.edu/econ1110jpw/Imacostcurvesquestion.xls Or use this PDF version if your app won’t load the Excel file https://courses.cit.cornell.edu/econ1110jpw/Imacostcurvesquestion.pdf Must be handed in, in paper, with your name on it, in class, on Wednesday April 11. NO LATE SUBMISSIONS. Period. Make sure you make a copy for yourself, since we will never give you back your paper. We will add 50 points to your MEL score if you hand it in and it looks basically ok on time. Those points will be added to your MEL score by us at the very very end, in the event you fall short of the 600 magic number. About Prelim 2 See Blackboard announcements about coverage and ROOMS! Wednesday’s lecture will be Q&A for Prelim 2. Send me questions in advance if you’d like to see them discussed in this lecture! I will try to get to them. Can’t promise, but will try.

Reminder About LSC Support

Using THE COST GRAPH for Jonathan to figure out q* and profit

About The Cost Graph Does The Cost Graph always look exactly like this? NO! But some things will always be true. Suppose Joe’s fc=$100 and Joe’s vc=q2

Using The Cost Graph to Derive Jonathan’s Short Run Supply Curve q*

Jonathan’s Short Run Supply Curve So, for a perfectly competitive firm, the srsfirm = srmc for all points where srmc ≥ sravc (this assumes that all fixed costs are sunk). Note that we have confirmed the “law of supply”!

i>clicker question For a profit maximizing perfectly competitive firm in the short run, which one of the following statements is true? The firm always earns zero profit. The firm never incurs negative profit. The firm’s accounting profit will be smaller than its economic profit. The firm’s marginal revenue and its price are always the same value, no matter what q it produces. The firm’s marginal revenue and its marginal cost are always the same value, no matter what q it produces.

i>clicker question An improvement in production technology will shift the marginal cost curve downward and decrease quantity supplied at each price. upward and increase quantity supplied at each price. upward and decrease quantity supplied at each price. downward and increase quantity supplied at each price. downward with no effect on market supply.

The Perfectly Competitive Short Run Market Supply Curve The market supply curve is the horizontal sum of the quantities supplied by each seller at each market price. Market supply, thus reflects the marginal costs of each of the producers in the market.

Reprise: The Short Run Market Supply How does our scratch supply curve compare to the one we bought off the shelf? Recall the supply function for X = mini speakers: QS = g(PX, Pfop, Poc, S&T, N) Where: QS = maximum quantity that producers are willing and able to sell PX = X’s price Pfop = the price of factors of production Poc = the opportunity costs S&T = science and technology N = number of firms in the market

Reprise: Producer’s Surplus – Again, Still Recall that producer’s surplus measures the gain to the firm from selling all units at the market price. PS on q units = Total Revenue – Variable Costs PS on any particular unit = Price – Marginal Cost We now know Profit = Total Revenue – Variable Costs – Fixed Costs Rearranging we get: Variable Costs = Total Revenue – Fixed Costs – Profit Plugging this expression for Variable Costs into PS we get: PS on q units = Total Revenue – Total Revenue + Fixed Costs + Profit So Producer’s Surplus can also be written as PS on q units = Fixed Costs + Profit An alternative interesting way to think of producer’s surplus On the graph, Producer’s Surplus is the area above the short run firm supply curve and below the market price

Jonathan’s Producer’s Surplus Jonathan’s individual producer’s surplus when the market price is $528, is… …the sum of his economic profits ($27,600) and his fixed costs ($25,600) = $53,200… … or alternatively it is total revenue ($121,440) minus variable costs ($68,240) = $53,200. srs-firm ≈$250

END OF MATERIAL FOR PRELIM 2 Thank goodness!

SO: The Market & The Firm in Short Run Equilibrium Given: Market Demand Firms’ Technologies (including some fixed inputs) Factor Prices The Number of Firms Need: Each firm is profit maximizing Market Demand = Short Run Market Supply Solve For: Q* q* P* profit*

SO: The Market & The Firm In Short Run Equilibrium $ $ Dmkt sratc srmc A a mr*=δ* P* P* SRSmkt w/N Q* q* Q q MARKET typical firm

Market Net Social Surplus The market equilibrium occurs at P* & Q* Consumers’ surplus is the blue shaded area Producers’ surplus is the red shaded area Net social surplus is the blue and red shaded area P Short Run Supply=MC P* Demand=MB Q* Quantity

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.