©2019 Jennifer P. Wissink, all rights reserved. Profit Maximization and Short Run Equilibrium In Perfect Competition Lecture 20 Dr. Jennifer P. Wissink ©2019 Jennifer P. Wissink, all rights reserved. April 10, 2019

Announcements: Micro Spring 2019 Be Mindful of MEL Stuff!  Quiz#09 TONIGHT Don’t forget to hand in hwps#2 TODAY HERE IN LECTURE Wissink X-tra Office Hours Before Prelim 2 - TODAY 2:30-3:30 Prelim 2 Testing Locations: Please Check Cornell's Web pages for Building Codes and Building Locations Key to Building Codes Thursday April 11 People w/accommodation letters arrive at 5:00pm - URH 202 Option 1 Early sitters (no extra time) start at 5:00pm – GSH G64 7:30 Evening Prelim (please arrive no latter than 7:15)    Last Names starting with A – L report to Statler Aud – Main Level only (no balcony)    Last Names starting with M – Z report to Uris Aud Friday April 12 - Option 2 Makeup Makeup (with no extra time) start at 3:00pm – GSH 132 Makeup people w/accommodation letters start at 1:30pm - URH 398

Where do you find profit in graphs?

Where do you find profit in graphs?

i>clicker question Consider Purity Ice Cream and Footies Freeze in the month of January. Which statement below is the most correct. Graph A represents both Graph B represents both Graph A represents Purity and B Footies Graph A represents Footies and B Purity $π A $π B -fc -fc

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

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

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