Short Run Equilibrium In Perfect Competition Lecture 19 Dr. Jennifer P. Wissink ©2019 Jennifer P. Wissink, all rights reserved. April 8, 2019

Announcements: Micro Spring 2019 Be Mindful of MEL Stuff! Quiz#08 is due Monday April 8 Quiz#09 is a review of elasticities & consumer theory & due Wednesday April 10 Don’t forget to get hwps#2 written up to turn in at lecture Wednesday. Easy extra credit! Wissink Office Hours Before Prelim 2 Tuesday: as usual, see https://courses.cit.cornell.edu/econ1110jpw/help.htm Wednesday: 2:30-3:30 Cornell Republicans is hosting a talk by Federal Reserve nominee Steve Moore this Wednesday from 5:30pm – 7:00pm at Goldwin Smith Hall G76. Feel free to go if you are interested in attending. Announcing…. Cassius Ian Wissink! Born 2:45am this morning!

Prelim 2 ROOMS 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

So What? The 7 short run cost curves will still look and feel and hang together the same way. We just now know that if there is more than one variable input behind the scenes, the plant manager has successfully carried out the cost minimization exercise correctly and has equated the bang/buck across all his variable inputs. In this way we derive the “best” or “minimum” cost functions. THE COST GRAPH

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

END OF MATERIAL FOR PRELIM 2 Thank goodness! But we keep using costs, so going forwards reviews and at the same time starts new stuff.

Now What?

Short Run Profit Maximization, Finally… Profit () = total revenue (tr) – short run total cost (srtc). (minimum or best) short run total cost Profit depends on the firm’s output level (q). That is:  (q) = tr(q) - srtc(q). Firm’s problem: choose q* to maximize  where  (q) = tr(q) - srtc(q). Note something old and something new: Marginal cost (srmc) = tc/q Marginal revenue (mr) = tr/q

Profit Maximization

Rules For Profit ( = TR-TC) Maximization in the Short Run If q* maximizes (q) = tr(q) – srtc(q) , then (1) mr(q*) = srmc(q*) the first order condition, or f.o.c. (2)  (q*) is a maximum and not a minimum the second order condition, or s.o.c (3) at q* it is worth operating  (q*>0)   (q=0) NOTE: This procedure is good, no matter what type of firm considered.

Intuition: Why mr=mc at the Profit Maximizing q* Why? Because.... If mr > mc at q, then… If mr < mc at q, then… If mr = mc at q, then…

“To Be Or Not To Be” Open, The Short Run Shut Down Decision

Reality Wrinkle: Sunk & Avoidable Fixed Costs When q > 0, fixed costs are just that. Fixed. When q = 0, need to rethink fixed costs some are sunk fixed costs some are avoidable fixed costs How would shut down rule be changed? i>clicker question: If half of your fixed costs are avoidable fixed costs, then in the short run, would you tend to shut down at a higher or lower market price? A. higher B. lower

Short Run Profit Maximization in a Perfectly Competitive Output Market Consider Structure, then Conduct, then Performance. Recall Structure for Perfectly Competitive Markets (1) Many buyers and sellers, and (2) Homogeneous output, and (3) Free entry and exit, and (4) Full and symmetric information. Our Example The Apple market, Cortland variety, of which Jonathan’s apple orchard is one of many Recall: Structure implies Jonathan is a PRICE TAKER!

Conduct: Short Run Profit Maximization in a Perfectly Competitive Output Market Notation Reminder q = Jonathan’s output Q = The aggregate output of the entire apple market P = The market price for apples Jonathan is a “price taker”. So, Jonathan’s perceived demand for HIS apples (δ) will be the prevailing market price P. So, for Jonathan tr = P∙q which implies that for Jonathan mr = P = δ The Market Jonathan

Jonathan’s Profit Maximizing Move When Market Price P=$528 Recall the rules for profit maximizing: If q* maximizes  , then (1) mr(q*) = srmc(q*) (2)  (q*) is a maximum and not a minimum. (3) at q* it is worth operating:  (q*>0)   (q=0) Jonathan's Apple Farm Costs (detail) Apples (tons/year) $Land $Hired Labor $Proprietor's time $Total Cost $Average Cost $Marginal larger delta method 200 12,400 54,400 13,200 80,000 400 210 58,560 84,160 401 440 220 63,200 88,800 404 484 230 68,240 93,840 408 528 240 73,760 99,360 414 588 250 105,600 422 632 260 86,400 112,000 431

Jonathan's Apple Farm Costs (finer detail) i>clicker question Suppose P*=$528=mr and you created your $mc column using the small delta method. If you’re looking at a table of $mc values, and none of them exactly match your $mr value... you should guess an answer. you should cry out frantically and loudly. you should use $mc relative to $mr to narrow down your decision to one of two quantities. you should try to approximate something between the two quantity values in the table. then there is no profit maximizing equilibrium quantity. Jonathan's Apple Farm Costs (finer detail) Apples (tons/year) Total Cost Marginal Cost (smaller delta) 200 80,000   210 84,160 220 88,800 230 93,840 240 99,360 250 105,600 260 112,000