MBA 201A Section 5: Long Run & Short Run

Overview  Short vs. Long Run Market (perfect competition) equilibria  PS 4  Q&A

Long Run vs. Short Run with Homogeneous Firms/ Perfect Competition  What is short run supply? (Number of firms) * q  What is long run supply? Generally almost perfectly elastic (w/ constant input cost)  Existing firms earn zero economic profits in the long run  What is price in the long run (under perfect competition)? P=min AC (which then can give you q* too)  How to find min AC? Either take the derivative (but check 2 nd derivative to make sure it’s a minimum…don’t worry if you don’t understand this) OR set MC=AC and solve for q (this everyone should know)  How many firms in long run? Total supply divided by min AC production level

PS 4, #2  a) Set MR=MC- with perfect competition MR=P Thus, 100=2q >>q*=50. Price? $100. Profit? 100* ^2=$2,100.  b) Q=50, *200=30,000 >>30,000/50=600 short run firms  c) How many firms in long run? Total supply divided by min AC production level. Min AC: 400/q+q=2q >>q*=20 >>MC(20)=40>>P*=40. >>Q=50,000-40*20=42,000 >>firms #:42,000/20=2100 Profit? $0  d) The LR – firms are price takers. MC = 40, so q = 40 b/c MC = q Profits = 40(40) – (200+ (40)^2 / 2) = 600 Therefore you crowd out 2 firms b/c q = 40 and the other firms make q = 20

PS 4, #2 (cont’d)  e) What if you can patent the technology? What price do you offer? $40.01 or $39.99? At you are sole supplier but can’t charge over this (or $40) due to (threat of) entry. What is the optimum plant production allocation? Have each plant produce at minimum AC, which we already solved for as q*=20. Hence we get total demand 42,000/20 =2100 plants. Profit=2100*400=$840,000. Why not q*=40? Profit(40)=$600 vs. Profit(20)=$400, but $400x2=800>600.

Questions on anything else?