1. ©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved.
Firm Short Run Profit Maximization & Perfectly Competitive Supply Lecture 18
Dr. Jennifer P. Wissink
©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved.
April 10, 2017

2. Announcements(micro)-Spring 2017
Prelim 2 is Thursday April 13, 7:30pm-9:00pm
Evening prelim conflicts: Please go to Blackboard and register for Option 1 or Option 2.
Other conflicts: Please see Prof. Wissink in person ASAP.
Coverage: Starts with the elasticity stuff we didn’t test on prelim 1 (slide 5 lecture 11) and goes through when I say “stop” on Wednesday April 12 in lecture 19. So stuff in chapters 5-8.
Office Hours: See
Also remember to use the ETC, located at 475 Uris Hall
Locations: All testing locations will be announced via Blackboard soon, so be on the lookout.
Upcoming MEL Quizzes Prior To Prelim 2
All due Thursday Morning. Note you can review them as soon as you submit.
Sorry if you got any automated from Blackboard about MEL Quiz due dates. They were set up by the Head TAs (as I asked) and put on auto-post before we all left for Spring Break and then I changed/extended the dates.  Even though I deleted the posts, they might have sent them to you via anyway.  If they did, sorry to have created any confusion...

3. Recall 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.

4. 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…

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

6. 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 would you tend to shut down at a higher or lower market price? A. higher B. lower

7. Short Run Profit Maximization in a Perfectly Competitive Output Market
Consider
Structure, then
Conduct, then
Performance.
Recall Structure for Perfectly Competitive Markets
(1) Many firms, 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!

8. Conduct: Short Run Profit Maximization in a Perfectly Competitive Output Market
Notation Reminder
Let q = Jonathan’s output
Let Q = The aggregate output of the entire apple market
Let 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

9. Jonathan’s Profit Maximizing Move When Market Price P=$528
Recall: 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

10. Jonathan's Apple Farm Costs (finer detail)
i>clicker question
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 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

13. 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

14. THE COST GRAPH for Jonathan

15. The Cost Graph Does The Cost Graph always look exactly like this?
NO!
Suppose
Joe’s fc=$100 and Joe’s vc=q2

16. Using The Cost Graph to Derive Jonathan’s Short Run Supply Curveq*

17. 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”!

18. 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.

19. 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.

20. 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

21. END OF MATERIAL FOR PRELIM 2
Thank goodness!