1. Perfectly Competitive Supply: The Cost Side of The Market

2. Announcements
To get raw score, multiply by 107!

3. Thinking About Supply: The Importance of Opportunity Cost
Harry is an unemployed, homeless resident of Burlington
How much time should Harry spend recycling beer bottles?
Chapter 6: Perfectly Competitive Supply

4. Thinking About Supply: The Importance of Opportunity Cost
High unemployment: Harry is choosing between waiting in line for an hour to get a meal worth $1.50 (his best alternative option), and collecting containers at 5 cents each.
Opportunity cost of collecting cans is $1.50/hour.
Chapter 6: Perfectly Competitive Supply

5. Example
Search time (hours/day)
Total number of containers found
Additional number of containers found 60 40 30 20 10
Chapter 6: Perfectly Competitive Supply

6. Chapter 6: Perfectly Competitive Supply
Example
Chapter 6: Perfectly Competitive Supply

7. Thinking About Supply: The Importance of Opportunity Cost
Costs and Benefits
1 hour collecting cans = (60)(.05) = $3
Benefit ($3) > Opportunity Cost ($1.50)
2nd hour benefit ($2) > Opportunity Cost ($1.50)
3rd hour benefit ($1.50) = Opportunity Cost ($1.50)
Chapter 6: Perfectly Competitive Supply

8. Thinking About Supply: The Importance of Opportunity Cost
Question
What is the lowest redemption price that would induce Harry to spend1 hour/day looking for cans to recycle?
Solution
60 containers x 2.5 cents = $1.50 = opportunity cost of waiting in line
Chapter 6: Perfectly Competitive Supply

9. Thinking About Supply: The Importance of Opportunity Cost
Reservation Price
Chapter 6: Perfectly Competitive Supply

10. Thinking About Supply: The Importance of Opportunity Cost
Reservation Price
1 hour recycling = p(60) = $1.50 = 2.5 cents
2 hours recycling = p(40) = $1.50 = 3.75 cents
3 hours recycling = p(30) = $1.50 = 5 cents
4 hours recycling = p(20) = $1.50 = 7.5 cents
5 hours recycling = p(10) = $1.50 = 15 cents
Chapter 6: Perfectly Competitive Supply

11. An Individual Supply Curve for Recycling Services
Harry’s Supply Curve 6 10 13 16 15
7.5 5
2.5
3.8
Deposit was $0.05 in 73, ~$.225 today
Deposit (cents/can)
Recycled cans
(10s of cans/day)
Chapter 6: Perfectly Competitive Supply

12. The Market Supply Curve for Recycling Services6 10 13 16 15
7.5 5
2.5
3.8
Harry’s Supply Curve 6 10 13 16 15
7.5 5
2.5
3.8
Barry’s Supply Curve
Deposit (cents/can) +
Deposit (cents/can) +
Recycled cans
(10s of cans/day)
Recycled cans
(10s of cans/day)
Chapter 6: Perfectly Competitive Supply

13. The Market Supply Curve for Recycling Services12 20 26 32 15
7.5 5
2.5
3.8 30
Deposit (cents/can) = =
Recycled cans
(10s of cans/day)
Chapter 6: Perfectly Competitive Supply

14. The Market Supply Curve with 1,000 Identical Sellers6 10 13 16 15
7.5 5
2.5
3.8
Deposit (cents/can)
Recycled cans
(10,000s of cans/day)
Chapter 6: Perfectly Competitive Supply

15. Chapter 6: Perfectly Competitive Supply
Reality check
Is this realistic? What happens to the number of cans Harry can get when he has to start competing with Barry and 998 other people laid off from Wall Street?
Many natural resources also fail to increase in supply as the number of producers increases
All economic production requires natural resources
Chapter 6: Perfectly Competitive Supply

16. Profit-Maximizing Firms in Perfectly Competitive Markets
Profit Maximization
Profit
Total Revenue - All Costs paid by the firm (including opportunity costs)
Profit-Maximizing Firms
Goal of the firm is to maximize the difference between total revenues and total firm costs
Chapter 6: Perfectly Competitive Supply

17. Reality check: goal of profit maximizing firms in real life
Why do CEO’s earn so much even when the company is doing poorly?
Privatize profits and socialize costs
Who gets the benefits from risky financial investments that pay off, who pays the costs when they don’t?
Costs of mercury contamination, climate change, etc.?
Who pays the costs of phosphorous and nitrogen runoff from farms, habitat loss, ozone thinning from methyl bromide, etc.?
Welfare for Wal-Mart employees, etc.
Chapter 6: Perfectly Competitive Supply

18. Reality check: goal of profit maximizing firms in real life
Maximize subsidies
Ag subsidies: $307 billion despite record profits
Farmers Facing Loss of Subsidy May Get New One
the top 10 percent of direct-payment recipients in 2010 received 59 percent of the money under the program…The average household income was… $201,465 for families living on large farms.
Tax breaks, quotas, not included in these estimates
Chapter 6: Perfectly Competitive Supply

19. Reality check: goal of profit maximizing firms in real life
Energy subsidies, perverse subsidies
Chapter 6: Perfectly Competitive Supply

20. Why do so many corporations donate to Democrats and Republicans at the same time?

22. Profit-Maximizing Firms in Perfectly Competitive Markets
The Perfectly Competitive Market
A market in which no individual supplier has significant influence on the market price of the product
Is this true for energy, agriculture, pharmaceuticals, Wal-Mart, etc.?
A Price Taker
A firm that has no influence over the price at which it sells its product
What about patented medicine, Wal-Mart?
Chapter 6: Perfectly Competitive Supply

23. The Characteristics of Perfect Competition
All firms sell the same standardized product.
e.g. agriculture, natural resources, somewhat true for clothes, electronics, etc., not true for patented medicines
The market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged.
e.g. small farmers, small woodlots, etc. What about health care, e.g. Fletcher Allen?
Chapter 6: Perfectly Competitive Supply

24. Chapter 6: Perfectly Competitive Supply
Reality check
What has been happening in the banking and finance sector?
From too big to fail to way too big to fail
What has been happening in general in the food & agriculture, energy, retailing and media sectors?
Chapter 6: Perfectly Competitive Supply

25. The Characteristics of Perfect Competition
Productive resources are mobile
What resources are not mobile?
How mobile is labor?
Buyers and sellers are well informed
Stiglitz’ Nobel
Information flows
Chapter 6: Perfectly Competitive Supply

26. The Demand Curve Facing a Perfectly Competitive Firm
Market supply and demand S D
Price ($/unit) P0 Q0
Market Quantity
(units/month)
Chapter 6: Perfectly Competitive Supply

27. The Demand Curve Facing a Perfectly Competitive Firm
Individual firm demand Di P0
Price ($/unit)
What happens to quantity demanded when the individual firm raises prices?
Lowers prices?
What is the elasticity of demand for that firm’s output?
Individual Firm’s Quantity
(units/month)
Chapter 6: Perfectly Competitive Supply