1. ©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

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3. Where do you find profit in graphs?

4. Where do you find profit in graphs?

5. 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

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

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

8. 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”!

9. 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.

10. 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.

11. 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.

12. 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

13. 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

14. 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

15. 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*

16. 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

17. 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