1. University of Hawai‘i at Mānoa Department of Economics ECON 130 (003): Principles of Economics (Micro) http://www2.hawaii.edu/~lindoj Gerard Russo Lecture #19 Tuesday, March 16, 2004

2. ANNOUNCEMENTS REVIEW SESSION Thursday, March 18, 2004, 4:30-5:30 PM BIL 152 MID-TERM EXAMINATION #2 Tuesday, March 30, 2004, 12:00-1:15 PM BIL 152

3. LECTURE 19 The Perfectly Competitive Firm in the Short-Run: Short-Run Firm Supply Short-Run vs. Long-Run The Perfectly Competitive Industry in the Short-Run: Short-Run Industry Supply

4. Profit Maximization $/Q Q MC ATC AVC 0 A E B C Q* P0P0 F TR equals the area of rectangle 0P 0 FQ*. TC equals the area of rectangle 0ABQ*. Therefore, Profits equal the area of AP 0 FB. TVC equals the area of rectangle 0ECQ*. TFC equals the area of rectangle EABC. Economic Profit

5. Profit Maximization $/Q Q MC ATC AVC 0 E B C Q0Q0 Firm demand: P=AR=MR P0P0 TR equals the area of rectangle 0P 0 BQ 0. TC equals the area of rectangle 0P 0 BQ 0. Therefore, Profits equal zero. TVC equals the area of rectangle 0ECQ 0. TFC equals the area of rectangle EP 0 BC.

6. Profit Maximization $/Q Q MC ATC AVC 0 E B C Q0Q0 Firm demand: P=AR=MR P0P0 F A Are the firm’s profits positive, negative or zero? Should the firm shut-down or continue to operate? Economic Loss

7. Firm Supply $/Q Q MC ATC AVC P 0 0 P 2 P 1 Q0Q0 P 1 =AR 1 =MR 1 P 0 =AR 0 =MR 0 P 2 =AR 2 =MR 2 Q1Q1 Q2Q2

8. Quantity (milllions) quantity (thousands) $/q Perfectly Competitive Firm Perfectly Competitive Industry MC ATC AVC Supply Demand PEPE QEQE qEqE P E =AR=MR What is the level of Firm Profit? Are Profits Positive, Negative, or Zero? 0

9. Quantity (milllions) quantity (thousands) $/q Perfectly Competitive Firm Perfectly Competitive Industry MC ATC AVC Supply Demand PEPE QEQE qEqE P E =AR=MR What is the level of Firm Profit? Are Profits Positive, Negative, or Zero? 0

10. Quantity (milllions) quantity (thousands) $/q Perfectly Competitive Firm Perfectly Competitive Industry MC ATC AVC Supply Demand PEPE QEQE qEqE P E =AR=MR What is the level of Firm Profit? Are Profits Positive, Negative, or Zero? 0

11. Quantity (milllions) quantity (thousands) $/q Perfectly Competitive Firm Perfectly Competitive Industry MC ATC AVC Supply Demand PEPE QEQE qEqE P E =AR=MR What is the level of Firm Profit? Are Profits Positive, Negative, or Zero? 0

12. Q (milllions) quantity (thousands) $/q Perfectly Competitive Firm Perfectly Competitive Industry MC ATC AVC Supply D2D2 P2P2 Q 2 =Σq i q2q2 P 2 =AR 2 =MR 2 Industry Supply is the Summation of the Firms’ Supply 0 P 3 =AR 3 =MR 3 D3D3 P3P3 D1D1 P 1 =AR 1 =MR 1 P1P1 q1q1 q3q3 Q 1 =Σq i Q 3 =Σq i