Course: EC 202 Intermediate Microeconomics
Lecture: 8
Semester: Autumn 2024
Coverage: Chapter 24 from Varian
Assessment components:
A. Autumn Multiple Choice (Coursework)
B. Test in February (Coursework)
C. Summer Final Exam
Topic: Profit Maximization for Individual Firms
Key concepts discussed:
Derivation of firm’s supply curve from marginal cost curve
Definition of shutdown point as the minimum average cost
Unconditional demands for factors
Assessment of substitution and output effects due to changes in factor prices
Keywords:
Profit function
Supply curve
Economic average cost
Unconditional demand for factors
Conditions for existence of competitive markets
Market equilibrium in short run
Economic profit and producer surplus
Market equilibrium in long run
Evidence on market dynamics
Market equilibrium with heterogeneous firms
Economic rent
Extra topics: Multi-product firms, Multi-plant firms
Characteristics:
Identical products produced by firms
Individual firm’s output is small relative to overall market demand, having no impact on market price
Main assumptions:
Firms produce undifferentiated products perceived as identical
Consumers possess perfect information about seller prices
Buyer’s purchases are too small to affect market price
Seller’s sales do not impact market price and input purchases are unaffected
Equal access to resources (technology, inputs) for all firms
Law of One Price:
Single price resulting from assumptions of identical products and perfect information
Price Takers:
Buyers/sellers accept the market price when making decisions
Free Entry:
Identical long-run cost functions for all firms
Topics covered:
Transition from individual supply functions to market supply curve
Determining market equilibrium
Understanding economic profit and producer surplus
Note: Number of firms is fixed in the short run
Market supply function computation:
Formula: !"(P) = ∑ᵢ 𝑠ᵢ(P)
For identical firms: !"(P) = n × s(P)
Emphasis on identical production:
Market supply function reflects horizontal addition of individual supply curves
Graph illustrating:
Individual firm's supply and industry supply
Diagram:
Intersection of demand (QD) and supply (QS) curves
Price (P*) and output (Q*) levels shown
Producer Surplus:
Area above market supply curve and below market price
Monetary benefit to producers from product sales
Each unit sold incurs short-run marginal cost
Graph depicting producer surplus relative to individual firm and market
Importance:
In short run, fixed costs are not opportunity costs
Thus, producer surplus reflects short-run economic profit instead of accounting profit
Scenario: 300 identical firms
Supply and demand functions provided
Inquiry on short-run equilibrium and profits
Further elaboration on 300 identical firms with focus on equilibrium determination
Profit maximization condition:
P = MC
Equations setup for calculation
Clarification on equations for equilibrium determination
Calculation outline for per-firm profit and producers’ surplus evaluated
Analysis of long-run individual supply with homogeneous firms
Definition:
Total quantity of output supplied at various market prices considering long-run adjustments
Explanation of individual supply curve contributions
Note: Number of firms is flexible in long run
Price levels and profit conditions relevant to firms
Mechanisms:
Entry of firms as long as profits are positive
Description of market equilibrium conditions
Profit conditions and implications for entry and exit among firms
Visual representation showing firm and market interactions
Function: !"(Q) = 40Q – Q² + 0.01Q³
Inquiry for equilibrium output, price, and firm count
Additional steps provided for equilibrium determination and solutions outlined
Detailed calculations including minimal points and total outputs
Conditions for equilibrium outlined for clarity
Solved for crucial relationships and equilibrium parameters
Observation of entry and exit trends in firms
Analysis of firm types with cost discrepancies
Methodology to construct supply functions for equilibrium determination
Discussion on market equilibrium impacts of varying firm costs
Indication of market equilibrium transition showing profit distributions
Discussion of source of profits among high-cost firms
Explanation of how the economic rent arises and impacts firms
Clarification of terms related to economic rent and profit context
Analysis of assumptions about product offerings
Importance of understanding both demand-side and production-side links
Concentration on cost impacts tied to production decisions
Definition:
Cost advantages in producing multiple products via a single firm
Examples of how economies of scope manifest in various industries
Overview of multi-plant operational structures and cost functions
Expression of profit calculation in multi-plant structures
Explanation of the cost-determination principle
Summary of profit distribution over multiple plants
Discussion on implications of operational choices regarding plant usage.