EC202_Lecture_8

Page 1: Lecture Introduction

  • Course: EC 202 Intermediate Microeconomics

  • Lecture: 8

  • Semester: Autumn 2024

  • Coverage: Chapter 24 from Varian

Page 2: Marking Criteria

  • Assessment components:

    • A. Autumn Multiple Choice (Coursework)

    • B. Test in February (Coursework)

    • C. Summer Final Exam

Page 3: Recap of Previous Lecture

  • 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

Page 4: Lecture Outline

  • 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

Page 5: Definition of Perfectly Competitive Market

  • Characteristics:

    • Identical products produced by firms

    • Individual firm’s output is small relative to overall market demand, having no impact on market price

Page 6: Formal Assumptions of Perfect Competition

  • 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

Page 7: Implications of Perfect Competition

  • 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

Page 8: Short-Run Equilibrium in Perfectly Competitive Market

  • 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

Page 9: Transition from Individual Supply to Market Supply

  • Market supply function computation:

    • Formula: !"(P) = ∑ᵢ 𝑠ᵢ(P)

    • For identical firms: !"(P) = n × s(P)

Page 10: Continuation of Market Supply Function

  • Emphasis on identical production:

    • Market supply function reflects horizontal addition of individual supply curves

Page 11: Graphical Representation of Supply

  • Graph illustrating:

    • Individual firm's supply and industry supply

Page 12: Market Equilibrium Illustration

  • Diagram:

    • Intersection of demand (QD) and supply (QS) curves

  • Price (P*) and output (Q*) levels shown

Page 13: Definition of Producer Surplus

  • 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

Page 14: Visual Representation of Producer Surplus

  • Graph depicting producer surplus relative to individual firm and market

Page 15: Include Fixed Costs in Producer Surplus

  • Importance:

    • In short run, fixed costs are not opportunity costs

    • Thus, producer surplus reflects short-run economic profit instead of accounting profit

Page 16: Example Deriving Short-Run Market Equilibrium

  • Scenario: 300 identical firms

  • Supply and demand functions provided

  • Inquiry on short-run equilibrium and profits

Page 17: Continuation of Example

  • Further elaboration on 300 identical firms with focus on equilibrium determination

Page 18: Example Solution for Short-Run Equilibrium

  • Profit maximization condition:

    • P = MC

  • Equations setup for calculation

Page 19: Continued Calculation for Short-Run Equilibrium

  • Clarification on equations for equilibrium determination

Page 20: Positive Profits at Market Equilibrium

  • Calculation outline for per-firm profit and producers’ surplus evaluated

Page 21: Long-Run Equilibrium in Perfect Competition

  • Analysis of long-run individual supply with homogeneous firms

Page 22: Long-Run Market Supply Curve Definition

  • Definition:

    • Total quantity of output supplied at various market prices considering long-run adjustments

Page 23: Deriving Long-Run Market Supply Curve

  • Explanation of individual supply curve contributions

  • Note: Number of firms is flexible in long run

Page 24: Conceptual Graph of Long-Run Equilibrium

  • Price levels and profit conditions relevant to firms

Page 25: Free Entry and Long-Run Supply for Identical Firms

  • Mechanisms:

    • Entry of firms as long as profits are positive

  • Description of market equilibrium conditions

Page 26: Dynamics of Market Conditions

  • Profit conditions and implications for entry and exit among firms

Page 27: Additional Graph: Free Entry and Long-Run Equilibrium

  • Visual representation showing firm and market interactions

Page 28: Example: Calculating Long-Run Equilibrium

  • Function: !"(Q) = 40Q – Q² + 0.01Q³

  • Inquiry for equilibrium output, price, and firm count

Page 29: Continued Example Calculation

  • Additional steps provided for equilibrium determination and solutions outlined

Page 30: Further Breakdown of Long-Run Example

  • Detailed calculations including minimal points and total outputs

Page 31: Summary of Long-Run Equilibrium Equations

  • Conditions for equilibrium outlined for clarity

Page 32: Derivation of Long-Run Equilibrium

  • Solved for crucial relationships and equilibrium parameters

Page 33: Evidence of Market Dynamics in US Manufacturing

  • Observation of entry and exit trends in firms

Page 34: Free Entry with Heterogeneous Firms

  • Analysis of firm types with cost discrepancies

Page 35: Supply Functions with Low-Cost Firms

  • Methodology to construct supply functions for equilibrium determination

Page 36: Market Dynamics with Low-Cost and High-Cost Firms

  • Discussion on market equilibrium impacts of varying firm costs

Page 37: Graphical Illustration of Market Supply Dynamics

  • Indication of market equilibrium transition showing profit distributions

Page 38: Economic Profit and Economic Rent

  • Discussion of source of profits among high-cost firms

Page 39: Premium Charged by Landowners

  • Explanation of how the economic rent arises and impacts firms

Page 40: Definition of Economic Rent

  • Clarification of terms related to economic rent and profit context

Page 41: Challenge of Multi-product Firms

  • Analysis of assumptions about product offerings

Page 42: Demand and Production Links

  • Importance of understanding both demand-side and production-side links

Page 43: Focus on Production Links

  • Concentration on cost impacts tied to production decisions

Page 44: Economies of Scope

  • Definition:

    • Cost advantages in producing multiple products via a single firm

Page 45: Instances of Economies of Scope

  • Examples of how economies of scope manifest in various industries

Page 46: Structure of Multi-plant Firms

  • Overview of multi-plant operational structures and cost functions

Page 47: Profit Function Overview

  • Expression of profit calculation in multi-plant structures

Page 48: Marginal Cost Equalization Across Plants

  • Explanation of the cost-determination principle

Page 49: Additional Plant Dynamics

  • Summary of profit distribution over multiple plants

Page 50: Using Limited Plant Number for Output

  • Discussion on implications of operational choices regarding plant usage.

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