Economics 1: Principles of microeconomicsWednesday, June 6, 2012Lecture 17Review:- Price Taker Competitive Marketo Individual firms have no market powero Perfectly elastic demand curve also marginal revenue curveo Shut down if P > AVCo Produce when MR=MCo Profit/unit = P - ATC- SR equilibriumo Industry supply = Industry demando All firms are producing where P is greater or equal to AVCo All firms are producing where MR=MCPreview:- Long run adjustment- Long run equilibrium conditions- Price Searcher firms (monopolies)Example: 4 lane freewayLane 1: cars average at 45 mphLane 2: cars average at 40 mphLane 3: cars average at 50 mph (less cars)Lane 4: cars average at 40 mphLanes 1,2,4, want to go join lane 3, so more cars will go to lane 3.Lane 3 will slow down and lanes 1,2,4 will speed upWhen the lanes merge, all the lanes then average at 47 mphAlways looking at what you can be earning at your next best choice.SS^D Market Q/tP*P^Supply curve shifts right when more firms enter and price will decreaseEconomics 1: Principles of microeconomicsWednesday, June 6, 2012Lecture 17MCATCP* L d=mr C* M Firm q* q/tAdjustment Steps:1. Profit attracts entry2. Industry supply increases3. Price decreases4. Repeat until profit equals zeroFirms making losses:S^ S MC ATC MCAVC d=mr Market FirmCan be doing better business somewhere else. Will get out whenever possible. Profit = Area P*, C*, L, MFirm is making a profitP*P* P*P^YZe*Economics 1: Principles of microeconomicsWednesday, June 6, 2012Lecture 17When firms leave the market, the supply curve shifts left and the price increases.Coming into the area as first settlers, you choose A land and make amazing profits* This sends a signal for more people to comePeople settling in B land make zero economic profit* No more incentiveSo C land stays unfarmedB land is not making a profitIf renting the land, A land will be higher to rent equal to the amount of profits making on that landIf own that land and selling it, will make as much as that profit of A landACCBBARiverA Land is the rich, fertile landCost of growing it is the lowestB land is not as fertileC land is even worseEconomics 1: Principles of microeconomicsWednesday, June 6, 2012Lecture 17Conditions for Long Run Equilibrium:1. Industry supply = Industry demand at P*2. All firms are where P is greater or equal to AVC3. All firms are where MR = MC4. All firms are making zero economic profits at minimum point on long run average curveFIRMMC LRATvaluedP* d = mrcostq/tMaking the product as cheap as we canINDUSTRY SDQ/tEfficiency Argument:q*Economics 1: Principles of microeconomicsWednesday, June 6, 2012Lecture 17- At P*, NGS is maximizedo Lower cost producers are producing for highest valued users- Every value produced is valued more than what is sacrificed to produce it- Units are produced at lowest possible costsAirlines Example of MonopolyP Q TR MR MC1000 1 1000 1000 400900 2 1800 800 400800 3 2400 600 400700 4 2800 400 400600 5 3000 200 X500 6 3000 0 X400 7 2800 -200 X300 8 2400 -400 X200 9 1800 -600 X100 10 1000 -800 xAll positive numbers in the MR row are part of the elastic demand curveAll negative numbers in the MR row are part of the inelastic demand curveThe zero in the MR curve is part of the inelastic demand curveEconomics 1: Principles of microeconomicsWednesday, June 6, 2012Lecture 17$ ATCAVC MONOPOLYD4 Q/tMRMonopolies are seen as inefficient.Argument:- Innovation: granted a patent- Natural monopoly: price searcher may be more efficient than the price taker700400Produce where MR=MCMC = $400Produce less than perfectly competitive market does and charges a higher