APPLIED ECONOMICS FOR MANAGERS SESSION 5 I REVIEW A CONSUMER THEORY 1 THE PROBLEM a CHOOSE A COLLECTION OF GOODS SERVICES QUANTITIES OF X1 X2 XN THAT MAXIMIZES UTILITY b SUBJECT TO THE BUDGET CONSTRAINT B P1X1 P2X2 PNXN 2 THE SOLUTION a SPEND ENTIRE BUDGET GET TO THE FRONTIER OF THE FEASIBLE BUNDLES B P1X1 P2X2 PNXN b CHOOSE THAT COLLECTION ON THE FRONTIER THAT SATISFIES THE EQUIMARGINAL PRINCIPLE MU1 MU 2 MU N P1 P2 PN B IMPLICATIONS 1 DEMAND CURVES SLOPE DOWNWARD 2 IN EQUILIBRIUM ALL CONSUMERS OBEY THE EQUIMARGINAL PRINCIPAL AND ALL FACE THE SAME RELATIVE PRICES VALUE AT THE MARGIN WILL BE THE SAME FOR ALL CUSTOMERS E G PX MU X PY MU Y E G SUPPOSE THAT PX 6 AND PY 2 THEN MUX MUY 3 I E IN EQUILIBRIUM EACH CONSUMER CONSIDERS ONE MORE UNIT OF X TO BE WORTH 3 MORE UNITS OF Y THE VALUE OF THOSE 3 Y UNITS WOULD BE 6 EXACTLY WHAT PX SHOWS II PRODUCER BEHAVIOR A OBJECTIVE PROFIT MAXIMIZATION I E MAXIMIZE THE DIFFERENCE BETWEEN REVENUE AND COSTS R Q C Q B A PRODUCTION EXPERIMENT C REVENUE PRICE TIMES QUANTITY PQ 1 TOTAL REVENUE 2 MARGINAL REVENUE D COST CONCEPTS 1 TOTAL COST TC Q 2 AVERAGE COST TC Q Q 3 MARGINAL COST TC Q dTC Q dQ E NECESSARY CONDITION FOR PROFIT MAXIMIZATION MARGINAL REVENUE MARGINAL COST F SUPPLY CURVE FOR THE COMPETITIVE INDUSTRY 1 P MC FOR EACH FIRM 2 AT ANY GIVEN P DETERMINE Q THAT LEADS TO MC EQUAL TO THAT PRICE AT EACH FIRM 3 ADD OUTPUT OF EACH FIRM TOGETHER TO GET TOTAL INDUSTRY OUTPUT AT THAT PRICE 4 REPEAT FOR OTHER PRICE LEVELS III COMPETITIVE EQUILIBRIUM IN THE SHORTAND LONG RUN A PROFIT MAXIMIZATION AT COMPETITIVE FIRMS 1 FIRM DEMAND CURVE VS INDUSTRY DEMAND CURVE 2 OPTIMAL PRODUCTION FOR A PROFIT MAXIMIZING COMPETITIVE FIRM B COMPETITIVE FIRMS AND PROFIT MAXIMIZATION IN THE SHORT RUN AND THE LONG RUN 1 P MC AS THE NECESSARY CONDITION 2 P AC AS THE LONG RUN EQUILIBRIUM NO ENTRY CONDITION C UNDERSTANDING THE COMPETITIVE OUTCOME 1 THE COMPETITIVE INDUSTRY SUPPLY CURVE AND MARGINAL COST CURVES 2 THE LONG RUN COMPETITIVE INDUSTRY OUTCOME a P AC b P MC c PX MU X PY MU Y unit unit unit MCFIRM 1 MARKET SUPPLY MCFIRM 2 P q1 P q1 q2 P unit q2 Q P Q unit SINDUSTRY P MCFIRM DFIRM DINDUSTRY Q q UNIT AC MC Possible Short Run Equilibrium Long run Equilibrium q