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SU ECN 203 - From Individual Market Demand to Shifting Cost Structure

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ECN 203 1nd Edition Lecture 10Outline of Last Lecture II. Elasticity III. Own Price Elasticity of Demand and Public Policy a. Change actual prices, change time prices b. Generate revenuec. Change behavior IV. Tax Incidence/Burden V. Intro to Cross Price Elasticity VI. Product Demand Shift Variables Outline of Current Lecture VII. From Individual to Market Demand VIII.Entry into the Market a. Symmetry on Entry and Exit IX. From Marginal Product to Marginal Cost X. Relationship of Average and Margin XI. The Firm’s Cost Structure a. Normal Return b. Shifting Cost Structure c. The Firm under Perfect CompetitionCurrent LectureLecture 10 2/9/15- From Individual to Market Demand o The sum of all individuals’ demands for a given good or service is the market demand forthat good or service.  At any given price, the market quantity demanded is the sum of the individuals’ quantities demanded at that price.  For example, - If at a $1 price These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o Quantity person A demands is 3 o Quantity person b demands is 4- Then at the $1 priceo The market demand is 4+3 = 7- If at a $5 priceo Quantity person A demands is 1o Quantity person b demands is 2- Then at the $5 priceo The market demand is 3 Since the market demand line is simply a sum of the individuals’ demands, changes in individuals’ demands due to changes in tastes, income, or prices of related goods can cause a shift in the market demands. - Entry into the Market o At the level of the market there is one more shift variable besides attitude changes of those in the marketo There is also entry of individuals into or exit of individuals from the market  For example, the impact of baby boomers on demand for diapers in the late 1940s. o More demanders mean more quantity demanded at any given price.  So with entry demand shifts right o Less demanders mean less quantity demanded at any given price…. So with exit demand shifts left o Symmetry on Entry and Exit  On the Supply Side of the Market - More supplies mean more quantity supplies at any given price…o Supply shift right - Less suppliers mean less quantity supplied at any given price…o Supply shifts left Entry and exit can be slow as with cohort movement through life stages, or it canbe volatile, affecting conditions in a market quickly, so it is a potential source of rapid changes in market conditions. Chapter 5 The Individual Firm in a Perfectly Competitive Market - From Marginal Product to Marginal Cost o In chapter 2 we learned that holding all other factors constant, as you increase one inputthe output from successive units of that input may increase initially but eventually the marginal product of that input will declineo This is important for what it costs to produce successive unit of output, or marginal cost We’ve assumed eventually diminishing MP- Successive units of input are more productive, so successive units of output cost less. MC goes down - Successive units of input are less productive, so successive units of output cost more. MC goes up - Relationship of Average and Margin o The margin always pulls the average in its direction o If the margin is above the average – it pulls the average up o If the margin is below the average – it pulls the average down - The Firm’s Cost Structure o So, relationship between MC and AC is that MC cuts through AC at lowest ACo Includes: Everything the firm has to pay others to stay in business o Normal Return: the amount just sufficient to beat the opportunity cost of being in business  To stay in business you have to make enough to cover all your business expensesand you have to pay yourself enough to make it worth staying in business. o The marginal cost curve shows how the cost of output changes for each successive unity produced.  It is one way to presents an individual firm’s cost structure  It is based on - The prices of inputs into production - Level of technology- The environment of production  If one of these changes, it changes the level of the cost structure and thus the level of the MC curve- Higher cost structure shifts MC up and lower cost structure shifts MC down - The MC curve of a firm is its supply line, these are the shift variables for the firm’s supply line. o Shifting Cost Structure If the cost of inputs go down or the technology improves then at any given quantity the MC and Ac will go down, lowering the cost structure.  If the cost of inputs go up or the technology gets worse than at any given quantity the MC and AC will go up raising the cost structure. o The Mc and the Firm’s Q^s Up to the Q the marginal cost per unit is falling so the firm is happy to produce these units. The question the firm has to address is:- As my MC rises, at what unit do I stop supplying?o This is determined by the Market Price. o The Firm Under Perfect Competition  No market failure or power  Market determines price – firm is a “price taker” Its demand line is perfectly elastic at the market price. - The market sets the price and for the firm that’s the demand line - So what quantity would the firm choose to supply?- The firm will supply Q at p = MC, not more or less. o As p changes MC traces the Firm’s Q^so It is the firm’s supply


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