ECN 203 1nd Edition Lecture 11Outline of Last Lecture II. From Individual to Market Demand III. Entry into the Market a. Symmetry on Entry and Exit IV. From Marginal Product to Marginal Cost V. Relationship of Average and Margin VI. The Firm’s Cost Structure a. Normal Return b. Shifting Cost Structure c. The Firm under Perfect CompetitionOutline of Current Lecture VII. The MC and the Firm’s Q^sVIII. The Firm in the Market IX. Marginal and Average a. The RelationshipX. The Marginal Cost and Average Cost Curves XI. Profit a. Total revenueb. Total costc. Profit XII. Dynamics of Perfect Competition XIII. When the profit is gone XIV.Innovation Current Lecture2/11/155.1-6.2- The MC and the Firm’s Q^so Up to the Q* the marginal cost per unit is falling so the firm is happy to produce these units. 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. The question the firm has to address is:- As my MC rises, at what unit do I stop supplying?  This is determined by the Market Price o The market sets the price For the firm, that’s the demand line D What quantity, Q, would the Firm choose to supply?- The firm in the market o The firm will supply Q at p=MC, not more, not less.  As p changes MC traces the Firm’s “Qs”- It is the firm’s Supply line - Marginal and Averageo Marginal cost identifies how much each specific unit costs as it is produced Represents each cost of each successive unit  Represents the actual cost of a specific additional unito The average cost is measured by dividing total cost of production by total number produced it spreads out the cost evenly among the units produced as if they all cost the same to produce  represents a measure of how much units cost if we spread the total costs out evenly for the given number produced o The Relationship The margin moves faster than the average because of how the average is calculated- The average calculation does not drop as fast because it includes the effects of the higher margins from before.  The margin always pulls the average in its direction- Whenever the margin is above the average it pulls the average up - If the margin is below the average it pulls the average down - Once the margin goes above the average, the average starts to rise because than the margin is pulling the average up.- The Marginal Cost and Average Cost Curves o The marginal cost starts below the average cost As the marginal cost rises it would eventually reach and cut above the average cost  At the point at which the MC cuts above the AC it starts to pull the AC up o MC intersects going from below to above the AC curve at the bottom point along the AC curve  The margin always pulls the avg in its direction  The MC cuts the Ac at the minimum AC point - Profito We call it profit when the total revenue of the firm is greater than the total costso We call it a loss when the total costs are higher than total revenue o We call it breaking even when the total costs equal total revenue  Total revenue = price x quantity - The amount of money it takes in from the sale of its product  Total cost = avg cost x quantity - The amount of money the firm spends in the process of producing Profit = total revenue – total cost o TC includes a normal return – a sufficient return to make it worth staying in business  Any positive profit is very nice, but not necessary to stay in business.  It is covering its opportunity cost - Dynamics of Perfect Competition o Profit attracts competitors o Competitors enter market o Market supply increaseso Market price fallso Falling market price squeezes firm’s profit  As market price goes down, the difference between price and the average cost get smaller Making no profit o This dynamic continues so long as there is any profit to attract competitors - When the profit is gone o The firms are mad  but society is served  all firms are forced to produce at the lowest average cost – the most efficient method production  firms don’t choose efficiency – they are forced to be efficient by perfect competition o The entrepreneur must be imaginative and innovative  lowering cost structure by coming up with a more efficient way to produce - Dynamics of Perfect Competition – Innovation o Leader firm with the lowest cost structure will enjoy a profit until others figure out the new more efficient production technique o Perfect competition requires commutative justice to ensure a fair, keen competition o Does PC ensure distributive justice? No, one will get a share proportional to one’s share of the initial endowment, and this initial distribution can be quite