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OSU ECON 4001.01 - Perfectly Competitive Markets

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Econ 4001.01 1st Edition Lecture 13Outline of Last Lecture II. Input Substitution and Marginal ProductsIII. Cost Minimizing Input Combination as Output ChangesIV. Short-Run vs. Long-Run Cost CurvesV. Non-Linear Cost Curves: Economies of Scalea. Diseconomies of ScaleVI. Sale Economies and Output ElasticityVII. Economies of ScopeVIII. Elements of Perfectly Competitive MarketsIX. Objectives of FirmsOutline of Current Lecture X. Firms Face Horizontal Demand CurvesXI. Choosing Outputa. In the Short-Runb. When the firm is making lossesXII. Short-Run Shutdown for Firms Making LossesXIII. Short- Run Supply Curve for Competitive FirmsXIV. Short-Run Responses to Price ChangesXV. Producer SurplusCurrent LectureProfit Maximization- Elements of Perfectly Competitive Marketso Many sellers: each firm is small relative to the market, so it has no influence on market price Firms behave as price takerso Homogeneous products: each firm produces output that is identical to that of other firms Firms share common demand curveo Free entry and exit: so profits lead to entry of new competitors and losses cause firms to leave market- Profit Maximization and Relationship to Costo Profit: difference between total revenue and total costThese 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. In equation form: pi(q)= TR(q) –TC(q)o For pi(q) to be at a maximum, change in pi/change in q=0o When profits are maximized MR(q)=MC(q)-The Firm faces a Horizontal Demand Curveo Price is independent of quantity produced for a perfectly competitive firmo As a result, P=AR(q)=MR(q)o Therefore, profit maximization requires P=MC(q)o Firm chooses quantity at which P=MC-Choosing Output in the Short Runo If a firm produces at any output, it should produce at level at which MR=MC (where MC is increasing)-Choosing Output when Firm is Making Losseso Total losses at output level q* can be found from the area of the rectangle ABCD-Short-Run Shutdown for Loss-making Plantso Firms should operate if P> ATC at q*If P>ATC at q* then firms make a profitProfit-making firms may want to consider expansiono Firms should shut down and re deploy assets if P<ATC at q*o Firms may choose to continue to operate if AVC<P<ATC at q*So, if low prices are expected to be temporary, or if a firm can quickly reduce variable cost, or if most of its fixed costs are non-recoverable (sunk)-Short-run Supply Curve- Competitive Firmso Short-run supply curve is MC curve above min. AVC; if price is below minimum AVC then supply is zero-Short Run Responses to Price Changeso What happens if market price drops? Firm reduces output (q) profit falls (or loss increase)o What happens if an input price increases (wages or material costs)? MC, AVC, ATC curves shift up, output falls, profit fallso What happens if fixed costs increase (property tax, insurance, salaries)? ATC moves up, but nothing else changes so output doesn’t move (you just make less profit)-Short Run Market Supply Curveo Horizontal sum of all individual firms’ MC curves; elasticity of supply depends on the steepness of MC curve-Producer Surpluso The area above marginal cost and below the price line- Marginal cost formula is the derivative of the cost of production


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