far Thus we have seen that the individual firms short run supply curve comes from their marginal cost curve. Definition: The market supply at any price is the sum of the quantities each firm supplies at that price. The short run market supply curve is the HORIZONTAL sum of the individual firm supply curves. (Just as market demand is the 1 HORIZONTAL sum of individual demand curves)
Example: From Short Run Firm Supply Curve to Short Run Market Supply Curve
Typical firm: Individual supply curves per firm. 1000 firms of each type SMC3 SMC2 $/unit $/unit
SMC1
Market:
30
Market supply
24 22 20 0
300 400 500
q (units/yr)
0
Q (m units/yr)
1.2 mill 2
Definition: A short run perfectly competitive equilibrium occurs when the market quantity demanded equals the market quantity supplied. ni=1 qs(P) = Qd(P) Qs(P)= Qd(P) and qs(P) is determined by the firm's 3 individual profit maximization
Example: Short Run Perfectly Competitive Equilibrium Typical firm: $/unit $/unit Market:
Supply SMC P* Ps q* Units/yr Q*
4 m. units/yr
SAC AVC Demand
300 identical firms Qd(P) = 60 P STC(q) = 0.1 + 150q2 SMC(q) = 300q NSFC = 0 AVC(q) = 150q
5
a. Short Run Equilibrium Profit maximization condition: P = SMC P= 300q qs(P) = P/300 Qs(P) = P Qs(P) = Qd(P) P = 60 P P*= 30
6
b. Do firms make positive profits at the market equilibrium? SAC = STC/q = .1/q + 150q When each firm produces .1, SAC per firm is: .1/.1 + 150(.1) = 16 Therefore, P* > SAC so profits are positive.
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Comparative Statics in the Short Run
As seen in previous chapters, the entry or exit of firms or consumers, among things, other can shift the market demand and supply curves Shifts in the market demand and supply curves will shift the equilibrium quantity as seen in chapters 1 and 2
8
In the short run, capital is fixed and firms may temporarily operate under an economic profit or loss. In the long run, capital can change and firms can enter and leave the market, resulting in zero economic profit. Remember that in the long run, all costs are nonsunk (they are all avoidable at 9 zero output)
Just as in the short run the firm operated at: P=SMC In the long run the firm operates at P=MC SMCMC (in general) since costs are reduced in the long run. Only at profit maximization is SMC=MC 10 (because the short run is operating at
$/unit
In the long run, this firm has an incentive to change plant size to level K1 from K0: MC SMC0 SAC 0 A
P
AC SAC1
SMC1
1.8
6
11 q (000 units/yr)
In the long run, a firms supply curve is The firms LR MC curve above AC. For if P>AC, Profits>0. Since Profits = PxQ-ACxQ As in the short run, market supply is the horizontal sum of individual firm supply.
12
$/unit
Long Run Supply Curve: MC S
P
AC
SMC1
1.8
6
13 q (000 units/yr)
Long Run Perfectly Competitive Equilibrium occurs when: 3)Each firm maximizes profit with regards to output and capital (P=MC) 4)Each firms economic profit is zero (as firms keep entering until the price is pushed down to zero profits) (P=AC) 5)Market Demand=Market Supply
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Long Run Perfectly Competitive Equilibrium
Typical Firm Market $/unit $/unit
SAC P*
MC
AC
Market demand
SMC
q*=50,000
q
Q*=10M.
15
Q