Lecture 12 _Mar 2_ - Economics 100A Lecture #12: Thursday,...

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1 Economics 100A Lecture #12: Thursday, Mar. 2 1) Competitive firm/market supply 2) Increasing/decreasing cost industries 3) Comparative statics of supply 4) Competitive market equilibrium
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2 (1) Competitive firm supply SRTC(q) = 100 + 20q + q 2 SRMC(q) = 20 + 2q SRAC(q) = 100/q + 20 + q s(p) solves: p=SRMC(q) q = s(p) = -10 + ½ p SRAC = SRMC at q = 10 p > 40 firm earns profit p < 40 firm loses money 100 20 SRTC SRMC SRAC 40 $ q q 10
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3 Firm supply (cont’d) Suppose all of F = 100 is sunk , so that … ANSC(q) = AVC(q) = 20 + q Competitive supply: p = SRMC(q), p>AVC(q) p = 20 + 2q s(p) = -10 + ½p, p > 20 20 SRMC AVC
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4 Competitive market supply Horizontal sum of firms’ supply curves: S(p) = s 1 (p) + s 2 (p) + … + s N (p) Assume: no technical interaction (e.g., common pool) no strategic interaction (e.g., collusion) Underground
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5 Special cases of market supply Identical competitive firms: S(p) = Ns(p) More firms proportionately more market supply Differences in cost of firms: S(p) = j s j (p) Own a scarce resources ( e.g., mineral deposit, a taxi medallion, a patent) Different costs ( e.g ., superior technology, more productive workers)
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6 p 140 50 175 q 6.47 6.47 6 7 p 7 5 0 AVC Representative Firm 200 150 100 50 250 700 Q 6 5 0 market S 3 S 4 S 5 S 2 S 1 S 1 Identical competitive firms
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7 p 100 140 165 215 315 450 25 50 S 2 S S 1 0 q, Q 6 7 8 5 Market supply with different firms
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8 Market supply elasticity Definition: Identical firms: S(p) = Ns(p) ε Q,p = % Δ (Ns)/% Δ p = % Δ s/% Δ p Special Cases Perfectly inelastic supply: S(p) = s (a constant) Perfectly elastic supply: S(p) = 0 if p < p S(p) = + if p > p Linear supply: S(p) = - a + bp Q,p = bp/(- a + bp) Constant elasticity supply: S(p) = ap b where a, b > 0 dp dQ Q p p p S p S p p p p S p S S S P Q s ) ( ) ( % ) ( ) ( % ,
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9 More time more elastic supply Q (units/yr) $/unit LRAC(Q) SRAC(Q,K) M.E.S LRMC(Q) SRMC(Q,K)
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10 (2) Increasing/decreasing cost industries Entry/exit of firms in response to changing conditions, e.g., increase or decrease in market demand New entrants attracted by profit, or established incumbents driven out by losses Entrants may be more or less efficient than incumbents Entry/exit of firms impacts factor prices Factor prices may rise or fall for all firms as entry/exit occurs This is a “pecuniary” economy – not derived from firms’ technology (e.g., IRTS/DRTS)
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11 Increasing/decreasing cost (cont’d) Increasing cost industry Entry of new firms drives up
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This note was uploaded on 03/18/2010 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

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Lecture 12 _Mar 2_ - Economics 100A Lecture #12: Thursday,...

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