Week 5B - COMM/FRE 295 October 6, 2010 Continuation of...

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Unformatted text preview: COMM/FRE 295 October 6, 2010 Continuation of Competitive Markets, Consumer Surplus, Producer Surplus, DWL Sections 8.1 8.6 Topics Examined Graphical illustration of short run profits for a competitive firm Long run equilibrium for a competitive industry Measuring consumer surplus Producer Surplus Dead Weight Loss Graphical Illustration of Revenue for a Competitive Firm 0 P q* ATC AVC AFC MC Notice that the firm produces where P = MC Graphical Illustration of Fixed Cost (A) 0 q* ATC AVC AFC MC Graphical Illustration of Fixed Cost (B) 0 q* ATC AVC AFC MC Graphical Illustration of Variable Cost 0 q* ATC AVC AFC MC Graphical Illustration of Profit 0 q* ATC AVC AFC MC Example The cost function for a firm that produces construction cable is C(q) = 0.05q 2 + 400. The firm bids on a contract to supply cable to the city. How much will the firm supply if it bids $10 per unit of q? How much profit will it earn? Solution Use cost function to calculate MC Set P = MC and solve expression for optimal quantity, q * 0.1q = P q * = 10P (set P = 10) Substitute q * into profit equation to obtain profits earned Profit equation = 10q [0.05q 2 + 400] How many firms operate in a competitive industry? A key assumption of a competitive industry is that firms can enter and exit the industry at virtually no cost If firms are making a profit, then other firms will enter, this will shift market supply to the right, and the equilibrium price will be forced down Price will continue to decrease until economic profits are driven to zero Firms Supply (MC) Mkt Supply = Sum of Firms Supply ATC Market Firm Q q Market Supply is the horizontal sum of individual firm supply Firms Supply (MC) Mkt Supply = Sum of Firms Supply ATC Market Firm Q q P Demand The intersection of market supply and demand determines equilibrium price, P Firms Supply (MC) Mkt Supply = Sum of Firms Supply ATC Market Firm Q q P Profits The price taking firm produces where P = MC q * Profits are positive in the short run q * Firms...
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This note was uploaded on 01/03/2011 for the course COMM 290 taught by Professor Brian during the Winter '09 term at The University of British Columbia.

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Week 5B - COMM/FRE 295 October 6, 2010 Continuation of...

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