Lecture%206%20MSF%20-%20Economic%20Profit%2c%20Aggregate%20Supply%2c%20Markets

Lecture%206%20MSF%20-%20Economic%20Profit%2c%20Aggregate%20Supply%2c%20Markets

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1 Fin 501 Financial Economics Lecture 6: Economic Profits, Aggregating Supply,  Markets Professor Nolan Miller
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2 Announcements Problem Set #2 is due Thursday. Problem Set #3 will NOT be due for credit.  The problem set and solution  will be distributed later this week. The first midterm is Thursday, September 30. MSFE Section: In Class MSF Sections: 7 – 8:20pm. Details to be distributed by email. Practice midterm questions will be available by the end of this week. My office hours this week will be Friday, 1:00 – 3:00. NO office hours on Tuesday/Thursday.
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3 Recap Last time we talked a lot about cost. Today:  Supply Supply: How much quantity does the firm make available for sale when  the price is p? Today: A bit more on supply. Economic Cost and Profit. Equilibrium.
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4 Profit Maximization and Supply Next, we turn to the firm’s supply decision: at price p, how much should  it make available for sale? First, focus on the short-term behavior of individual firms. Then turn to industry supply and long-run behavior of individual and the  market.
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5 Profit Maximization and Marginalism The key to thinking about the firm’s decision is to focus on the  “margin.” In asking whether to increase output, firm asks whether the  additional (“marginal”) benefit of doing so is greater than its  marginal cost. Should I produce another unit? Marginal benefit: sell it for p. Marginal cost: marginal cost at current Q, MC(Q). Produce another unit if p > MC(Q). *True if firm takes price as given.  Not true for a monopolist! *
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6 Profit Maximization and Supply A competitive firm takes price as given. Revenue:  R(Q) = P Q. The firm’s profit is Revenue – Cost: Profit: P Q – C(Q). The firm chooses Q that maximizes P*Q – C(Q). This is an unconstrained optimization problem. Take the derivative, set it equal to zero: d/dQ (P Q – C(Q)   P – C’(Q * ) = 0  If the firm produces a positive quantity, it produces Q *   where P = MC(Q * ).
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7 Profit Maximization and Supply To make sure Q *  really maximizes profit, need to check three  things: 1. Second order conditions: make sure Q *  is a local maximizer.  Negative  second derivative (i.e., -C’’(Q) < 0). 1. Multiple solutions: if there are multiple points where p = MC(Q), check  which one has the highest profit. 1.
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This note was uploaded on 01/18/2011 for the course FIN fin580 taught by Professor Miller during the Spring '10 term at University of Illinois, Urbana Champaign.

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Lecture%206%20MSF%20-%20Economic%20Profit%2c%20Aggregate%20Supply%2c%20Markets

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