204_summer_2009_lecture_14

204_summer_2009_lecture_14 - University of Toronto...

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Unformatted text preview: University of Toronto Department of Economics ECO 204 Summer 2009 Sayed Ajaz Hussain Lecture 14 1 Ajaz Hussain. Department of Economics Last Time ¡ Types of firms: ¢ Competitive ¢ Market Power ¢ Monopsony ¢ Dual Monopoly ¡ Some objectives of the firm ¡ Profit algebra: ¢ Competitive firm ¢ Firm with market power 2 Ajaz Hussain. Department of Economics Today ¡ Rational vs. irrational producers ¡ Competitive firms as price takers ¡ Market demand and supply reexamined ¡ Profit maximization algebra ¡ “Equilibrium” ¡ Competitive firm: supply curve ¡ Short vs. Long run ¡ Industry shocks: adjustment dynamics 3 Ajaz Hussain. Department of Economics Competitive Firm Ajaz Hussain. Department of Economics 4 Competitive Firm with no opportunity cost Output Inputs Price Taker Price Taker Price of Output: P Prices of Inputs: P L , P K Recall Competitive firm: definition ¡ Firm is a price taker ¡ Firms believe their output to be independent of price ¡ Firms need only to choose output, not price ¡ Competition may ensue even with 2 firms ¡ See this article on commodities ¡ Why does ECO 100 work with “many” firms? ¡ In Aluminum case, what caused primary aluminum to start behaving “competitively”? “Rational” vs. “Irrational” Producers ∏ = R – C = (P – AVC)Q – TFC Ajaz Hussain. Department of Economics 5 Firm profitable: ∏ ≥ Firm unprofitable: ∏ < 0 ∏ = (P – AVC)Q – TFC ≥ ∏ = (P – AVC)Q – TFC < 0 ∏ = (P – AVC)Q – TFC < 0 Should firm “shut down”? Rational firm: “Yes” Irrational firm: “No” (Example?) ∏ = (P – AVC)Q – TFC ≤ Should firm “shut down”? P is not a function of Q ho are the “irrational” producers from Aluminum ase? How to identify them in data ? Perfect Competition: ECO 100 Ajaz Hussain. Department of Economics 6 MARKET FIRM Q Q P P Market Supply Market Demand Firm Demand arket Price Textbook treatments of Market Demand and Market Supply almost always involve the use of linear demand and supply curves In real life, this is not true, especially for supply. Linear curves will not explain “spikes” in prices without concomitant change in volume. Market Price The Importance of Working with Real, Possibly Non ‐ Linear, Demand and Supply Curves Ajaz Hussain. Department of Economics 7 Q P S D 1 Q P S Time Time Time Time P Q D 2 P Q D 1 D 2 D 3 Price & Volume: “Dependent” Price & Volume: “Independent” See Google Finance Linear Market Demand: Plausible Ajaz Hussain. Department of Economics 8 Consumer Utility Consumer Demand Market Demand U = Q 1 α Q 2 β U = (Q 1 – α ) 2 /2 β + Q 2 Q 1 = ( α /( α + β ) ) Y P 1 ‐ 1 Q 1 = α + β P 1 P Q P Q When summed across any number of consumers, demand will still be linear When summed across very many consumers, demand will be linear Q P Market Demand Individual Demand Assume very many consumers Market demand becomes linear by “smoothing” individual demands Linear Market Supply curve plausible?...
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This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto.

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204_summer_2009_lecture_14 - University of Toronto...

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