Week8.Monopoly.2009

# Week8.Monopoly.2009 - ECMA04H Week Eight Finish up Perfect...

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1 ECMA04H – Week Eight Finish up Perfect Competition – 1. Algebra 2. Long-run equilibrium Then: Monopoly First….remember effects of increase in Demand

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2 Before: Market Demand: P = 154 - .06Q Total cost function of each PC firm: TC = 3q 2 + 10q + 432 FC = 384 Therefore, for PC industry in SR Demand: P = 154 - .06Q Supply: P = 10 + .06Q SR equilibrium where D and S intersect Q 0 * = 1200, P o * = \$82
3 Now: Demand shifts up to P = 226 - .06Q. How does the PC firm and industry respond in SR? How are resources reallocated in economy to respond to additional demand? The new demand will change SR industry equilibrium… Raising the market price…

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4 The rising market price is what calls forth new supply behaviour by each firm …which increases profit of the firm
5 The market reallocates resources “as if by an invisible hand” (Adam Smith, 1776)

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6 The long run A period of time long enough for all available adjustments to be made by all firms in the industry (and potential entrants) Which adjustments? 1. All firms get to “best” size (q MES ) 2. Firms enter or exit the industry Q: What does “best” size mean? A: Most competitive size – with lowest possible average cost of production (q MES )
7 Q: Why do firms enter or exit? A: In response to profit incentives (economic profit)

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8 SR - capital is fixed (firm) - no entry or exit (industry) LR - all inputs variable (firm) - free entry and exit (industry) Because of entry and exit, supply is more responsive in the long run (more elastic).
Think about the long run for the firm Long Run Average Cost – LRAC or LAC P q PC FIRM - LR q MES

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10 How big will the firm decide to be in the long run? How much output will the PC firm produce in the LR? Choose capital equipment such that q = min LRAC = q MES What will happen to the price in a competitive industry in the LR?
11 What is the PC firm’s supply curve in the LR?

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12 What is the PC industry supply curve in the LR?
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Week8.Monopoly.2009 - ECMA04H Week Eight Finish up Perfect...

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