business economics notes-3

business economics notes-3 - Econ5103 BusinessEconomics...

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  1 Econ5103 Business Economics Lecture Notes 3
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  2 Part A Perfectly competitive supply: the cost side of the market
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  3 Learning Objectives State the law of supply Describe how a firm in a perfectly competitive market decides how much to supply at each price Apply the profit-maximising rule Explain the relationship between the law of diminishing returns and SR cost curves Construct a market supply curve from individual supply curves Use theory of supply to predict the firm behaviour Define and calculate producer surplus and analyse welfare effects
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  4 The opportunity cost Example: How much time should Harry spend recycling soft drink containers?
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  5 The opportunity cost Harry is choosing between washing dishes for $6/hour and collecting containers at 2 cents each Opportunity cost of collecting cans is $6/hour Applying the cost-benefit principle: 1 hour collecting cans = (600)(.02) = $12 Benefit ($12) > Opportunity cost ($6) 2nd hour benefit ($8) > Opportunity cost ($6) 3rd hour benefit ($6) = Opportunity cost ($6)
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  6 The opportunity cost Question: What is the lowest refund that would induce Harry to spend at least 1 hour/day recycling? Solution: 600 containers x 1 cent = $6 = opportunity cost of washing dishes
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  7 The opportunity cost Harry’s additional earnings from searching the additional hour will be ( 29 6 $ = Q p ) ( Q p The smallest refund that will lead Harry to search another hour must satisfy the equation: = 400 p (400)= $6 p = 1.5 cents ($0.015) ΔQ
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  8 Harry’s individual supply curve for  recycling services
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  9 Individual and market supply curves The quantity that corresponds to a given price on the market supply curve is the sum of the quantities supplied at that price by all individual sellers
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  10 Market supply curve Horizontal summation of individual supply curves Upward sloping Reasons for upward-sloped supply curve: costs tend to rise with expanded production each individual exploits his most attractive opportunities first different potential sellers face different opportunity costs
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  11 Supply in perfectly competitive  markets Profit: The total revenue a firm receives from the sale of its product minus all costs – explicit and implicit – incurred in producing it Profit maximising firm: A firm whose primary goal is to maximise the difference between its total revenues and total costs, or profit Perfectly competitive market: A market in which no individual supplier has any influence on the market price of the product Price taker: A firm that has no influence over the price at which it sells its product
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  12 Characteristics of perfectly  competitive markets 1. All firms sell the same standardised product 2. The market has many buyers and sellers each of which buys or sells only a small fraction of the total quantity exchanged 3. Sellers are able to enter and leave a market as they like 4. Buyers and sellers are well informed 1-12
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This note was uploaded on 08/07/2011 for the course ECON 3002 taught by Professor Dulip during the Three '11 term at University of Sydney.

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business economics notes-3 - Econ5103 BusinessEconomics...

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