Lecture+15+October+27

Lecture+15+October+27 - Todays Agenda Short-run supply and...

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Today’s Agenda Short-run supply and the shut-down point Long run industry equilibrium Long run industry supply
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Q Q $/Q $ MR, AR PQ=TR P 1 P Revenue is proportional to Q for a perfect competitor
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The supply decision Should the firm produce anything? If so, what quantity should it produce?
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Q $ STC(Q) TR(Q) Q π (Q) $ Q* slope = MC(Q*) slope = MR(Q*) = P slope = 0
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Q $ STC(Q) TR(Q) Q π (Q) $ Q* At Q*, MR = MC
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Q* in terms of MR, MC curves Q $/Q SMC MR P 1
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Q* in terms of MR, MC curves Q $/Q SMC MR P 1 Q*(P 1 )
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Q* in terms of MR, MC curves Q $/Q SMC Q*(P 2 ) MR P 2 MR P 1
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Q* in terms of MR, MC curves MR P 2 Q $/Q SMC Q*(P 3 ) MR P 1 MR P 3
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Q* in terms of MR, MC curves P 2 Q $/Q SMC P 1 P 3
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Is the profit-maximizing firm profitable? Q $/Q SATC AVC SMC P MR
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Is the profit-maximizing firm profitable? Q $/Q SATC AVC SMC P MR Q*
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Is the profit-maximizing firm profitable? Q $/Q SATC AVC SMC P MR Q*
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Is the profit-maximizing firm profitable? Q $/Q SATC AVC SMC P MR Q*
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Is the profit-maximizing firm profitable? Q $/Q SATC AVC SMC P MR Q*
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Is the profit-maximizing firm profitable? Q $/Q SATC AVC SMC P MR Q*
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Is the profit-maximizing firm profitable?
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Suppose P is lower Q $/Q SATC AVC SMC P MR
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Suppose P is lower Q $/Q SATC AVC SMC P MR
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Suppose P is lower Q $/Q SATC AVC SMC P MR
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AVC(Q*) < P < SATC(Q*) Q $/Q SATC AVC SMC P MR Firm loses money at Q* Even so, it loses less than it would if it shut down.
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Suppose P is still lower Q $/Q SATC AVC SMC P MR
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Suppose P is still lower Q $/Q SATC AVC SMC P MR
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Short run supply curve Q $/Q SATC AVC SMC Supply
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Competitive supply in the long run In the long run: Firms can vary all factors of production. Firms can enter or leave the industry. Long run cost functions LAC is the envelope of all SATCs Shape determined by returns to scale
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Long-run industry equilibrium 3 requirements No firm has an incentive to change K No firm has an incentive to change Q No firm has an incentive to enter or leave the industry.
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Lecture+15+October+27 - Todays Agenda Short-run supply and...

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