Lecture+16+October+28

Lecture+16+October+28 - Today’s Agenda • Competitive...

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Unformatted text preview: Today’s Agenda • Competitive supply: a numerical example • Demand and marginal revenue when the firm has power over price • Monopoly price, output and profits • Short run • Long run • Barriers to entry E x a m M o n d a y … C o v e r a g e : t a x e s t h r o u g h l o n g- r u n s u p p l y ( N O T m o n o p o l y ) C h a p t e r s 7 , 9- 1 3 MR Q LAC LMC SMC SATC Q* S short run $/Q $/Q D INDUSTRY FIRM D' S long run Long run industry supply curve: horizontal line at minimum of LAC Only P = min LAC is compatible with long run equilibrium Q $/Q LAC MR P Q $/Q LAC MR P Only P = min LAC is compatible with long run equilibrium Q $/Q LAC MR P SATC Q $/Q LAC MR P Finding the long-run industry supply curve in the exogenous factor prices case • You need only determine the minimum value of LAC. • Long run industry supply is horizontal at this value. • Comparative statics of long-run industry supply are thus quite straightforward: • What is the effect of the parameter charge in question on the height of the minimum point on LAC? Example • What is the long-run incidence of a $1 per unit-tax levied on sellers? • What is the effect on LAC? • Shifts upward by $1 at all Q • Minimum value of LAC thus rises by $1. • Hence long-run industry supply shifts upward by $1. • Price rises by full amount of the tax. • Consumers bear entire burden of the tax. An implicit assumption • We have been assuming that factor prices are unaffected by the expansion of the industry. • Factor prices assumed to be exogenous . • Exogenous = determined outside the model; unaffected by changes in variables determined within the model • What if factor prices rise as the industry grows? • That is, what if factor prices are endogenous ? MR Q LAC LMC SMC SATC Q* S industry $/Q $/Q D INDUSTRY FIRM D' As the industry expands, factor prices rise, shifting costs upward Q S short run $/Q $/Q D INDUSTRY FIRM D' MR LAC LMC SMC SATC S' As the industry expands, factor prices rise, shifting costs upward Q S short run $/Q $/Q D INDUSTRY FIRM D' MR LAC LMC SMC SATC S' S long run Entry process is cut off earlier as rising costs eliminate profits more quickly Shape of long run industry supply curve • Depends on how factor prices vary when industry expands • Exogenous factor prices case: long run supply curve is horizontal at height of minimum value of LAC • “Constant cost” industry • “Increasing cost industry”: long run supply curve is upward sloping -$115.63 $715.63 $506.67 $96.89 $32.03 $35.78 $40.00 $25.33 20-$55.65 $625.65 $468.79 $83.29 $28.98 $32.93 $35.82 $24.67 19-$8.65 $548.65 $434.88 $70.91 $26.31 $30.48 $32.08 $24.16 18 $26.57 $483.43 $404.49 $59.74 $24.03 $28.44 $28.78 $23.79 17 $51.23 $428.77 $377.17 $49.78 $22.11 $26.80 $25.92 $23.57 16 $66.54 $383.46 $352.50 $41.04 $20.56 $25.56 $23.50 $23.50 15 $73.72 $346.28 $330.03 $33.52 $19.38 $24.73 $21.52 $23.57 14 $73.98 $316.02 $309.31 $27.20 $18.54 $24.31 $19.98 $23.79 13 $68.53 $291.47$291....
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This note was uploaded on 11/10/2011 for the course ECON 220:102 taught by Professor Rubin during the Fall '11 term at Rutgers.

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Lecture+16+October+28 - Today’s Agenda • Competitive...

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