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econ2020-chapter6-notes

# econ2020-chapter6-notes - Perfectly Competitive Supply The...

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Perfectly Competitive Supply: The Cost Side of The Market Chapter 6

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Thinking About Supply: The Importance of Opportunity Cost Example How much time should Harry spend recycling soft drink containers?
Harry’s Choices Harry is choosing between washing dishes for \$6/hour and collecting containers at 2 cents each. Opportunity cost of collecting cans is \$6/hour.

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Harry’s Can Collection Production Function Search time (hours/day) 0 0 1 600 2 1,000 3 1,300 4 1,500 5 1,600 Total number of containers found Additional number of containers found xxx 600 400 300 200 100
Costs and Benefits Costs and Benefits 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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Redemption Price versus Time Question What is the lowest redemption price that would induce Harry to recycle 1 hour/day? Solution 600 containers x 1 cent = \$6 = opportunity cost of washing dishes
Calculating the Reservation Price Reservation Price ( 29 6 \$ = Q p Opportunity Cost

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Reservation Price Schedule Reservation Price 1 hour recycling = p (600) = \$6 = 1 cent 2 hours recycling = p (400) = \$6 = 1.5 cents 3 hours recycling = p (300) = \$6 = 2 cents 4 hours recycling = p (200) = \$6 = 3 cents 5 hours recycling = p (100) = \$6 = 6 cents
An Individual Supply Curve for Recycling Services Recycled cans (100s of cans/day) Deposit (cents/can) 0 6 10 13 16 6 3 2 1 1.5 15 Harry’s Supply Curve

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For Multiple Collectors Assume Harry has a brother, Barry, who also works as a dishwasher. Barry has the same opportunity cost and the same can collecting production function. Barry would thus have an identical supply curve.
The Market Supply Curve for Recycling Services Recycled cans (100s of cans/day) Recycled cans (100s of cans/day) Deposit (cents/can) + Deposit (cents/can) 6 10 13 16 6 3 2 1 0 1.5 15 Harry’s Supply Curve 6 10 13 16 6 3 2 1 0 1.5 15 Barry’s Supply Curve

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Recycled cans (100s of cans/day) Deposit (cents/can) 12 20 26 32 6 3 2 1 0 1.5 30 = The Market Supply Curve for Recycling Services Market Supply Curve
The Market Supply Curve with 1,000 Identical Sellers Recycled cans (100,000s of cans/day) Deposit (cents/can) 6 10 13 16 6 3 2 1 0 1.5 15 Market Supply Curve

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The Upward Slope of Supply What do you think? Why is the supply curve upward sloping? Remember: Principle of Low Hanging Fruit
“Perfectly Competitive” Firms If firms are “perfectly competitive” they produce an identical product, such as field corn, iron ore, or milk. Also, there are so many firms in the market that the output of any particular firm is insignificant relative to the entire output of all the firms. In these situations, the firm’s output does not affect the market price. These firms are called “price takers.”

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Profit-Maximizing Profit Maximization Profit Total Revenue - All Costs (explicit & implicit) Total Revenue to a firm is price*output Profit-Maximizing Firms Goal of the firm is to maximize the difference between total revenues and total costs, e.g. make the most profit possible.
Repeat:

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econ2020-chapter6-notes - Perfectly Competitive Supply The...

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