Transcript srmkts

COMPETITIVE SUPPLY
IN THIS SECTION WE WILL DERIVE THE
COMPETITIVE FIRM’S SUPPLY CURVE.
THEN WE’LL ADD TOGETHER THE SUPPLY CURVES
OF THE FIRMS TO GET THE MARKET SUPPLY
CURVE OF A GOOD.
FINALLY, WE’LL SHOW HOW MARKET PRICES ARE
DETERMINED IN COMPETITIVE MARKETS.
Competitive markets in the short-run
slide 1
THE SUPPLY CURVE OF A COMPETITIVE
FIRM CORRESPONDS ALMOST EXACTLY TO
ITS MARGINAL COST CURVE.
[Recall that a supply curve tells you how much will
be desired to be sold at each price. The game here
is to choose several prices, then and see how much
the firm wants to sell at each price.]
Competitive markets in the short-run
slide 2
To find a firm's supply curve we need to review the
ideas of AVERAGE COST, and AVERAGE
VARIABLE COST.
What do the AC and AVC curves look like for a
competitive firm?
Competitive markets in the short-run
slide 3
We can show Average and Total Fixed Costs on the
diagram. The next slide shows how.
$/Q
MC
AC
AFC = AC - AVC
AVC
Q
Competitive markets in the short-run
slide 4
Total fixed cost (FC) can be shown on the graph, and
is, of course, that same at every output.
$/Q
FC if output is small
MC
AC
AVC
Q
$/Q
FC if output is larger
MC
AC
AVC
Q
Equal areas at any output
Competitive markets in the short-run
slide 5
If price is greater than AVC, then the firm should
produce where MC = MR.
$/Q
$/Q
FC: Loss if Q = 0
Loss at MC=MR
MC
AC
AVC
Q
Competitive markets in the short-run
MC
AC
AVC
Q
slide 6
If price is less than AVC, then the firm should
produce nothing and take a loss equal to FC.
$/Q
$/Q
FC: Loss if Q = 0
Loss at MC=MR
MC
AC
AVC
Q
Competitive markets in the short-run
MC
AC
AVC
Q
slide 7
If a firm cannot cover its variable costs, it should
shut down, and take a loss equal to fixed cost.
If a firm’s revenue is greater than variable costs, it
should produce where MC = MR, even if that
means taking a loss.
Competitive markets in the short-run
slide 8
ONE POINT OF THIS IS THAT WE CAN
NOW FIND THE SUPPLY CURVE OF AN
INDIVIDUAL COMPETITIVE FIRM.
Supply curve of a competitive firm:
The curve that shows for each
level of output price the
quantity supplied by the firm.
Competitive markets in the short-run
slide 9
In the short-run, a competitive firm’s supply curve is
its marginal cost curve above average variable
cost.
Economists sometimes say “Marginal cost curves are
supply curves.” This is almost true. The
exception is the part of a marginal cost curve that
lies below AVC.
Competitive markets in the short-run
slide 10
The next (hidden slide) shows the derivation of the
firm's short-run supply curve.
The firm's SR supply curve is its marginal cost curve
above average variable cost.
Hidden slide
Competitive markets in the short-run
slide 11
Finding the industry supply curve
There are many firms in a perfectly competitive
industry.
We can find the industry or market supply curve by
adding together the quantities supplied by all firms
at each market price.
Competitive markets in the short-run
slide 13
IF THERE ARE 500 FIRMS IN THE INDUSTRY, THE
MARKET SUPPLY CURVE CAN BE FOUND BY ADDING
TOGETHER THE SUPPLY OF THE FIRMS AT EACH PRICE.
$/q
$/Q
S= MC
MC=SRS
P2
AC
Q1=500q1
P1
P0
q0 q1 q2
Typical firm
Competitive markets in the short-run
q
Q0 Q1
Q
Q2
Industry
slide 14
EQUILIBRIUM IN THE SHORT-RUN FOR A FIRM
AND INDUSTRY IN PERFECT COMPETITION.
BY INCLUDING THE MARKET DEMAND CURVE WE CAN
FIND THE MARKET CLEARING PRICE.
$/q
$/Q
S= MC
MC=SRS
AC
pE
D
q
qE
Typical firm
Competitive markets in the short-run
Q
QE
Industry
slide 15
HERE ARE SOME
APPLICATIONS OF THE
SHORT-RUN MODEL OF
COMPETITION
Competitive markets in the short-run
slide 16
1) Suppose the perfectly competitive market for
Xmas trees is in short-run equilibrium. There
is an increase in demand for Xmas trees.
What is the effect on the market price and
quantity of trees, and on the quantity and
profits of the typical firm?
Competitive markets in the short-run
slide 17
EQUILIBRIUM IN THE XMAS TREE MARKET IN
THE SHORT-RUN.
$/q
$/Q
S= MC
MC=SRS
AC
pE
D
q
qE
Q
QE
Industry
Typical firm
XMAS TREE MARKET
Competitive markets in the short-run
Hidden slide
slide 18
PROBLEM SUMMARY:
A)
B)
C)
D)
Industry output increases.
Price rises.
The firm’s output rises.
The firm’s profits rise.
Competitive markets in the short-run
slide 20
2) Suppose the perfectly competitive market for
pizza is in short-run equilibrium. There is an increase
in the price of tomato sauce, an ingredient of pizza.
What is the effect on the market price and quantity of
pizza, and on the quantity and profits of the typical
firm?
Competitive markets in the short-run
slide 21
EQUILIBRIUM IN THE PIZZA MARKET IN
THE SHORT-RUN.
$/q
$/Q
S= MC
MC=SRS
AC
pE
D
q
qE
Typical firm
Competitive markets in the short-run
PIZZA MARKET
Q
QE
Industry
Hidden slide
slide 22
SUMMARY:
The increase in the price of an input raises both
average costs and marginal costs for all of the
firms.
Therefore all firms want to supply less than before at
the going market price.
Excess demand causes price to rise, but price cannot
rise by as much as costs rose, so profits will fall.
Competitive markets in the short-run
slide 24
3) There is an improvement in the technology in the
beer industry. What is the short-run effect on the
typical firm and industry if the industry is
perfectly competitive?
Competitive markets in the short-run
slide 25
EQUILIBRIUM IN THE BEER MARKET IN
THE SHORT-RUN.
$/q
$/Q
S= MC
MC=SRS
AC
pE
D
q
qE
Typical firm
Competitive markets in the short-run
BEER MARKET
Q
QE
Industry
Hidden slide
slide 26
SUMMARY:
The improvement in technology lowers both average
costs and marginal costs for all of the firms.
Therefore all firms want to supply more than before
at the going market price.
Excess supply causes price to fall.
Competitive markets in the short-run
slide 28
4) The pizza market is in equilibrium in the shortrun at a price of $10 per pizza. The government
decides to impose a tax of $2 per pizza on all
pizzas sold. What is the short-run effect of the tax
on the price of pizza, quantity of pizzas for the
firm and industry, and on the profits of the typical
firm?
Competitive markets in the short-run
slide 29
EQUILIBRIUM IN THE PIZZA MARKET IN
THE SHORT-RUN.
$/q
$/Q
S= MC
MC
AC
pE
D
qE
q
Typical firm
QE
Industry
PIZZA MARKET
Competitive markets in the short-run
Q
Hidden slide
slide 30
SUMMARY:
THE FIRMS’ MC CURVES AND THE MARKET
SUPPLY CURVE RISE BY $2.
IN THE NEW EQUILIBRIUM, MARKET
QUANTITY IS LESS, FIRM QUANTITY IS
LESS, PRICE IS HIGHER (BUT BY LESS
THAN $2), AND PROFITS ARE LESS.
Competitive markets in the short-run
slide 32