#### Transcript L10-producer econ1

```Perfectly Competitive
Supply: The Cost
Side of The Market
MB
MC
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
Importance of Opportunity Cost
Harry is an unemployed, homeless
resident of Burlington

How much time should Harry spend
recycling beer bottles?
Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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

Importance of Opportunity Cost
High unemployment: Harry is choosing
between waiting in line for an hour to
get a meal worth \$1.50 (his best
alternative option), and collecting
containers at 5 cents each.
Opportunity cost of collecting cans is
\$1.50/hour.
Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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Example
Search time
(hours/day)
Total number of
containers found
0
0
1
60
2
100
3
130
4
150
5
160
Copyright c 2004 by The McGraw-Hill
containers found
Chapter 6: Perfectly Competitive Supply
60
40
30
20
10
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Example
Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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
Importance of Opportunity Cost
Costs and Benefits
1 hour collecting cans = (60)(.05) = \$3
 Benefit (\$3) > Opportunity Cost (\$1.50)
 2nd hour benefit (\$2) > Opportunity Cost
(\$1.50)
 3rd hour benefit (\$1.50) = Opportunity Cost
(\$1.50)

Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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
Question


Importance of Opportunity Cost
What is the lowest redemption price that
would induce Harry to spend1 hour/day
looking for cans to recycle?
Solution

60 containers x 2.5 cents = \$1.50 =
opportunity cost of waiting in line
Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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
Importance of Opportunity Cost
Reservation Price
pQ   \$1.50
Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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
Importance of Opportunity Cost
Reservation Price
1 hour recycling = p(60) = \$1.50 = 2.5 cents
 2 hours recycling = p(40) = \$1.50 = 3.75 cents
 3 hours recycling = p(30) = \$1.50 = 5 cents
 4 hours recycling = p(20) = \$1.50 = 7.5 cents
 5 hours recycling = p(10) = \$1.50 = 15 cents

Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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An Individual Supply
Curve for Recycling Services
Deposit (cents/can)
Harry’s Supply Curve
Deposit was
\$0.05 in 73,
~\$.225 today
15
7.5
5
3.8
2.5
0
Copyright c 2004 by The McGraw-Hill
6
10
Recycled cans
(10s of cans/day)
Chapter 6: Perfectly Competitive Supply
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16
15
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The Market Supply Curve
for Recycling Services
Barry’s Supply Curve
15
+
7.5
5
3.8
2.5
0
Deposit (cents/can)
Deposit (cents/can)
Harry’s Supply Curve
15
7.5
5
3.8
2.5
6
10
13
Recycled cans
(10s of cans/day)
Copyright c 2004 by The McGraw-Hill
16
15
+
0
6
10
13
Recycled cans
(10s of cans/day)
Chapter 6: Perfectly Competitive Supply
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The Market Supply Curve
for Recycling Services
=
Deposit (cents/can)
Market Supply Curve
15
7.5
5
3.8
2.5
=
Copyright c 2004 by The McGraw-Hill
0
12
20
26
32
Recycled cans
(10s of cans/day)
30
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The Market Supply Curve
with 1,000 Identical Sellers
Deposit (cents/can)
Market Supply Curve
15
7.5
5
3.8
2.5
0
Copyright c 2004 by The McGraw-Hill
6
10
Recycled cans
(10,000s of cans/day)
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13
16
15
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Reality check



Is this realistic? What happens to the
number of cans Harry can get when he
has to start competing with Barry and
998 other people laid off by IBM?
Many natural resources also fail to
increase in supply as the number of
producers increases
All economic production requires natural
resources
Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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
Profit-Maximizing Firms in
Perfectly Competitive Markets
Profit Maximization

Profit
 Total
Revenue - All Costs paid by the firm
(including opportunity costs)

Profit-Maximizing Firms
 Goal
of the firm is to maximize the difference
between total revenues and total firm costs
Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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Reality check: goal of profit
maximizing firms in real life

Why do CEO’s earn so much even when the
company is doing poorly?

Privatize profits and socialize costs




Who gets the benefits from risky financial
investments that pay off, who pays the costs when
they don’t?
Costs of mercury contamination, climate change,
etc.?
Who pays the costs of phosphorous and nitrogen
runoff from farms, habitat loss, ozone thinning from
methyl bromide, etc.?
Welfare for Wal-Mart employees, etc.
Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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
Reality check: goal of profit
maximizing firms in real life
Maximize subsidies

Ag subsidies: \$307 billion
despite record profits
Farmers Facing
Loss of Subsidy
May Get New One
the top 10 percent of
direct-payment
recipients in 2010
of the money under
the program…The
average household
income was…
\$201,465 for families
living on large farms.
Tax breaks,
quotas, not
included in these
estimates
Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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
Reality check: goal of profit
maximizing firms in real life
Energy
subsidies,
perverse
subsidies
Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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
Why do so many corporations donate to
Democrats and Republicans at the
same time?
Copyright c 2004 by The McGraw-Hill
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Copyright c 2004 by The McGraw-Hill
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
Profit-Maximizing Firms in
Perfectly Competitive Markets
The Perfectly Competitive Market
A market in which no individual supplier
has significant influence on the market
price of the product
 Is this true for energy, agriculture,
pharmaceuticals, Wal-Mart, etc.?


A Price Taker
A firm that has no influence over the price
at which it sells its product
 What about patented medicine, Wal-Mart?

Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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The Characteristics of Perfect
Competition
1. All firms sell the same standardized
product.
e.g. agriculture, natural resources, somewhat true
for clothes, electronics, etc., not true for
patented medicines
2. The market has many buyers and sellers,
each of which buys or sells only a small
fraction of the total quantity exchanged.
e.g. small farmers, small woodlots, etc.
What about health care, e.g. Fletcher Allen?
Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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Reality check
What has been happening in the
banking and finance sector?
From too big to fail to way too big to fail
What has been happening in general in
the food & agriculture, energy, retailing
and media sectors?
Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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The Characteristics of Perfect
Competition
1. Productive resources are mobile
What resources are not mobile?
How mobile is labor?
2. Buyers and sellers are well informed
Stiglitz’ Nobel
Information flows
Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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The Demand Curve Facing
a Perfectly Competitive Firm
Price (\$/unit)
Market supply and demand
S
P0
D
Q0
Market Quantity
(units/month)
Copyright c 2004 by The McGraw-Hill
Chapter 6: Perfectly Competitive Supply
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The Demand Curve Facing
a Perfectly Competitive Firm
Price (\$/unit)
Individual firm demand
P0
Di
•What happens to quantity demanded
when the individual firm raises prices?
•Lowers prices?
•What is the elasticity of demand for that
firm’s output?
Individual Firm’s Quantity
(units/month)
Copyright c 2004 by The McGraw-Hill