Transcript No Slide Title - Vermont Chinese School

CDAE 254 - Class 25 Nov 28
Last class:
Result of Quiz 7
7. Profit maximization and supply
Today:
7. Profit maximization and supply
8. Perfectly competitive markets
Next class:
8. Perfectly competitive markets
Readings:
Chapter 7 and Chapter 8
CDAE 254 - Class 25 Nov 28
Important dates:
Problem set 7 due Tuesday, Dec. 5
Problems 7.1, 7.2., 7.3 and 7.8 from the textbook
Final exam: 3:30 – 6:30pm, Friday, Dec. 15
7. Profit maximization and supply
7.1.
7.2.
7.3.
7.4.
7.5.
7.6.
7.7.
Goals of a firm
Profit maximization
Marginal revenue and demand
Marginal revenue curve
Alternatives to profit maximization
Short-run supply
Applications
Result of Quiz 7
N = 43
Range = 5 – 10
Average = 8.52
1. How will a company change L and K when w/v is not equal to the RTS?
2. Returns to scale and calculate TC, AC and MC
(1) Returns to scale
(2) Calculate TC, AC and MC
3. Draw a graph AND use the graph to explain why the TC in the short run
is likely to be higher than that in the long run for the same level of output
4. Major difference between accounting cost and opportunity cost
5. For a given TC function
(1) Returns to scale
(2) AC =
MC =
6. Relation between MC and q   returns to scale
Class exercise
Suppose that the demand function for a company’s
product is estimated as q = 8 - 0.5 P where q is the
quantity and P is the price.
(1) Draw the demand curve
(2) Derive the MR function and draw the MR curve
(3) What is the price elasticity of demand when P=4?
(4) If the company wants to increase its market share,
should it increase or decrease its price (current
price is 4)?
7.5. Alternatives to profit maximization
(1) TR maximization
-- A graphical analysis
-- Comparison of profit maximization and TR
maximization:
Output level:
Total profit:
(2) Markup pricing:
-- P = AC + markup
-- Markup and price elasticity of demand
(e.g, textbooks vs. general books)
7.6. Short-run supply by a price-taking firm
(1) Profit maximizing decision: MC = MR = P
(2) The firm’s supply
(3) Shutdown decision:
STC = SFC + SVC
If TR < SVC , the company should shut down
SAC = SAFC + SAVC
i.e., If the price is less than the short-run
average variable cost (SAVC), the firm will
shut down the production.
(4) The firm’s supply curve: SMC above the SAVC
7.6. Short-run supply by a price-taking firm
(5) Practice questions according to handout graph
(a) Where is the firm’s supply curve
(b) What are the break-even price & output
(c) What is the shutdown price level?
(d) What is the total profit at the shutdown price?
(e) What is the total profit when P= 100?
(f) What is the total short run fixed cost (SFC)?
(g) What is the total variable cost
8. Perfect competition
8.1.
8.2.
8.3.
8.4.
8.5.
8.6.
8.7.
Basic concepts
Supply in the very short run
Short-run supply
Short-run price determination
Shifts in supply and demand curves
Long-run supply
Applications
8.1. Basic concepts
(1) An overview of an economy
(2) Market structures
-- Perfectly competitive market
-- Monopoly
-- Oligopoly
(3) Supply response: The change in quantity of output
in response to a change in demand conditions.
(4) Very short run, short run, and long run
8.2. Supply in the very short run
(1)
(2)
(3)
(4)
A graphical analysis (Fig. 8.1)
Market equilibrium
Impact of a shift in demand
Impact of trade, inventories, and government
interventions
8.3. Short-run supply
(1) Short-run: The number of firm is fixed but the
existing firms can change their output levels in
response to changes in the market.
(2) Supply curve: Relationship between market price
and quantity supplied.
(3) Short-run supply curve of an individual firm:
SMC above the SAVC (Ch. 7).
(4) Short-run supply curve in a market (Fig. 8.2)
(5) Notations
8.3. Short-run supply
(6) Short-run elasticity of supply
(a) Recall our general definition of elasticity
Elasticity of Y with respect to X
Percentage change in Y
= Percentage change in X
(b) Short-run supply elasticity
Percentage change in Qs
=
Percentage change in P
8.3. Short-run supply
(6) Short-run elasticity of supply
(c) Estimation of supply elasticities:
-- From two observations
-- From a supply equation
8.4. Short-run price determination (Fig. 8.3)
(1)
(2)
(3)
(4)
Supply and demand in a market
Market equilibrium
An example
Effect of an increase in market demand
Class Exercise
Suppose a market has 100 identical producers and each
producer has the following supply function:
q = - 2 + 0.5 P
(a) Graph the supply curve for one firm and then graph
the supply curve for the market
(b) Calculate the supply elasticity for the market when
P=12
If the demand function for the market is Q = 1000 – 30 P,
(c) Derive the market equilibrium P* and Q*
(d) Calculate the demand and supply elasticities at the
market equilibrium price and quantity