Bài giảng Macroeconomics - Chapter 5: Perfectly Competitive Supply

Chapter 5: Perfectly Competitive SupplyIdentify the firm's demand curve, and explain its derivationDescribe how the firm employs fixed and variable inputs to produce outputDetermine why price equals marginal cost at the profit-maximizing output levelConstruct the industry supply curve from the supply curves of individual firmsDefine and calculate price elasticity of supplyDefine and calculate producer surplusPerfectly Competitive FirmsPerfectly Competitive FirmsStandardized ProductsIdentical goods offered by many sellersNo loyalty to your supplierMany Buyers, Many SellersEach has small market shareNo buyer or seller can influence pricePrice takersMobile ResourcesInputs move to their highest value useFirms enter and leave industriesInformed Buyers and SellersBuyers know market pricesSellers know all opportunities and technologiesPerfectly Competitive MarketMarket supply and market demand set the priceBuyers and sellers take price (P) as givenPerfectly competitive firm can sell all it wants at the market priceSince the firm is small, its output decision will not change market priceEach firm must decide how much to supply (Q)Imperfectly competitive firms have some control over priceSome similarities to perfectly competitive firmsPerfectly Competitive Firm's DemandProduction IdeasProduction converts inputs into outputsMany different ways to produce the same productTechnology is a recipe for productionA factor of production is an input used in the production of a good or a serviceExamples are land, labor, capital, and entrepreneurshipThe short run is the period of time when at least one of the firm's factors of production is fixedThe long run is the period of time in which all inputs are variableProduction in the Short RunA perfectly competitive firm has to decide how much to produceThe firm produces a single product (glass bottles) using two inputs (workers and a bottle-making machine)Labor is a variable factor – it can be changed in the short runBottle-making machine is a fixed factor – it cannot be changed in the short runDetermine the profit maximizing level of output Law of Diminishing ReturnsAt low levels of production, the law of diminishing returns may not holdGains from specializationDiminishing returns eventually sets in and is often caused by congestionOnly so many people can fit into the officeOnly one worker can use the machine at a timeWhen some factors of production are fixed, increased production of the good eventually requires ever larger increases in the variable factorCost ConceptsFixed cost is the sum of all payments for fixed inputsThe $40 per day for the bottle machineOften referred to as the capital costVariable cost is the sum of all payments for variable inputsThe total labor costWage rate of $10 per hourTotal cost is the sum of all payments for all inputsFixed cost plus variable costFind the Output Level that Maximizes ProfitProfit = total revenue – total costSince Total cost = fixed cost + variable costProfit = Total revenue – variable cost – fixed costThe firm must know about both revenues and costs in order to maximize profits.Increase output if marginal benefit is at least as great and marginal cost.Decrease output if marginal benefit is greater than marginal cost.The Seller’s Supply RuleThe profit maximizing quantity does not depend on fixed costA firm should increase output only if the extra benefit exceeds the extra cost (cost-benefit principle)The extra benefit is the priceThe extra cost is the marginal cost – the amount by which total cost increases when production risesThe competitive firm produces where price equals marginal costWhen diminishing returns apply, marginal cost rises as production increasesThe Firm’s Shut-Down ConditionFirms can suffer losses in the short runSome firms continue to operateSome firms shut downWhen should the firm shut down in the short run?If revenue from sales is less than its variable cost when price equals marginal costThe firm will suffer a loss equal to fixed costIf it remains open it will suffer an even larger loss because variable costs are greater than total revenue"Law" of SupplyShort-run marginal cost curves have a positive slopeHigher prices generally increase quantity suppliedIn the long run, all inputs are variableLong-run supply curves can be flat, upward sloping, or downward slopingThe perfectly competitive firm's supply curve is its marginal cost curveAt every quantity on the market supply curve, price is equal to the seller's marginal cost of productionApplies in both the short run and the long runIncreases in SupplyTechnologyMore output, fewer resourcesInput Prices Decrease costs Number of Suppliers More suppliers in the market Expectations Lower prices in the futurePrice of Other Products Lower prices for alternative productsPrice Elasticity of SupplyPrice elasticity of supply is defined as the percentage change in quantity supplied from a 1 percent change in pricePrice elasticity of supply = ΔQ / QΔP / PPrice elasticity of supply = PQ1slopexDeterminants of Price Elasticity of SupplyInput Flexibility Use adaptable inputs, more elastic Mobility of Inputs Resources move where needed, more elastic Produce Substitute Inputs Alternative inputs easy to find, more elastic TimeLong run, more elasticSupplyIndividual Supply CurveMarket Supply CurveOpportunity CostMarket Equilibrium PriceMarket Demand CurveProfit-Maximizing QuantitySupply DeterminantsProducer Surplus