Bài giảng Microeconomics - Chapter 6 Perfectly Competitive Supply: The Cost Side of the Market

Perfectly Competitive Supply: The Cost Side of the Market0Profit-Maximizing Firmsand Perfectly Competitive MarketsSlide 6 - 11Profit MaximizationProfitThe difference between the total revenue the firm receives from the sale of its product minus all costsProfit-maximizing firmA firm whose primary goal is to maximize profits2Perfect CompetitionPerfectly Competitive MarketA market in which no individual supplier has significant influence on the market price of the productA Price taker is a firm thatHas no influence over the price at which it sells its productSells only a fraction of the market outputCan sell as much output as it wishes3Fig. 6.1The Demand Curve Facing a Perfectly Competitive FirmDi4Production TerminologyFactor of ProductionAn input used in the production of a good or serviceShort RunA period of time sufficiently short that at least some of the firm’s factors of production cannot be changedLong RunA period of time of sufficient length that all the firm’s factors of production are variable5Law of Diminishing ReturnsFixed factor of productionAn input whose quantity cannot be altered in the short runVariable factor of productionAn input whose quantity can be altered in the short runLaw of Diminishing ReturnsIf one factor is variable and all others are fixed, increased production of the good eventually requires ever larger increases in the variable factor6II. Graphing the RelationshipsSlide 6 - 77Fig. 6.2Total Output, Marginal Product, and Average Product for a Glass-Bottle Maker24681012141618202205010024681012141618202202000400060008000Employees/day(b)Bottles (100s/day/worker)Bottles (100s/day)Employees/day(b)Average productMarginal productTotal outputof bottles8Choosing Output (a)How much to produce?The goal is to maximize profitProfit = TR (total revenue)– TC (total cost)A perfectly competitive firm chooses to produce the output level where profit is maximizedCost-Benefit Principle A firm should increase output as long as the marginal benefit exceeds the marginal cost9Choosing Output (b)Cost-Benefit PrincipleIncrease output if the marginal benefit exceeds the marginal costFor a perfectly competitive firmMarginal benefit = marginal revenue = priceCost-Benefit Principle for a Price TakerKeep expanding as long as the price of the product is greater than marginal costChoose the output where P = MC10Table 6.2Employment, Output, Revenue, Costs, and Profit: W = $10/day, Fixed Costs = $40/day11Table 6.4Employment, Output, Revenue, Costs, and Profit: W = $14/day, Fixed Costs = $40/day12Shut Down?Perfectly competitive firms should produce where P = MC, with one exception:Is firm best off going out of business entirely?If variable costs exceed total revenue, the best the firm could do is shut down in the short run. That way the firm will only lose the fixed costsWhile if it keeps producing it will lose all fixed costs AND experience additional losses from the variable costs exceeding revenue13Variable Costs, Revenue and ProfitsThe firm starts with fixed cost (short-run)As long as revenues exceed variable costs , this excess can be used to cover some fixed costsIf production can be increased (I.E., if marginal benefit exceeds marginal costs) this excess eventually covers all fixed costs and then starts accumulating profit from then on14Fig. 6.3The Firm’s Marginal Cost of Production15Fig. 6.4Price = Marginal Cost: The Perfectly Competitive Firm’s Profit-Maximizing Supply Rule16Perfectly Competitive Firm’s Supply CurveThe perfectly competitive firm’s supply curve is itsMarginal cost curve (I.e. when price is above average variable cost)At every point along a market supply curvePrice measures what it would cost producers to expand production by one unit17III. Cost, Profit Maximization, and Supply in the Short Run18Fig. 6.7The Relationship between Product Curves and Cost CurvesMaximum marginal productMaximum average productAverage ProductMarginal productMarginal CostAveragevariable costMinimum average variable costMinimum marginal cost00Variable input/day (workers/day)Output (100 bottles/day)(b)(a)Output(bottles/day/work)$/100 bottles19Graphing Cost Curves (a)Average Total Cost (ATC) equalsAverage Variable Cost (AVC) plusAverage Fixed Cost (AFC)AVC eventually goes up as output increasesLaw of Diminishing ReturnsAs marginal costs increase, eventually they pull up AVC20Graphing Cost Curves (b)AFC goes down with increasing outputSpreading the overhead over more unitsSo ATC is pulled in two directionsIt takes longer to start going up than AVCThe MC curveCuts through AVC at its minimumLater, cuts through ATC at its minimum21Fig. 6.8Short-Run Average and Marginal Cost Curves for a Glass-Bottle MakerMinimum marginal costMinimum averagevariable costMinimum averagetotal costAverage total costMarginal costAverage variable costAverage fixed cost01002003004005000.500.400.300.200.080.220.260.10Output (bottles/day)$/bottle22The Shut-Down Rule RevisitedThe perfectly competitive firm should shut down when revenue falls below variable costs, that is:When P falls below the minimum of the AVC curveSo the MC curve is the supply curveBut only its portion above minimum AVC23Fig. 6.9Costs and Profits for a Glass Bottle MakerProfits per bottle=$0.32 - $0.28 = $0.04Average total costMarginal costAverage variable costMinimum average total costMinimum average variable costTotal profit = $0.04 x 400 = $16.000.500.400.300.200.100.320.280100200300400500Output (bottles/day)$/bottle24Shifts in Supply CurveWhen the determinants of supply change, the supply curve shifts. Determinants of supply are:Technology (better technology, lower cost, supply shifts to the right)Input Prices (lower prices, lower cost, supply shifts to the right)Number of Suppliers (more of them, market supply shifts to the right)Expectations (if future prices are expected lower, current market supply shifts to the right)Prices of Products Alternative to Producers (lower prices of one crop make producers switch away from that crop and into another crop, whose supply shifts to the right)25IV. The Price Elasticity of SupplySlide 6 - 2626Price Elasticity of SupplyThe percentage change in the quantity supplied that will occur in response to a one-percent change in its price% change in Q is: ΔQ/Q% change in P is: ΔP/PSo elasticity is: ε = (ΔQ/Q) / (ΔP/P)27Fig. 6.11 Graphically Calculating the Price Elasticity of Supply28Fig. 6.12A Supply Curve for which Price Elasticity Declines as Quantity Rises29Perfect ElasticityPerfectly InelasticElasticity of supply is zeroWhether the price is high or low, the same amount is availablePerfectly ElasticElasticity of supply is infiniteWhen additional units can be produced using the same combination of inputs purchased at the same prices30Fig. 6.13A Perfectly Inelastic Supply Curve31Fig. 6.14A Perfectly Elastic Supply Curve32Determinants of Supply ElasticityThe more easily additional units of inputs can be acquired, the higher the price elasticity (more elastic)Flexibility of InputsMobility of InputsAbility to Produce SubstitutesTimeUnique and Essential Inputs are the ultimate supply bottleneck33