a. technology and production function b. c i ii i cost
TRANSCRIPT
Microsoft PowerPoint - 103Micro_Part3C1.pptxA. Technology and
Production FunctionA. Technology and Production Function C i i i i
C i i i iB. Cost MinimizationB. Cost Minimization
C. Profit Maximization and SupplyC. Profit Maximization and Supply
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Part 3. Part 3. The Theory of Choice II: The Theory of Choice II: Producer TheoryProducer Theory
C. C. Profit Maximization & Profit Maximization & Profit Maximization & Profit Maximization & SupplySupplySupplySupply
1.1. Perfect CompetitionPerfect Competition 2.2. Profit MaximizationProfit Maximization 3.3. ShortShort--Run SupplyRun Supply & Competitive Equilibrium& Competitive Equilibrium
LL R S l & C titi Eq ilib iR S l & C titi Eq ilib i4.4. LongLong--Run Supply & Competitive EquilibriumRun Supply & Competitive Equilibrium 5.5. ZeroZero--Profit ConditionProfit Condition 6.6. Producer SurplusProducer Surplus6.6. Producer SurplusProducer Surplus
Perloff (2014, 3e, GE), Chap. 8, Sections 9.1-9.2 2
Part 3C. Part 3C. Profit Maximization & SupplyProfit Maximization & Supply
1.1. Perfect CompetitionPerfect CompetitionPerfect CompetitionPerfect Competition
Perfectly Competitive MarketsPerfectly Competitive Markets Perfectly Competitive MarketsPerfectly Competitive Markets PricePrice--Taking BehaviorTaking Behavior Why Perfect Competition Is ImportantWhy Perfect Competition Is ImportantWhy Perfect Competition Is ImportantWhy Perfect Competition Is Important
3Perloff (2014, 3e, GE), Section 8.1. 2015.3.5
Perfectly Competitive MarketsPerfectly Competitive Markets
Definition: Definition: Perfectly Competitive MarketsPerfectly Competitive Markets A perfectly competitive market structure has A perfectly competitive market structure has
the following properties: PC1PC1 P i T k P i T k PC1:PC1: Price Takers Price Takers There are many buyers and sellers in the market. There are many buyers and sellers in the market. No one can significantly affect the market price. No one can significantly affect the market price.
All buyers and sellers are price takers.All buyers and sellers are price takers.
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PC2: PC2: Homogeneous Products Homogeneous Products gg Consumers believe that all firms in the market sell Consumers believe that all firms in the market sell identicalidentical products.products.identicalidentical products.products. PC3: PC3: Perfect Information Perfect Information Buyers and sellers know the prices Buyers and sellers know the prices charged by charged by firms. firms.
If firms have perfect information about the knowledge of technology, then all firms have identical cost structures.
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PC4: PC4: Low Transaction CostsLow Transaction Costs44 The expenses of finding a trading partner and The expenses of finding a trading partner and making a trade for a good or service other than themaking a trade for a good or service other than themaking a trade for a good or service other than the making a trade for a good or service other than the price paid for that good or service are low.price paid for that good or service are low. PC5: PC5: Perfect Mobility of FactorsPerfect Mobility of FactorsPC5: PC5: Perfect Mobility of FactorsPerfect Mobility of Factors Factors are perfectly mobile among alternative uses.Factors are perfectly mobile among alternative uses. PC6:PC6: No Externalities & Public GoodsNo Externalities & Public Goods There are no external costs or benefits in There are no external costs or benefits in consumption or production.consumption or production.
All goods are privateAll goods are privateAll goods are private. All goods are private. PC7: PC7: Free Entry & ExitFree Entry & Exit FiFi f l t d itf l t d it th k tth k tFirms Firms freely enter and exit freely enter and exit the market.the market.
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PricePrice--Taking BehaviorTaking Behavior
A Competitive FirmA Competitive Firm a firm is a competitive firm if it is a price price a firm is a competitive firm if it is a price price
takertaker. A fi t i ifi tl ff t th k tAny firm cannot significantly affect the market price for its output or the prices at which it buys it i tits inputs. Even if some of those conditions of perfectly competitive markets are violated, firms and consumers may still be price takers.
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Q: Q: Why would a competitive firm be a price taker?Why would a competitive firm be a price taker?QQ y p f py p f p
A: A: It has no choice.It has no choice. I titi k t h f d dIn a competitive market, each face a demand curve that is horizontal at the market price.
Given the market price, the firm can sell as much as it wants at that price, so it has no incentive to lower its price. However, a small increase in price results in its demand falling to zero, so it has no incentive to raise its price.
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Derivation of A Competitive Derivation of A Competitive Derivation of A Competitive Derivation of A Competitive Firm’s Demand CurveFirm’s Demand Curve
Q:Q: Are the demand curved faced by individual Are the demand curved faced by individual competitive firms actually flat?competitive firms actually flat?competitive firms actually flat?competitive firms actually flat?
The Residual Demand CurveThe Residual Demand Curve The residual demand curve, Dr(p),that a single firm faces is the market demandmarket demand, D(p), minus the supply of the other firmssupply of the other firms in the market, So(p).
( ) ( ) ( )r oD D S( ) ( ) ( ) r oD p D p S p
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Figure: Figure: Residual Demand CurveResidual Demand Curvegg
The residual demand curve that the firm faces is much flatterflatter than the market demand curve.ee e e de d cu ve.
10Perloff (2014, 3e, GE), Figure 8.1, p. 272.
The Elasticity of the Residual Demand The Elasticity of the Residual Demand yy CurveCurve If there are n identical firms in the market, theIf there are n identical firms in the market, the elasticity of demand facing firm i is derived as follows.follows.
( ) ( ) ( ) r oD p D p S p
( ) ( ) ( )
r odD p dD p dS p dp dp dp
0( ) ( ) ( )
r o QdD p p dD p p Q dS p p
dp dp dp
( ) ( ) ( )
Qp p p p Q p p dp q dp Q q dp Q q
= n = n – 1
D p D p S pe ne n e n
( 1)i o
The elasticit of the resid al demand c r e is
, , , , ,( 1) < < i o D p D p S p D p D pe ne n e ne e
+ The elasticity of the residual demand curve is much “higher”higher” than the market elasticity. Th id l d d h h fi f iThe residual demand curve that the firm faces is much “flatter”flatter” than the market demand curve.
e.g., , ,1.1, =3.1, and 78,o D p S pe e n
( )i o , , ,( 1) i o
D p D p S pe ne n e
= 78 ( 1 1) 77 3 1 = 324 5= 78 (–1.1) – 77 3.1 = –324.5 The residual demand curve that the firm faces is h i t l if
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Why Perfect Competition Why Perfect Competition Why Perfect Competition Why Perfect Competition is Important?is Important?
Many markets can be reasonably described as Many markets can be reasonably described as competitivecompetitive.competitivecompetitive.
Many markets have many or all of the properties of a perfectly competitive marketa perfectly competitive market.
e.g., agricultural markets & other commodity markets, stock exchanges retail and wholesale markets buildingstock exchanges, retail and wholesale markets, building construction markets and others
We can use the Demandthe Demand--Supply Model Supply Model toWe can use the Demandthe Demand Supply Model Supply Model to accurately predict the impacts of changes in economic environment to analyze the effects ofeconomic environment to analyze the effects of government policies.
13
A perfectly competitive market has many A perfectly competitive market has many A perfectly competitive market has many A perfectly competitive market has many desirable properties. desirable properties.
Economists use this model as the ideal againstEconomists use this model as the ideal against which real-world markets are compared.
Small Number of Firms:Small Number of Firms: Monopoly & OligopolySmall Number of Firms:Small Number of Firms: Monopoly & Oligopoly Differentiated Products: Differentiated Products: Monopolistic C i iCompetition Limited Entry & Exit: Limited Entry & Exit: Entry Barriers & Regulations Imperfect InformationImperfect Informationpp High Transaction CostsHigh Transaction Costs Imperfect MobilityImperfect MobilityImperfect MobilityImperfect Mobility Externalities & Public GoodsExternalities & Public Goods
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C. Profit Maximization and SupplyC. Profit Maximization and Supply
1
Part 3. Part 3. The Theory of Choice II: The Theory of Choice II: Producer TheoryProducer Theory
C. C. Profit Maximization & Profit Maximization & Profit Maximization & Profit Maximization & SupplySupplySupplySupply
1.1. Perfect CompetitionPerfect Competition 2.2. Profit MaximizationProfit Maximization 3.3. ShortShort--Run SupplyRun Supply & Competitive Equilibrium& Competitive Equilibrium
LL R S l & C titi Eq ilib iR S l & C titi Eq ilib i4.4. LongLong--Run Supply & Competitive EquilibriumRun Supply & Competitive Equilibrium 5.5. ZeroZero--Profit ConditionProfit Condition 6.6. Producer SurplusProducer Surplus6.6. Producer SurplusProducer Surplus
Perloff (2014, 3e, GE), Chap. 8, Sections 9.1-9.2 2
Part 3C. Part 3C. Profit Maximization & SupplyProfit Maximization & Supply
1.1. Perfect CompetitionPerfect CompetitionPerfect CompetitionPerfect Competition
Perfectly Competitive MarketsPerfectly Competitive Markets Perfectly Competitive MarketsPerfectly Competitive Markets PricePrice--Taking BehaviorTaking Behavior Why Perfect Competition Is ImportantWhy Perfect Competition Is ImportantWhy Perfect Competition Is ImportantWhy Perfect Competition Is Important
3Perloff (2014, 3e, GE), Section 8.1. 2015.3.5
Perfectly Competitive MarketsPerfectly Competitive Markets
Definition: Definition: Perfectly Competitive MarketsPerfectly Competitive Markets A perfectly competitive market structure has A perfectly competitive market structure has
the following properties: PC1PC1 P i T k P i T k PC1:PC1: Price Takers Price Takers There are many buyers and sellers in the market. There are many buyers and sellers in the market. No one can significantly affect the market price. No one can significantly affect the market price.
All buyers and sellers are price takers.All buyers and sellers are price takers.
4
PC2: PC2: Homogeneous Products Homogeneous Products gg Consumers believe that all firms in the market sell Consumers believe that all firms in the market sell identicalidentical products.products.identicalidentical products.products. PC3: PC3: Perfect Information Perfect Information Buyers and sellers know the prices Buyers and sellers know the prices charged by charged by firms. firms.
If firms have perfect information about the knowledge of technology, then all firms have identical cost structures.
5
PC4: PC4: Low Transaction CostsLow Transaction Costs44 The expenses of finding a trading partner and The expenses of finding a trading partner and making a trade for a good or service other than themaking a trade for a good or service other than themaking a trade for a good or service other than the making a trade for a good or service other than the price paid for that good or service are low.price paid for that good or service are low. PC5: PC5: Perfect Mobility of FactorsPerfect Mobility of FactorsPC5: PC5: Perfect Mobility of FactorsPerfect Mobility of Factors Factors are perfectly mobile among alternative uses.Factors are perfectly mobile among alternative uses. PC6:PC6: No Externalities & Public GoodsNo Externalities & Public Goods There are no external costs or benefits in There are no external costs or benefits in consumption or production.consumption or production.
All goods are privateAll goods are privateAll goods are private. All goods are private. PC7: PC7: Free Entry & ExitFree Entry & Exit FiFi f l t d itf l t d it th k tth k tFirms Firms freely enter and exit freely enter and exit the market.the market.
6
PricePrice--Taking BehaviorTaking Behavior
A Competitive FirmA Competitive Firm a firm is a competitive firm if it is a price price a firm is a competitive firm if it is a price price
takertaker. A fi t i ifi tl ff t th k tAny firm cannot significantly affect the market price for its output or the prices at which it buys it i tits inputs. Even if some of those conditions of perfectly competitive markets are violated, firms and consumers may still be price takers.
7
Q: Q: Why would a competitive firm be a price taker?Why would a competitive firm be a price taker?QQ y p f py p f p
A: A: It has no choice.It has no choice. I titi k t h f d dIn a competitive market, each face a demand curve that is horizontal at the market price.
Given the market price, the firm can sell as much as it wants at that price, so it has no incentive to lower its price. However, a small increase in price results in its demand falling to zero, so it has no incentive to raise its price.
8
Derivation of A Competitive Derivation of A Competitive Derivation of A Competitive Derivation of A Competitive Firm’s Demand CurveFirm’s Demand Curve
Q:Q: Are the demand curved faced by individual Are the demand curved faced by individual competitive firms actually flat?competitive firms actually flat?competitive firms actually flat?competitive firms actually flat?
The Residual Demand CurveThe Residual Demand Curve The residual demand curve, Dr(p),that a single firm faces is the market demandmarket demand, D(p), minus the supply of the other firmssupply of the other firms in the market, So(p).
( ) ( ) ( )r oD D S( ) ( ) ( ) r oD p D p S p
9
Figure: Figure: Residual Demand CurveResidual Demand Curvegg
The residual demand curve that the firm faces is much flatterflatter than the market demand curve.ee e e de d cu ve.
10Perloff (2014, 3e, GE), Figure 8.1, p. 272.
The Elasticity of the Residual Demand The Elasticity of the Residual Demand yy CurveCurve If there are n identical firms in the market, theIf there are n identical firms in the market, the elasticity of demand facing firm i is derived as follows.follows.
( ) ( ) ( ) r oD p D p S p
( ) ( ) ( )
r odD p dD p dS p dp dp dp
0( ) ( ) ( )
r o QdD p p dD p p Q dS p p
dp dp dp
( ) ( ) ( )
Qp p p p Q p p dp q dp Q q dp Q q
= n = n – 1
D p D p S pe ne n e n
( 1)i o
The elasticit of the resid al demand c r e is
, , , , ,( 1) < < i o D p D p S p D p D pe ne n e ne e
+ The elasticity of the residual demand curve is much “higher”higher” than the market elasticity. Th id l d d h h fi f iThe residual demand curve that the firm faces is much “flatter”flatter” than the market demand curve.
e.g., , ,1.1, =3.1, and 78,o D p S pe e n
( )i o , , ,( 1) i o
D p D p S pe ne n e
= 78 ( 1 1) 77 3 1 = 324 5= 78 (–1.1) – 77 3.1 = –324.5 The residual demand curve that the firm faces is h i t l if
12
Why Perfect Competition Why Perfect Competition Why Perfect Competition Why Perfect Competition is Important?is Important?
Many markets can be reasonably described as Many markets can be reasonably described as competitivecompetitive.competitivecompetitive.
Many markets have many or all of the properties of a perfectly competitive marketa perfectly competitive market.
e.g., agricultural markets & other commodity markets, stock exchanges retail and wholesale markets buildingstock exchanges, retail and wholesale markets, building construction markets and others
We can use the Demandthe Demand--Supply Model Supply Model toWe can use the Demandthe Demand Supply Model Supply Model to accurately predict the impacts of changes in economic environment to analyze the effects ofeconomic environment to analyze the effects of government policies.
13
A perfectly competitive market has many A perfectly competitive market has many A perfectly competitive market has many A perfectly competitive market has many desirable properties. desirable properties.
Economists use this model as the ideal againstEconomists use this model as the ideal against which real-world markets are compared.
Small Number of Firms:Small Number of Firms: Monopoly & OligopolySmall Number of Firms:Small Number of Firms: Monopoly & Oligopoly Differentiated Products: Differentiated Products: Monopolistic C i iCompetition Limited Entry & Exit: Limited Entry & Exit: Entry Barriers & Regulations Imperfect InformationImperfect Informationpp High Transaction CostsHigh Transaction Costs Imperfect MobilityImperfect MobilityImperfect MobilityImperfect Mobility Externalities & Public GoodsExternalities & Public Goods
14