14AVCACMCP1P2P3P4QPriceShut Down PointFirm’s Supply
15The Firm’s short run total cost curve is STC = 100 +20Q + Q2. ExampleThe Firm’s short run total cost curve isSTC = Q + Q2.The short run Marginal cost curve isSMC = QIf SFC = 100, while SVC = 20Q + Q2Find AVC , Minimum level of average variable cost, supply curve
18The Firm’s short run total cost curve is STC = 100 +20Q + Q2. ExampleThe Firm’s short run total cost curve isSTC = Q + Q2.The short run Marginal cost curve isSMC = QIf SFC = 36, while NSFC = 64Find ANSC , Minimum level of average non sunk cost, supply curve
20Short Run perfectly Competitive equilibrium DSD(P*)SACQ*QPP*
21STC = 0.1 + 150Q2 , all fixed cost are sunk. The Market consists of 300 identical firms, and the market demand curve is given byD(P) = 60 – P.Each firm has a short run cost curveSTC = Q2 , all fixed cost are sunk.The corresponding short run marginal cost curveSMC = 300Q.The corresponding average variable cost curve isAVC = 150Q.You should verify that the minimum level of AVC is 0. Thus, a firm will continue to produce as large as price is positiveFind Short run equilibrium in market, at equilibrium, do the firm make positive profit?
22Comparative Statics in short run Increase in the number of firmDSQ1SACQ1fQPP1S’Q2P2Q2f
23Long Run – Plant Adjustment PriceQuantityP1SAC1MC1SAC2MC2LACLMCQ1Q2
24Long Run Supply CurvePriceQuantityP1LACLMCQ1Q2Q*P2P*
25Long Run Supply CurvePriceQuantityP1LACLMCQ1Q2Q*P2P*
26Free Entry and Long Run P* = MC ( Q* ) P* = AC ( Q* ) 1. Long Run Profit is maximized with respect to output and plant size.P* = MC ( Q* )2. Economic profit is Zero.P* = AC ( Q* )
27Free Entry and Long Run 3. Demand equals Supply. D( P* ) = n Q* D S LACQ*QPP*SACLMCSMC
28In this market, each firm and potential entrant has a long – run average cost AC( Q ) = 40 – Q – 0.01Q2.And a corresponding long run marginal cost curveMC( Q ) = 40 – 2Q Q2.Where Q is thousand units per year. The Market demand curve isD( P ) = 25,000 – 1,000P,Where D(P) is also measured in thousand units. Find the long run equilibrium price, quantity per firm, and number of firms.
29Long Run Market Supply Curve DSQ1LACQ1fQPP1SACLMCS’D’P2Q2fQ2AB
30Industry Long Run Supply Curve Constant CostDSQ1LACQ1fQPP1LMCS’D’P2Q2fQ2ABSL
31Industry Long Run Supply Curve Q1LAC1Q1fQPP1LMC1S’D’P2Q2fQ2SLIncreasing CostP3LMC2LAC2
32STC ( Q ) = 16 + Q2 SMC ( Q ) = 2Q D ( P ) = 110 – P Problem 1The bolt industry currently consists of 20 producers, all of whom operate with identical short run total cost functionSTC ( Q ) = 16 + Q2Where Q is the annual output. The corresponding short run marginal cost curve isSMC ( Q ) = 2QThe market demand for the bolts isD ( P ) = 110 – PWhere P is the market price
33a ) Assuming that all of the firm fixed cost is sunk, what is the firm’s short run supply curve? b ) What is the short run market supply curve?c ) Determine the short run equilibrium price and quantity in the industry.
34The corresponding long run average cost function is Problem 2Propylene is used to make plastic. The propylene industry is perfectly competitive, and each producer has a long run marginal cost function given byMC ( Q ) = 40 – 12Q + Q2The corresponding long run average cost function isAC ( Q ) = 40 – 6Q + (1/3)Q2The market demand curve for propylene isD ( P ) = 2200 – 100P
35a ) What is long run equilibrium price in the industry? b ) At this price, how much would an individual firm produce?c ) How many firms are in the propylene market in long run competitive equilibrium.d ) Suppose the demand curve shifted so that it is now D ( P ) = A – 100P. How large would A have to be so that in the new long run competitive equilibrium, the number of propylene firms was twice what it was in the initial long run equilibrium?.
36The long run total cost function for producers of mineral water is Problem 3The long run total cost function for producers of mineral water isTC ( Q ) = cQWhere Q is the output of individual firm expressed as thousand liters per year. The market demand curve isD ( P ) = a – bPFind the long run equilibrium price and quantity in term of a, b, c, . Can you determine the equilibrium number of firms? If so, what is it? Why not?