1. Long Run: Equilibrium P.C. Profits and losses –are inconsistent with P.C. LR equilibrium –are signals to which firm owners respond causing industry supply to shift. causing product prices to change eliminating profits & losses in the long run. Profit = more firms enter and profit disappears Loss = firms exit market and losses disappear

2. Long Run Adjustment 1.) Exit and Entry –stops when firms are making 0 economic profit. 2.) Change Size of Plant –stops when firms have the plant that coincides with the min. LRATC and firms are making 0 economic profit

3. Entry & Exit Quantity of Sweaters (firm) Price ($) S Quantity of Sweaters (industry) Price ($) D P1P1 Q1Q1 d = MR ATC MC Initial Market Condition q1q1 Break-even P=Min.ATC Long Run Adjustment

4. Higher price creates economic profit d2d2 P2P2 Q2Q2 Quantity of Sweaters (firm) Price ($) Quantity of Sweaters (industry) Price ($) S Entry and Exit D1D1 P1P1 Q1Q1 d1d1 ATC MC q1q1 D2D2 q2q2 Q1Q1 Increased cold weather increases demand for sweaters Long Run Adjustment

5. Quantity of Sweaters (industry) Price ($) S1S1 Entry and Exit D1D1 P1P1 Q1Q1 Economic profit attracts new firms. Price falls to break-even point. Quantity of Sweaters (firm) Price ($) d1d1 ATC MC q1q1 Q1Q1 D2D2 S2S2 Break-even P=Min.ATC Long Run Adjustment Ease of Entry important for Long Run Adjustment

6. Quantity of Sweaters (industry) Price ($) S1S1 Constant Cost Industry D1D1 P1P1 Q1Q1 Demand shifts, offering profit to current firms. Q1Q1 D2D2 S2S2 Long Run Supply Additional firms do not increase costs. LRS More firms enter, shifting supply yet not increasing input costs. Long run supply is horizontal.

7. Quantity of Sweaters (industry) Price ($) S1S1 Increasing Cost Industry D1D1 P1P1 Q1Q1 Demand shifts, offering profit to current firms. Q1Q1 S2S2 Long Run Supply Additional firms increase costs. LRS More firms enter, shifting supply yet increasing input costs Long run supply is upward sloping D2D2

8. Quantity of Sweaters (industry) Price ($) S1S1 Increasing Cost Industry D1D1 P1P1 Q1Q1 Demand shifts, offering profit to current firms. Q1Q1 D2D2 S2S2 Long Run Supply Additional firms decrease costs. LRS More firms enter, shifting supply yet decreasing input costs Long run supply is downward sloping

9. Technological Change: Process of Adjustment The first firms to adopt new technology will make a profit, other firms will eventually exit or switch –Composition of industry is varied consisting of new and old tech firms –Technological change brings temporary gains to producers Lower prices and better products resulting from technological advance bring permanent gains to consumers

10. Quantity (sweaters per day) Price (dollars per sweater) 14 25 40 Change Plant Size (Firm-wide) 20 6 8 SRAC 0 MC 0 MR 0 Short-run profit maximizing point MC 1 SRAC 1 LRAC MR 1 Long-run competitive equilibrium m Long Run Adjustment Changing plant size will Result in changed MC and Therefore SRAC curves

11. Long-Run: Competitive Equilibrium Quantity per Time Period Price per Unit d = MR = P = MC=SRATC =LRATC LAC SAC MC QeQe E P (= MR) = MC : SR equilibrium MC = SRATC : no incentive for firms to enter or leave Min LRATC : minimum per unit costs achieved so plant size is optimal In the Long Run: P=MC=minATC

12. Long Run: Summary Competition and the Desire for Profit –The forces that provide for both productive and allocative efficiency in PC markets in the long run P = MC = min ATC (P.C. Long Run Equil.) –Indicates both productive and allocative efficiency. Micro Efficiency and the Long Run

13. Productive Efficiency Productive Efficiency - occurs when1.) Productive Efficiency - occurs when P = min ATC –firms produce at min ATC and receive a price =min ATC. Firms must use the best available, least-cost technology, or they will not survive. –Requires that each good in the optimal product mix be produced in the least costly way.

14. Allocative Efficiency Allocative Efficiency - occurs when2.)Allocative Efficiency - occurs when P = MC –resources are used to produce the total output whose composition best fits consumer preferences, the optimal product mix. optimal mix –Requires resources be allocated to firms so as to obtain the optimal mix of products

15. Allocative Efficiency:P=MC Price of X –society’s measure of the relative worth of that product at the margin. measures the extra benefit or value society gets from additional units of X (MSB – Marginal Social Benefit) Marginal Cost of X –society’s measure of the value of the other goods that the resources used in the production of an extra unit of X could otherwise have produced. measures the sacrifice or opportunity cost to society of using resources to produce additional X (MSC – Marginal Social Cost) Recall:

16. Allocative Efficiency When P = MC  MSB = MSC each good is produced to the point at which –society’s value of the last unit = society’s value of the alternative goods sacrificed by its production.

17. Efficiency of the Equilibrium Quantity MSC MSB Q0Q0 Q*Q* B0B0 C0C0 P*P* Allocative Efficiency, MSC=MCB Quantity MC, MB $ Producer Surplus Consumer Surplus + Consumer + Producer Surplus is Maximized

18. Allocative Efficiency When P = MC  MSB = MSC each good is produced to the point at which –society’s value of the last unit = society’s value of the alternative goods sacrificed by its production. economic well being is maximized; that is, consumer surplus + producer surplus, is maximized

19. Summary: Perfect Competition & The Invisible Hand –Consumers and producers pursue their own self-interest and interact in markets. –Market transactions generate an efficient—highest valued—use of resources.

20. Usefulness of the Perfectly Competitive Model It reduces the complexity of reality into manageable size It highlights the idea of an efficient allocation & use of resources It shows the role of prices, profits and competition in the market system

21. Usefulness of the Perfectly Competitive Model Serves as a yardstick against which real- world market structures, resource allocation, prices, profits, competition and firm behaviour can be compared. Acts as a guide to public policy and corrective action.

22. Failure of Perfect Competition Inefficient resource allocation can lead to MARKET FAILURE (ie: externalities and public goods) PC firm are too small to engage in extensive R&D, slowing technological growth (ie: Microsoft wouldn’t be making so many advances if it where in a PC market)

23. Monopoly a single seller of a product which has no close substitutes. Market power is the ability to influence the market price by influencing the total quantity offered for sale.

24. Characteristics of Monopoly 1. Single seller firm & industry are the same 2. Unique product 3. Barriers to entry 4. Good will advertising 5. Price maker/searcher

25. Why do monopolies arise? Barrier to Entry: something that prevents new firms from entering and competing 1.Key resources owned by a single firm. 2.Government grants exclusive right (eg. patent) to produce product. Economies of Scale - Natural Monopoly: single firm can supply a product to an entire market at a lower per unit cost than could 2 or more firms. - Using economies of scale to predate and maintain monopoly power is illegal in Canada

26. ATC Quantity (millions of kilowatt-hours) 5 10 15 Natural Monopoly 01234 D Price (cents per kilowatt-hour) 1 firm can supply 4 million kWh at 5 cents/kWh 2 firms can supply 4 million kWh at 10 cents/kWh 4 firms can supply 4 million kWh at 15 cents/kWh Demand cuts LAC to the left of the min. LAC There are economies of scale over the relevant range of output.There are economies of scale over the relevant range of output.

27. Pricing & Output Decision: Monopolist Monopolists have the ability to influence the output price by choosing the output level. The firm’s demand curve is the market demand curve. A monopolist’s MR is always less than price (except for the first unit)

28. Area B (-) Loss = -$3 Area A (+) Gain = $7 D Demand curve = AR curve Marginal Revenue: Always Less Than Price Quantity of Electricity per Time Period Price of Electricity 8 3 P = $8 TR = $24 7 4 P = $7 TR = $28 To sell 3 units, each unit sold for $8 To sell 4 units, each unit sold for $7 Lose $1/unit on 3 units or -$3 Gain $7 on the 4th unit or +$7 Net Gain (MR) = $4 (  TR/  TO)

29. Demand & Marginal Revenue To increase quantity sold –the monopolist lowers selling price –lowering price to sell an additional unit also lowers price on the previous units - which previously would have sold for more. Q1Q1 P1P1 Quantity per Time Period Price, and Marginal Revenue per Unit D=AR P2P2 Q2Q2 P3P3 Q3Q3  Marginal revenue lies below D/AR for the monopolist MR

30. Monopoly: Profit Max. Decision $ CFilm rental1800Auditorium OAuditorium rental 250  holds 700 SOperator 50people TTicket takers 100 S TOTAL$2200 Ed’s Costs of Showing Movie

31. Costs Film Rental$1800 Auditorium250 Operator50 Ticket Takers100 Total $2200 Ed’s Profit Maximizing Decision What will Ed charge for admission to maximize profits? 100 1000 900800 700 600500400300200 0 1 2 3 8 5 6 4 7 9 10 Tickets Per Week $ Per Ticket Demand (AR)

32. Profit Maximizing Rule Look at demand for revenue information PQTRMR Profit $ $ 73002100  TR/  TO TR-TC 640024003.00 200 550025001.00 300 46002400-1.00 200 37002100 -100 TC=$2200 MC=0 PRODUCE ALL THOSE UNITS FOR WHICH MR  MC. –All costs are sunk/fixed: –TC = $2200 –MC = $0

33. 100 1000 900800 700 600500400300200 0 1 2 3 8 5 6 4 7 9 10 Tickets Per Week $ Per Ticket The Profit Maximizing Decision Demand (AR) MR Profit Maximization MR  MC MC = 0  MR = 0 Q * = 500 P * = $5.00 TR$2500 TC$2200 Profit$300

34. Change Cost Conditions Now suppose the distributor of the films changes the rental fee from a flat $1800 to $800 and $2.00 for every ticket sold. TFC=$800 +$400 = $1200

35. Revenue Info Cost Info D emand FC = $1200 P,$’s Qn MR,$’sTC,$’s MC,$’s 7.00 3001800 6.00 4003.0020002.00 5.00 5001.0022002.00 4.00 600-1.0024002.00

36. The Profit Max Decision when MC = $2.00 Profit Maximization MR  MC MC = 2  MR = 2 Q * = 400 P * = $6.00 Profit=$400 MC Demand (AR) MR 100 1000 900800 700 600500400300200 0 1 2 3 8 5 6 4 7 9 10 Tickets Per Week $ Per Ticket

37. Midterm #2 1 Hour in length 50 questions multiple choice Allocate 1 min. per question Feel free to leave questions until end Non-cumulative: Covers all TOPICS since first midterm