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Lecture

# Economics 2151B - Lecture 2.docx

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School
Western University
Department
Economics
Course
Economics 2150A/B
Professor
Kristin Denniston
Semester
Winter

Description
Economics 2151B Wednesday January 8 Lecture 2 Main concepts that you need to remember when looking at graphs: 1. Firm vs. Market – is it the firm’s graph or the market’s graph? 2. Is it a SR or LR scenario 3. Economically efficient (the level of output that maximizes total surplus) • Q occurs where P = MC (ch. 10) Last time:  Reviewed ch. 9 on perfect competition  Note: you won’t be asked any math questions on ch. 9 this term (we covered this last term)  A perfectly competitive market is characterized by: 1. Many buyers and sellers (everyone is a price taker) 2. Identical products (one firm’s product didn’t differentiate from another firm’s product in any significant way) 3. Perfect information about price and quality 4. Ease of entry and exit (equal access to resources)  A firm may have positive or negative profits in the short run, but in the long run, profits ALWAYS go to 0 (for every firm in the market) o Ease of entry and exit is what drives profits to 0 in the long run Example of firm’s graph vs. market’s graph: Figure 1  There was a different supply curve for the firm and for the market o The firm sees a horizontal demand curve, which tells us that the firm can sell as much as it wants to at the given market price, P 1. It doesn’t determine the market price, it just observes that market price. o The market demand curve is a normal downward sloping demand curve where market supply and market demand intersect. This sets the market price P . 1  The perfectly competitive firm takes that market price as given and maximizes its profit by producing a quantity where the market price is equal to the marginal cost of producing.  The perfectly competitive firm will set and produce quantity to maximize profits, and this occurs where P = MC.  If there’s an increase in demand in the short-run, the market price increases from P Oo P in2the short run. The firm will increase its quantity produced from q 1 to q2, and in the short run, the price goes up.  In the long-run, you get entry into the market because it is perfectly competitive, and the firm is not made to block entry.  It showed us an example of a constant cost industry, which means we get entry until the price returns to its original level, and we have a horizontal long-run supply curve. o Output is higher (there is more being sold in the market), but the price is the same as before Increasing Cost Industry: an industry with specialized labour or scarce resources  Has an upward sloping long-run supply curve Decreasing Cost Industry: experiences economies of scale (decreasing long-run average costs) in the production of its inputs  Has a downward sloping long-run supply curve *Note: you want to think about what is happening both in the short-run and the long-run (because the effects will be different.) Definitions of Profit:  π = TR – TC  π = Q x (P - AC) o This definition is useful for graphs What does supply look like in perfect competition? 1. FIRM’S SUPPLY CURVE – average costs of production in relation to marginal costs of production a. Short Run Supply Curve – MC above min. average avoidable costs, otherwise 0  Some inputs are fixed  Some costs may be sunk  Shows the SMC curve, SAC curve, ANSC (average non-sunk cost) curve, and AVC (average variable cost) curve o
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