Intermediate Microeconomics Perfect Competition Tin Cheuk (Tommy) Leung CUHK
Tin Cheuk (Tommy) Leung (CUHK)
Intermediate Microeconomics
1 / 12
Market Structure
Three constraints faced by a firm 1 2 3
customers nature competitors
Competition level and pricing Microsoft as a price maker Tea Restaurant as a price taker
Tin Cheuk (Tommy) Leung (CUHK)
Intermediate Microeconomics
2 / 12
Individual Firm’s Supply
Price taking firms Choose output y to maximize profit max py − c(y ) y
FOC: p = c 0 (y ) SOC: c 00 (y ) > 0
Tin Cheuk (Tommy) Leung (CUHK)
Intermediate Microeconomics
3 / 12
Properties of Supply
Supply upward sloping Differentiate the FOC w.t.r. p 1 = c 00 ∂y ∂p
=
∂y ∂p
1 >0 c 00
Firms shut down condition: MC (y ) = AVC (y )
Tin Cheuk (Tommy) Leung (CUHK)
Intermediate Microeconomics
4 / 12
Short Run Equilibrium
Capital and price constant Firms stay if p − AVC (y ) > 0 quit otherwise
Tin Cheuk (Tommy) Leung (CUHK)
Intermediate Microeconomics
5 / 12
From Short to Long Run
Assumptions 1 2
identical firms free entry
If short run profit positive 1 2 3 4
↑ entry price ↓ profit ↓ zero profit
Tin Cheuk (Tommy) Leung (CUHK)
Intermediate Microeconomics
6 / 12
Meaning of Zero Profit
Zero profit 6= industry disappears Accounting profit vs economic profit Cost as opportunity cost
Tin Cheuk (Tommy) Leung (CUHK)
Intermediate Microeconomics
7 / 12
Example: Garden Gnomes Industry Factors of production 1
2
gnome mold: cost $1000; can make 500 gnomes/year; no use after one year Plaster and labor: cost $7 for each gnome
Takes order on Jan 1st; sales on Dec 31st Demand: D(p) = 60000 − 5000p Interest rate (r ): 10% 1
2 3 4
Minimum operating profit to justify the purchase of a gnome mold on Jan 1st? Short-run marginal cost? average variable cost? Lowest price for gnomes s.t. rate of return for gnome mold = r ? For the price in (3), demand for gnomes? demand for molds?
Tin Cheuk (Tommy) Leung (CUHK)
Intermediate Microeconomics
8 / 12
Answer
Tin Cheuk (Tommy) Leung (CUHK)
Intermediate Microeconomics
9 / 12
Quasi-fixed Factor and Economic Rent
Fixed vs quasi-fixed factor Quasi-fixed factor: fixed from the viewpoint of industry variable from the viewpoint of firm
Economic rent in long run: revenue - variable cost Examples: taxi license
Tin Cheuk (Tommy) Leung (CUHK)
Intermediate Microeconomics
10 / 12
Example – Taxi License in Ham Harbor Free entry in taxi service market originally Marginal cost per trip: $5 Capacity of each taxi: 20 trips per day Demand: D(p) = 1200 − 20p 1
2
Competitive equilibrium price per ride? Number of rides per day? Total number of taxicabs? License to existing taxicabs in 1990, no new licenses in the future. Demand in 1995: D(p) = 1220 − 20p. 1 2 3 4
Equilibrium price in 1995? Profit per taxicab license per year if a taxi operated every day? Interest rate was 10%, market price of a license? Maximum amount of expenditure for a campaign against abolition of license system?
Plaster and labor: cost $7 for each gnome. Takes order on Jan 1st; sales on Dec 31st. Demand: D(p) = 60000 â 5000p. Interest rate (r): 10%. 1. Minimum operating profit to justify the purchase of a gnome mold on Jan 1st? 2. Short-run marginal cost? average variable cost? 3. Lowest price for gnomes s.t. rate of return for ...
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