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(ECEN 4503)
Engineering Economics
Lecture #9:
Reviewing
Supply,
demand and
government
policies
- Controls of
price
- Taxes
Market and
welfare
- Consumer,
producer and
the efficiency of
markets
- Taxes
- International
Trading
Firm behavior
and the
organization
of industry
- Cost of
production
- Firms in
competitive
markets
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Introduction
Competitive market
Firms in the market?
Market power?
Firm behavior
How firms make production decision in competitive market?
Which types of cost are important:
Fixed
costs
Variable costs
Average total cost
Marginal cost
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Example:
Market for milk:
Sellers: diary farmers
Buyers: population
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the profit
Profit = Total revenue Total cost
unit sold.
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Quantity
(Q)
Total
revenue
(TR)
Total
cost
(TC)
Profit
(TR-TC)
0 gallons
1
2
3
4
5
6
7
8
$0
6
12
18
24
30
36
42
48
$3
5
8
12
17
23
30
38
47
$3
1
4
6
7
7
6
4
1
Marginal
Marginal cost
revenue
(MC=TC/Q)
(MR=TR/Q)
$6
6
6
6
6
6
6
6
$2
3
4
5
6
7
8
9
Change in
profit
(MR-MC)
$4
3
2
1
0
1
2
3
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Quantity
(Q)
Total
revenue
(TR)
Total
cost
(TC)
Profit
(TR-TC)
0 gallons
1
2
3
4
5
6
7
8
$0
6
12
18
24
30
36
42
48
$3
5
8
12
17
23
30
38
47
$3
1
4
6
7
7
6
4
1
Marginal
Marginal cost
revenue
(MC=TC/Q)
(MR=TR/Q)
$6
6
6
6
6
6
6
6
$2
3
4
5
6
7
8
9
Change in
profit
(MR-MC)
$4
3
2
1
0
1
2
3
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output.
If marginal cost is greater than
marginal revenue
The firm should decrease its
output.
Marginal revenue and marginal
output
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Market price
Price-taker
Max Profit ,
Q
Given P
Proof?
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The
Because the firms marginal-cost curve determines the quantity of the good
the firm is willing to supply at any price, the marginal-cost curve is also the
competitive firms supply curve.
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recovered.
Department of Electrical Engineering taught in English
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In the short run, the firm produces on the MC curve if P > AVC, but shuts down
13
if P < AVC.
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Profit = TR TC
= (P ATC) Q
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Practice
follows:
Calculate the companys average fixed cost,
average variable cost, average total cost, and
marginal cost.
b) The price of a case of ball bearing is $50. Seeing
that she cannot make a profit, the chief executive
officer (CEO) decides to shut down operation.
What are the firms profit/losses? Was this a wise
decision? Explain.
c) Vaguely remembering his introductory economics
course, the Chief Financial Officer tell the CEO it
is better to produce 1 case of ball bearing, because
marginal revenue equals marginal cost at the
quantity. What are the firms profit/losses at that
level of production? Was this the best decision?
Explain.of Electrical Engineering taught in English
Department
a)
17
$100
$0
100
50
100
70
100
90
100
140
100
200
100
360
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Long-term:
The number of firms can change
Old firms exit, new firms enter the market
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At the end, firms that remains in the market must be making zero
profit.
Profit = (P ATC) Q
The price and average total cost are driven to equality.
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free entry and exit, firms must be operating at their efficient scale.
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In markets with entry and exit, there is only one price consistent with zero profit the
minimum of average total cost. As a result, the long-run market supply curve must be
horizontal at this price.
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Practice
Ex6. Analyze the two following situations for firms in
competitive markets:
Suppose that TC = 100 + 15q, where TC is total cost and q is
the quantity produced. What is the minimum price necessary for
this firm to produce any output in the short run?
b) Suppose that MC = 4q, where MC is marginal cost. The
perfectly competitive firm maximizes profits by producing 10
units of output. At what price does it sell these units?
a)
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Conclusion
Firms objective
Profit maximization
Max Profit ,
Q
Given P
Firm decisions
Optimality condition:
Short-run
P = MC
Long-run
market
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