Supply Flashcards
What is profit?
Profit = revenue - cost
To maximise profits firms must answer what two questions?
- Output decision: what output level (q*) maximised its profit or minimises its loss?
- Shutdown decision: is it more profitable to produce q* or shut down?
Mathematically, when are profits maximised?
(Pi is the signal for Profit)
When marginal profit is 0.
Find q where d(pi)/dq = 0
At optimum quantity q* we must have what?
Marginal cost = marginal revnue
MC(q) = MR(q)
When does the firm continue to produce and when does it shut down?
Firm only shirts down is revenue < variable cost
When does the firm produce q*?
Only if it makes more profits at q* than at q = 0 (shut down)
What is marginal revenue?
Change in revenue for a small increase in output , dR(q)/dq
Does the price a firm gets for its output change as output goes up?
Depends on market structure
Perfect competition rules
Both buyers and sellers are price takers
Perfect knowledge
Freedom of entry and exit
Homogenous goods
Firms are likely to be price takers if:
There are a large no. Of firms - each firms decision doesn’t influence market supply by much
Identical products - consumers can easily switch to a competitor
Full information - easy for consumers to buy elsewhere if firm raises price
Negligible transaction costs - buyers and sellers waste little time or money finding each other
Free entry and exit - leads to a large no. Of firms
What are some real world markets that are almost perfectly competitive
- stock markets
- retail
- commodity markets
Where is profit max?
MC = MR
Draw me a perfect competition short run profit and loss
When should a firm shut down in the short run?
If P < AVC (aka if MR and MC meet at a point lower than AVC)
What is the market supply curve?
The horizontal sum of the supply curves of all individual firms
In the short run the no. Of firms in a market is ..?
Fixed
The more firms the … the supply curve at a given price
Flatter
Is the number of firms fixed in the LR?
No. Firms enter or exit the market.
If
Market price > ATC and firm makes a supernormal profit -> entry
If market price < ATC and firm is making losses -> exit
What is a constant cost market in the Long run?
A constant cost market is when input prices are constant as firms enter or exit
As firms enter the market what happens to suplply? (Constant cost market)
SR supply increases
Market price falls
Cost curves do not change as it’s a constant cost market
Therefore profit falls.
What is a constant cost market?
Where an increase in supply doesn’t affect prices of inputs (dentists and receptionists)
What is an increasing cost market?
An increase in supply increases input prices (if industry is an important source of input demand) e.g jet engines and aircraft producers
What is a decreasing cost market?
An increase in supply lowers input prices due to scale effects (computer industry and electronic components)
Shape of the LR market supply depends on..?
Depends on the firms cost structure and how entry/exit affects input prices
What is Y calculated from?
Y = No labour income + labour income
Y = Y^u + Y^e
Y = Y^u +wH
What is labour income ?
Wage rate * hours working
w * H
wH
What is leisure equation?
N = 168 - H
Consumption equation?
Y = Y^u + wH
What happens to budget line if wage rate decreases?
Budget line rotates from leisure point downward
Axes for labour supply graph?
Consumption, y
Leisure, x
If non labour income changes, what happens to budget line?
Parallel shift in budget line
So if non labour income increases then it shifts outward parallel to original line
