In this class, we will derive equilibrium outcomes across a variety of market structures. We will begin by understanding equilibrium under a market structure called Perfect Competition, a benchmark construction. Economists have tools to measure the efficiency of market outcomes. We next consider the polar extreme of a competitive market: a monopoly market. We will determine the monopoly equilibrium price and quantity and efficiency properties. Much economic activity takes place in markets with just a handful of very large producers. To understand equilibrium in these oligopoly markets requires more careful attention to strategic interdependence. To capture this interdependence, we consider collusive arrangements among a small number of rivals as well as the use of simple game theoretic techniques to model equilibrium. Market Failure describes situations where markets fail to find the efficient outcome. Information asymmetries are one fertile form of market failure. Another form of market failure occurs when externalities are present. We will examine one key externality, pollution, and construct a policy prescription to mitigate the negative efficiency impacts of this externality. Upon successful completion of this course, you will be able to: • Explain how different market structures result in different resource allocations. • Model the impact of external shocks to a particular market structure and demonstrate the new equilibrium price and quantity after the impact of this external shock has played out. • Evaluate the efficiency of an equilibrium. Different market structures produce different levels of efficiency. • Explain when and why the government might intervene with regulatory authority or antitrust litigation to lessen inefficiencies in some markets. • Describe how information problems can cause inefficient outcomes. • Understand externalities and consider optimal government response to these market failures. This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. For more information, please see the Resource page in this course and onlinemba.illinois.edu.
1-1.4. Firm Supply Curve in a Perfectly Competitive Industry
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來自 University of Illinois at Urbana-Champaign 的課程
Firm Level Economics: Markets and Allocations
280 個評分
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University of Illinois at Urbana-Champaign
280 個評分
課程 2（共 7 門，Specialization Managerial Economics and Business Analysis ）
從本節課中
Module 1: Perfect Competition
This module introduces the concept of a perfectly competitive market. It is a benchmark construction, but it accurately models many markets in our economy. We will understand equilibrium outcomes in both the short run and the long run. We will understand how to analyze shocks to these equilibria.
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Larry DeBrockDean Emeritus and Professor of Finance and Professor of Economics
University of Illinois, Urbana-Champaign College of Business Department of Business Administration
Our goal as you know,
is to figure out equilibrium in this market,
a perfectly competitive market.
The conditions of perfect competition have led us to
understand that perfectly competitive firms treat price as given.
Now, what we want to do,
is think about supply.
That's what we're trying in constructing.
We built demand a long time ago.
We're trying to think about a supply curve in this industry,
and here's what we're going to do.
We're going to build a supply curve for a particular firm first,
and then, we'll aggregate up,
because we've got lots of these firms.
So, our goal is to derive
a supply function for a single firm that's in a competitive market,
and for us, just to be clear,
we're calling it a perfectly competitive industry.
Once we know that, we can aggregate up.
Now, again, we'll start with some notation.
We're going to let lowercase q sub i be defined as the individual output of firm i,
and we're going to let capital Q be defined as market output of all firms.
What that means, is that I know my graph output then,
is just going to be equal to the summation for i equals one to n,
where there are n players in
this industry of the individual outputs of each of these firms.
Where do these outputs come from?
That's what we're doing, we're to build a supply curve to show
the optimal response of an individual player.
Once I figure out the response function for an individual player,
then I'm going to sum across these response functions and I have a market supply curve.
Alright. So, let's recall that for profit maximization,
we wanted to set marginal revenue equal to marginal cost.
That is, the individual firm which search for the output level,
firm has no control over price, price is given.
With such for the output level,
where the marginal revenue of the last unit produced,
is just equal to the marginal cost of the last unit produced.
Graphically, we put dollars and cents,
or price, in the vertical axis.
On the horizontal axis,
we'll put lowercase q,
representing the individual firm,
and we know the marginal cost curve for that firm looks something like this.
Now remember, the marginal cost was actually U-shaped when we built the cost curves,
but we were able to determine earlier that for any parametrically given price,
the firm doesn't really care about
the downward sloping part of the marginal cost curve of the firm,
the action happens where the marginal cost curve is sloping up.
So, this curve really does have this part here,
but I'm just not really showing it going forward.
So, we'll go forward and just take
these off here just to get the clutter factor a little bit reduced.
Marginal cost remember, was the slope of the total cost function.
The derivative of cost,
the change in cost for a change in output,
and we want to set that equal to marginal revenue
for a firm in a perfectly competitive market,
we know that a firm faces a price from the market,
some price p zero,
and that is in fact,
the marginal revenue for the firm.
How do we know that? Well, we establish that they are price takers.
For every given unit of production,
they get exactly price.
Think about, you could say,
''Well, how's that work?''
I hope, I guarantee,
take the largest corn farmer in Illinois,
the largest corn farmer in Illinois,
and have her double her production.
It's the largest corn farmer doubled her production,
what will be the impact on the price of the Chicago Board of Trade?
Nothing. Be like a little bug landing on a lake,
that ripple effect would be smaller.
Now, if Honda were to double its production of a chords,
there would be some impact on market prices,
but that's a different game.
That's what we're going to talk about later.
When there's a small number of producers,
their output decisions can actually have big impact.
Here, we're talking about a special case where firms are
relatively so small that their output decision doesn't impact price.
So, for this particular farmer,
if corn is three dollars and forty cents a bushel,
for every extra bushel of corn that is walking across the horizontal axis,
the output for this particular farmer as she produced more and more corn,
every extra unit will get exactly what the market price was.
So, that's why we have that horizontal line and
we call marginal revenue, the change in ribbon.
Of course, this means for
profit maximization that the firm will want to set marginal revenue equals marginal cost,
we'll call this Q star subzero associated with a price of P zero.
Now, we don't know much about profits in this situation,
but since we're a little bit sloppy here,
I'll put this on here just to make sure that we remember we're in the short run.
In the short run, the firm can't really change its plant equipment,
it's stuck in this industry.
This is the profit maximizing output.
You would ask the question,
what if they're losing a lot of money there?
Well, we have already worked through something called,
The shutdown condition, which would tell us that,
''Even though you're losing money,
sometimes it's important for you to continue to keep operating,
because you're earning enough money from
your operating cash to pay back some of that fixed cost.''
The rule for that for us if you recall,
was the price just had to be above average variable cost.
Let me remind you,
if price is greater than or equal to average variable cost,
you do not shut down.
Only, when the price falls below average variable costs, would you say,
''Unlock on my doors,'' and I'm waiting till a broker calls and tells me,
''I found a buyer for your corn acreage,
or your craft plant on the edge of town,
whatever the industry is that you're dealing with.''
So, in this situation,
I now got a point that tells me,
''For this particular price,
exactly how much the firm would want to produce?''
Let's go a long, long, long, time back,
module one. Of course, one.
We introduce supply by saying,
the supply curve tells us how much producers are willing to supply,
how much they're willing to put on the market for different possible prices.
Well, that's still a supply curve here.
What that means, is that the exercise I want to start to tear,
is let's try different prices.
Let's try different prices,
send those prices as signals out,
and see how when the price changes,
the individual producer changes his or her optimal output.
We'll say, ''All right, we'll try a different price.''
We'll call this price P one,
and it would have MR one,
and the result would be the firm would go to where marginal revenue equals marginal cost,
back at that point,
it always goes to marginal revenue equals marginal cost that always maximize its profit.
Again, this price is greater than average variable cost.
So, even though the firm may be losing money,
in the short run, this is the best thing to do,
keep slugging it out,
and they may in fact, depending on where I drew the average cost curve,
they could still be making money here,
positive economic profits, we don't know.
How about trying a different price?
We'll call this P two,
and that would be MR two.
Now, Q star for a price of two is out here.
Now, you can see that what's happening here.
As I vary price,
the signal from the market comes in parametric to the producer,
because the producer is by constraints of this particular market,
to perfectly competitive market,
the producer is a price taker,
that's a horizontal marginal revenue curve.
So, for every possible price you might call out here,
that line goes across,
and you can see what happens for different possible prices,
what we're ended up doing,
is this whole locus of points
along that upward-sloping marginal cost curve
at or above the average variable cost curve,
is in fact, the short run supply curve for an individual firm.
The short-run supply for an individual firm in a competitive market
is that portion of MC at or above AVC.
That portion of the marginal cost curve at or above
the average variable cost curve tells the firm exactly when it should stop producing.
If price goes up, you can see they're going to produce a little more,
they're going to produce a little more,
but because they're getting a higher price,
but of course, because of the law of diminishing
marginal product that we established before when we did cost,
if they're going to produce more,
it's going to get increasingly more expensive.
So, at some point, they're going to stop.
Just thinking about this point q_2.
At the point q_2 the firm doesn't want to go any farther out,
because of the firm were to produce one more unit of this product,
the extra revenue of that unit,
would be less than the extra cost of producing that.
That's not good. Money in your cache residue is going down.
Also, you don't want to stop short of that,
because the extra revenue if you're here,
is greater than the extra cost,
go ahead and produce a little more.
Only when you focus in right on that point,
have you maximized the residuals to your firm, and that's what you want to do.
