CDAE 254 - Class 25 Nov. 27

Last class: 7. Profit maximization and supply 8. Perfectively competitive markets Quiz 7 (take-home)

Today: 8. Perfectly competitive markets Class exercise

Next class: 9. Policy analysis

Important dates:Problem set 7: due Thursday, Dec. 6 Problems 7.1, 7.2., 7.3, 7.8, 8.1, 8.2., 8.3. and 8.4 (textbook)

Final exam: 3:30-6:30pm, Tuesday, Dec. 11

8. Perfect competitive markets

8.1. Basic concepts

8.2. Supply in the very short run

8.3. Short-run supply

8.4. Short-run price determination

8.5. Shifts in supply and demand curves

8.6. Long-run supply

8.7. Applications

8.1. Basic concepts (1) An overview of an economy

(2) Market structures

-- Perfectly competitive market

-- Monopoly

-- Oligopoly

(3) Supply response: The change in quantity of output in response to a change in demand conditions.

(4) Very short run, short run, and long run

8.2. Supply in the very short run (1) A graphical analysis (Fig. 8.1)

(2) Market equilibrium

(3) Impact of a shift in demand

(4) Impact of trade, inventories, and government interventions

8.3. Short-run supply (1) Short-run: The number of firm is fixed but the

existing firms can change their output levels in response to changes in the market.

(2) Supply curve: Relationship between market price and quantity supplied.

(3) Short-run supply curve of an individual firm:

SMC above the SAVC (Ch. 7).

(4) Short-run supply curve in a market (Fig. 8.2)

For example, there are only two firms in a market: qa = - 2 + 0.5P, qb = -6 + 1 P

(5) Notations

8.3. Short-run supply (6) Short-run elasticity of supply

(a) Recall our general definition of elasticity

Elasticity of Y with respect to X

=

(b) Short-run supply elasticity

=

Xin change Percentage

Yin change Percentage

Pin change Percentage

Qin change Percentage s

8.3. Short-run supply (6) Short-run elasticity of supply

(c) Estimation of supply elasticities: -- From two observations

For example: the supply in the market increased from 100 to 120 units when the price increased from $2.0 to $2.6. What is the supply elasticity?

-- From a supply function:

For example: Q = -10 + 0.6P, what is the supply elasticity when P = 40?

8.4. Short-run price determination (Fig. 8.3) (1) Supply and demand in a market

(2) Market equilibrium

(3) An example

(4) Effect of an increase in market demand

8.5. Shifts in supply and demand curves

(1) A shift in supply curve and the importance of the slope of the demand curve

(2) A shift in demand curve and the importance of the slope of the supply curve

Class Exercise Suppose a market has 100 identical producers and each producer has the

following supply function:

q = - 2 + 0.5 P

(a) Graph the supply curve for one firm and then graph the supply curve for the market

(b) Calculate the supply elasticity for the market when P=12

If the demand function for the market is

Q = 1000 – 30 P,

(c) Derive the market equilibrium P* and Q*

(d) Calculate the demand and supply elasticities at the market equilibrium price and quantity

8.6. Long run supply (1) Constant cost market (pp. 269-270)

(2) Increasing cost market (pp. 272-273)

(3) Decreasing cost market (pp. 275-276)

(4) Examples