Lecture 4 Eco

Review and Agenda

Quantity Supplied equals quantity demanded in equilibrium Supplied curves slope up (weakly) in competitive markets b/c:

Firms only enter if p ≥ ac for minimized average cost. Marginal cost tends to increase in quantity for firms

And firms set MR=P under perfect competion And firms set MR=MC to maximize profits

L7-L9 will model supply with imperfect competition

Example: Natural monopoly

PS3 review Today: Industry quantity demanded slopes down because:

More people buy at all at a lower price People who buy at all buy more at a lower price Both effects driven by “bang for the buck” considerations

l5: estimating supply and demand curves and other stuff

PS 3 problem 1

Demand for black yoga pants is downward sloping. At a price of 100, demand is 1 million. Any firm that wants to make black yoga pants can do so at a total cost of c(q) = 10M + 20q. How many firms will "naturally" enter this business? 1 firm can clearly make profit (e.g. at q = 1M) Can competitive firms earn non-negative profits? No. AC is declining everywhere. This means AC > MC at any quantity So P = MC (pure competition) implies P < AC P < AC implies negative profits

PS 3 problem 2

50 farmers own farms. Each farm is 100 acres. One acre of land is worth $10,000 used in agriculture. A large number of home builders are now interested in purchasing lots from these farmers. Home builder’s demand for acres of land is given by qd = 75, 000 − 2p where q is the number of acres and p is the price per acre. What will be the equilibrium price per acre in this market?

Looking for qd = qs equilibrium price Demand is easy Supply?

Up to q = 50 × 100 = 5, 000, MC = 10,000 For q > 5, 000 supply curve is vertical

Where do the curves meet?

p = 10, 000 ⇒ qd = 55, 000 NG qs = 5, 000 = qd ⇒ p = 35, 000 OK

PS 3 problem 3

You produce foam for twerkers. Your costs of operation for a year are given by c(q) = 5, 000, 000 + 10q q ≤ 1M 10, 000, 000 + 20q for q ∈ (1M, 2M]

where q is the...