CLASS NOTES FOR ECONOMICS 251
DR. WILLIAM SHINGLETON
FALL 2005
OCT 4-6; AND 13
NO CLASS OCT 11
COMPETITIVE MARKETS CH 23, 29
REVIEW
PROFIT
AND CAPITAL
NORMAL PROFIT
ECONOMIC PROFIT
ACCOUNTING = NORMAL + ECONOMIC
VENTURE
CAPITAL
SURVIVORSHIP
PRINCIPLE I AND II
PRICE
TAKING FIRMS
OPERATING RULES FOR PRICE TAKING FIRMS
CASE
1... P < MIN AVC
SHORT RUN
THE INTERSECTION RULE
LONG
RUN
CASE
2... P > MIN AVC BUT P < MIN ATC
SHORT RUN
SET Q AT P = MR = MC
HOW TO SHOW ECONOMIC LOSS
LONG
RUN/LIQUIDATION
CASE
3... P = MIN ATC
SHORT RUN P VS AVC
SET Q AT P = MR = MC
LONG RUN P VS ATC
SET Q AT P = MR = MC
HOW TO SHOW ECONOMIC PROFIT (= 0)
CASE 4... P > MIN ATC
SHORT RUN
P VS AVC
SET Q AT P = MR = MC
LONG RUN
P VS ATC
SET Q AT P = MR = MC
PROFIT MARGIN = P - ATC
MAX MARGIN IS NOT MAXIMUM PROFIT
HOW TO SHOW ECONOMIC PROFIT
SUPPLY CURVE OF FIRM
SHORT RUN FROM MC
CURVE ABOVE AVC
LONG RUN FROM MC
CURVE ABOVE ATC
INDUSTRY SUPPLY
INDUSTRY SUPPLY
CURVE... SHORT RUN
ECONOMIC PROFITS
AND LOSSES AS MARKET SIGNALS
NO ENTRY/EXIT
THE ROLE OF
EQUILIBRIUM
INDUSTRY SUPPLY
CURVE... LONG RUN
ECONOMIC PROFITS
AND LOSSES AS MARKET SIGNALS
FREE ENTRY/FREE
EXIT
THE ROLE OF
EQUILIBRIUM
COMPETITIVE INDUSTRY
FREE ENTRY AND EXIT
HOMOGENEITY
MANY SELLERS
MANY BUYERS
EXAMPLES/AS TIME ALLOWS/INCLUDE FARM EXAMPLES
EFFECT
OF DEMAND CHANGE
SETUP
SHORT
RUN
LONG
RUN
EFFECT
OF COST CHANGE
SETUP
SHORT
RUN
LONG
RUN
STORY GUIDELINES
IT WAS A DARK AND
STORMY NIGHT...
NO, THAT'S NOT
IT. LET ME TRY AGAIN.
USE TWO DIAGRAMS
ONE FOR THE FIRM
ONE FOR THE
INDUSTRY
START AT
EQUILIBRIUM IN EACH
(NORMAL PROFIT FOR FIRM)
END AT EQUILIBRIUM
IN EACH
ONLY TWO KINDS OF
CHANGES CAN START PROCESS
1. CHANGE IN COST
AFFECTS FIRM FIRST
CHANGES PROFIT/LOSS
THE MOTIVATION OF
THE FIRM IS PROFIT
SHOW ECONOMIC PROFIT OR LOSS
CHANGES SHORT-RUN INDUSTRY SUPPLY
SHORTAGES/SURPLUSES
INFORMATION
SIGNALS
LONG RUN ENTRY/EXIT
RE-ESTABLISHES EQUILIBRIUM
CHANGES SHORT-RUN
INDUSTRY SUPPLY
CHANGE
IN LONG-RUN INDUSTRY SUPPLY
THE MOTIVATION OF
THE FIRM IS PROFIT
2. CHANGE IN INDUSTRY DEMAND
AFFECTS INDUSTRY DEMAND FIRST
SHORTAGES/SURPLUSES
ARE INFORMATION
SIGNALS
AFFECTS PRICE
FIRM REACTS TO PRICE CHANGE
CHANGES PROFIT/LOSS
SHOW ECONOMIC PROFIT
OR ECONOMIC LOSS
THE MOTIVATION OF
THE FIRM IS PROFIT
NO SHORT-RUN CHANGE IN ANY
SUPPLY
LONG RUN ENTRY/EXIT
RE-ESTABLISHES
EQUILIBRIUM
THE MOTIVATION OF
THE FIRM IS PROFIT
CHANGE IN SHORT-RUN
INDUSTRY SUPPLY
NO
CHANGE IN LONG-RUN INDUSTRY SUPPLY
ROLE OF EQUILIBRIUM
AND PROFITS
GIVE A REASON FOR
EACH AND EVERY CHANGE