1 Perfect Comp. with Exit/Entry & Quantity Choice

Transcription

1 Session 4 Entry/Exit with uantity Decision [Summary] age 1 1 erfect Comp. with Exit/Entry & uantity Choice Based on the blackboard in Session 4 and slides in Session : merged, filled in, and streamlined. 2 Main ideas: each firm Each firm has a break-even price, above which it would enter or stay in the market, below which it would exit or stay out of the market. Because of economies of scale, firm has a minimum scale of production: entry is a discrete jump into the market. These things were true in entry/exit with fixed quantity. But there, break-even price and scale were given to us. Here we need to calculate them taking into account quantity choice. We also need to find the actual quantity produced when price exceeds break-even.

2 Session 4 Entry/Exit with uantity Decision [Summary] age 2 3 Main ideas: aggregate (could look like this) A flat part shows entry of a firm. It occurs at the firm s break-even price on the vertical axis. Its width on the horizontal axis is the scale with which the firm enters the market. Between these flat parts, there is no entry. But existing firms expand output as the price rises. 4 Main ideas: equilibrium 2 1 Demand 2 Supply=Demand determines how many firms are in the market and how much each produces. Here there are firms in the market.

3 Session 4 Entry/Exit with uantity Decision [Summary] age 3 erfect Comp. with Exit/Entry & uantity Choice Each firm s entry/exit and quantity decisions 1. Its about AC & MC 2. Numerical example and equilibrium 3. Diverse firms 4. Identical firms (free entry) 6 uantity decision depends only on the MC curve MC s()

4 Session 4 Entry/Exit with uantity Decision [Summary] age 4 7 Entry/exit: It is about average cost Average cost speaks about: economies of scale entry and exit decisions. 8 Typical AC curve: U-shaped (Could be more complicated, but U-shaped AC provides best intuition. It is only case we consider with perfect competition.) AC Decreasing AC = Economies of scale Increasing AC = Diseconomies of scale 4 6 7

5 Session 4 Entry/Exit with uantity Decision [Summary] age 9 Economies of scale Economies of scale come from: { (a) long-run fixed costs (b) returns to specialization (= entry costs, set up costs, first-copy costs, ) (c) use of different technologies and indivisible inputs at different scales These translate into decreasing MC, or more complicated patterns. FC >. Simplest case. Best intuition. Only case we consider. So, for us: U-shaped AC means FC > and increasing MC. AC and profitability: rofit > >AC Loss rofit Loss AC =.8 : some quantities lead to profit, others a loss. = 4 : it is impossible to earn a profit. (Need MC curve to see which quantity gives highest profit.)

6 1 Sep Oct 12 Timothy Van Zandt rices & Markets Session 4 Entry/Exit with uantity Decision [Summary] age 6 11 Min AC = break-even price = entry/exit threshold rice: Enter or stay in AC u AC 4 Exit or stay out u 12 Combine to see entry and scale decisions at same time roduce nothing until AC u. Then enter market with u. Always produce at least u, following MC curve MC AC AC u u

7 Session 4 Entry/Exit with uantity Decision [Summary] age 7 13 erfect Comp. with Exit/Entry & uantity Choice Each firm s entry/exit and quantity decisions Its about AC & MC Numerical example and equilibrium 3. Diverse firms 4. Identical firms (free entry) 14 Exercise 3.8 TC = FC = 144 MC = constant/intercept derivative AC = TC/ u = 12 solves MC = AC AC u = 27 = ac( u ) = mc( u )

8 Session 4 Entry/Exit with uantity Decision [Summary] age 8 1 MC = MC AC = u =12 AC u =27 4 AC AC u 1 2 u

9 Session 4 Entry/Exit with uantity Decision [Summary] age 9 17 Together MC 4 AC AC u 1 2 u 18 erfect Comp. with Exit/Entry & uantity Choice Each firm s entry/exit and quantity decisions Its about AC & MC Numerical example and equilibrium 3. Diverse firms 4. Identical firms (free entry)

10 Session 4 Entry/Exit with uantity Decision [Summary] age 19 Numerical example too complicated; just understand interpretation A flat part shows entry of a firm. It occurs at the firm s break-even price AC u on the vertical axis. Its width on the horizontal axis is the scale u with which the firm enters the market. Between these flat parts, there is no entry. But existing firms expand output as the price rises, following their MC curves. Equilibrium Numerical example too complicated. Just understand interpretation. 2 1 Demand 2 Supply=Demand determines how many firms are in the market and how much each produces. Here there are firms in the market. Their total output comes from MC=.

11 Session 4 Entry/Exit with uantity Decision [Summary] age Equilibrium profit 2 1 Demand 2 Usual shading of producer/consumer surplus works. Compared to entry/exit with fixed quantity, we cannot identify profit of individual firm. Still, a firm is in the market and earns profit because of cost advantage over other firms. 22 Long-run adjustment to shift in demand 2 1 New demand 2 Shift in demand leads to higher price and output, as usual. Here, higher output comes from entry of one more firm and expansion of output by all firms.

12 Session 4 Entry/Exit with uantity Decision [Summary] age erfect Comp. with Exit/Entry & uantity Choice Each firm s entry/exit and quantity decisions Its about AC & MC Numerical example and equilibrium Diverse firms Identical firms (free entry) 24 Similar firms (almost free entry) Main ideas are same as when quantity is fixed 2 1 Demand 2 Firms have similar break-even prices; these nearly pin down equilibrium price. Supply is very elastic: small changes in price big change in number of firms. Each firm in the market has low profit.

13 Session 4 Entry/Exit with uantity Decision [Summary] age 13 2 Identical firms (free entry) Main ideas are same as when quantity is fixed AC u 2 1 Demand 2 Firms have same break-even price AC u ; this pins down equilibrium price. Supply is perfectly elastic. Each firm has zero profit. 26 Identical firms: Calculations When we studied free entry with fixed quantity, the break-even price and quantity per firm were given. Now we calculate them from the AC curve. Otherwise, same logic. 1. = AC u [Common break-even price] 2. i = u [Common minimum scale] 3. = d( ) [From the demand curve] 4. N = / i [Total output divided by output per firm]

14 Session 4 Entry/Exit with uantity Decision [Summary] age Example Each firm Market TC = MC Demand: = - FC = 144 MC = AC = AC u AC = AC u 4 Agg. u = 12 AC u = 27 u i 4 1. = = d(27) = i = N = = 28 erfect Comp. with Exit/Entry & uantity Choice Each firm s entry/exit and quantity decisions Its about AC & MC Numerical example and equilibrium 3. Diverse firms 4. Identical firms (free entry)