In order to maximize profits, firms must ensure that any given output level is produced at least cost and then select the price-output combination that results in total revenue exceeding total cost by the greatest amount possible. With this in mind, this second module of the Power of Markets course addresses how firms can most effectively convert inputs into final output and then covers determining the best price-output combination for a firm and how this varies depending on whether the firm is operating in a perfectly competitive or imperfectly competitive market setting.
Key Points About the Long-run Industry Supply Curve
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En provenance du cours de University of Rochester
The Power of Markets II: Market Structure and Firm Behavior
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À partir de la leçon
Week 7 - Profit Maximization in Perfectly Competitive Markets
How Firms Maximize Profits in Perfectly Competitive Markets.
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Mark ZupanProfessor of Economics and Public Policy
Simon School of Business
Welcome back, last time we introduced the concept of long earn supply curve and
talked about how it needn't be flat. It needn't be a constant cost industry.
it more likely, and in most situations we observe and increase in cost case.
Where input prices rise as an industry expands.
And it's very rare
to run into a decreasing cost case. Theoretically possible, but rare.
Now, let's emphasize a few key points about the long-run supply curve.
It isn't derived by horizontally summing supply curves of individual firms.
The industry short run supply curve is derived by
summing each firm's short run marginal cost curve, or
supply curve above average variable cost.
There's no analog to the long run industry supply curve.
It merely keeps track, in a sense, of the
bottom of the long run average cost curve u.
For the representative firm as the industry expands or shrinks.
And where that bottom of the U rises as
an industry expands, you'll have an increase in cost case.
If it stays constant, we'll have a constant
cost case, and in the rare case where that bottom diminishes
as an industry expands, we have a decrease in cost case.
Second key point, we assume technology remains constant
and that the supply of inputs remains constant.
We hold these factors constant as an industry expands or shrinks.
Now note it doesn't mean that input prices remain constant.
It just assumes that the supply curve of inputs doesn't change.
Input prices may well go up for certain inputs, as the industry expands
and bits up the prices of those particular inputs along the given supply curve.
Third point.
In reality, we're likely never to reach a long run equilibrium.
There are constant changes, markets are buffeted by
constant changes in demand and technology in input supply.
John Maynard Keynes in particular, a noted economist earlier
last century, note, in the long run, we're all dead.
Because economists often have a tendency to say, this'll happen in the long run,
and what he meant by that is,
we're constantly dealing in a short run situation.
That said, the long-run equilibrium still gives us an important reference point.
Where markets will be pointing at, and that's important to
know for studying a market, let's say for a particular stock.
how that stock price is likely to behave, if we know what's going on in terms
of technology or demand for an industry, the firm behind the stock operates in.
Fourth point.
At any point, a longer and longer supply curve.
There is no incentive for entry or exit.
We've wiped out the profit signal.
So if there is still a positive profit
signal, conversely we're not in long run equilibrium.
Fifth, who benefits as we move along the curve?
While firms that make zero profit at each
point, it doesn't mean that the owners of certain
inputs aren't benefitting as an industry expands.
Finance professors, for example, as well as other faculty have
become better off as the MBA educational market has expanded.
And then last point, the actual process of adjustment.
May look very differently from what we've laid off, laid out
depending on how people's expectations are incorporated into a particular setting.
For example in the graphs that we looked at, we assumed that there was a
shift outward in demand that wasn't expected by representative firms.
We'd get the different situation play out if representative
business school anticipated correctly, that demand was going to increase.
It would be adding scale as in consonance with the demanding increases
occurring, and not just reacting to an unexpected increase in demand.
In, again at the beginning of the section on perfect competition we said
that it's very rare for any industry to meet all the criteria perfectly.
atomistic suppliers and buyers.
Perfect product homogeneity.
A perfect entry or, perfect information. no, costless entry and exit.
It's very rare for any industry to meet all four of the criteria perfectly.
That said certain industries get remarkably close to that outcome.
And it still provides the competitive model.
A useful reference point for explaining or predicting
what has either happened or what will happen.
Let me just give you a couple examples drawn from
recent history, of this, how we can this competitive model.
There's an industry called the feed lot industry.
In which feed lot operators take cattle, young cattle
and fatten them up over the space of a year.
By feeding corn or different food supplements to promote the weight gain.
And then the cattle are sold off to slaughterhouses after
the end of the roughly year long fattening up process.
The feed lot business has been going through a tough time the last few years.
A number of factors have been at play.
First there's been a drought in certain key states in the United States
where feed lot operators produce or engage in the activities that they do.
What that drought has done has raised the price of corn, raised the price of feed.
It's also raised the price of the young cattle that the feed lot operators buy due
to producers of young cattle scale back on their operations.
Certain buyers of fattened up cattle have diminished their purchases, when
they've, understood that those feedlot operators are using certain food
supplements like xylimax And so instead feedlot operators have had
to shift their input usage towards more, now more expensive corn.
And there's also been a, a lowered price
for the final cattle produced by the feedlot operators.
As people have shifted consumption away from beef toward poultry.
What's the end result of all these forces is
squeezing out, putting pressure, imposing losses, on feedlot operators.
In 2012, 2,000 of the 77,000 went out of business.
Similar exodus is expected in 2013.
There's been a negative profit or in loss signal created in this industry.
And exit will keep occurring until that negative loss,
until that negative profit or loss signal gets distinguished.
Opposite case is going on in Iowa right now.
It's been t he hottest real estate market, believe it or not,
perhaps around the world. Why?
Because of a shift toward ethanol production in the United States.
there was a law passed in 2008 that required 9 billion gallons of ethanol to
be produced and added into gasoline. By 2012, sorry, by 2022.
that mandate will grow to 36 billion gallons a year.
What's ended up happening as more and more corn,
has a key input to ethanol production, has been bought
to fulfill this federal mandate. The price per bushel of corn has been
rising dramatically. From $2 in 2006 to $5 per bushel
in 2008, to $6.50 per bushel in 2011. 25% of corn
production now gets steered toward ethanol in the United States.
Land that's used to produce corn, any owner of land, has
been the scarce input, that's been bid up in price along the way.
Just between 2007 and 2008 an acre of
farmland in Iowa, prime corn production country, has increased
50% roughly from $4200 an acre to $6500 an acre.
And that trend has continued beyond them.
By contrast over the same period, real
estate in Manhattan has risen only 3.2%, and
in red hot London real estate has
increased only 16%, over that same time period.
So just give you a flavor on the positive side, as profits, signals create With
incentive Tanner its owners have scarce inputs.
Even though the overall profit in corn production as we move to the long run
will get wiped out, it doesn't mean
that certain owners of scarce inputs won't benefit.
And in this case, appreciable.
Un, in particular, in the ethanol market, its owners are scarce.
Land that is used to produce the corn that's behind the ethanol.
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