Chapter 23: Aggregate Supply

Transcription

1 Econ Microeconomic Analysis Chapter : Aggregate Supply Instructor: Hiroki Watanabe Spring Watanabe Econ Aggregate Supply / Introduction Short-Run Aggregate Supply Long-Run Aggregate Supply Fixed Factors & Economic Rent Summary Watanabe Econ Aggregate Supply / Introduction Short-Run Aggregate Supply Long-Run Aggregate Supply Fixed Factors & Economic Rent Summary Watanabe Econ Aggregate Supply /

2 Firm s counterpart to Ch.A Aggregate Demand. Aggregate supply is a bit more complicated than aggregate demand. UMP isn t twofold. Jack s decision is twofold: Whether engage in the market or not. How many cheesecakes to produce. Time frame matters. Watanabe Econ Aggregate Supply / Marginal Cond Find y* Time Frame? Short Long Is Spi(y*)>? Yes Take y* Is Lpi(y*)>? Yes No Take y* Revise y*= Watanabe Econ Aggregate Supply / Introduction Short-Run Aggregate Supply Short-Run Aggregate Supply Short-Run Profit Long-Run Aggregate Supply Fixed Factors & Economic Rent Summary Watanabe Econ Aggregate Supply /

3 Short-Run Aggregate Supply Two bakers in town: Liz and Kenneth. Each with individual supply function s L (p), s K (p). Definition. (Aggregate Supply Function) Aggregate supply function S(p) is defined by S(p) :=. Note, on a graph, aggregate supply is a horizontal sum of individual supply. Watanabe Econ Aggregate Supply / Short-Run Aggregate Supply Example. (Aggregate Supply) p Liz s L (p) Kenneth s K (p) Aggregate Supply S(p) Watanabe Econ Aggregate Supply / Short-Run Aggregate Supply Price ($) Liz s L (p) Kenneth s K (p) Aggregate Supply S(p) Watanabe Econ Aggregate Supply /

4 Short-Run Profit Recall Jack may be incurring a loss: does not guarantee Cf. p. in Ch. ˆ π(y) := TR(y) VC(y) π(y) := TR(y) TC(y). If the market price falls between AVC(y SD ) and AC(y MES ), π(y) < while ˆπ(y) >. Long-term strategy is to exit, and short-term strategy is to stay in the business and earn positive short-run profit. Watanabe Econ Aggregate Supply / Short-Run Profit Example. (Short-Run vs Long-Run Profit) Let s say Liz, Kenneth and Jack are in baking business. Ongoing market price is p =. While they all earn ˆπ(y) := TR(y) VC(y) >, some of them might have π(y) := TR(y) TC(y) <. Watanabe Econ Aggregate Supply / Short-Run Profit MC, AC, AVC, Price ($) / MC(y) Liz s AC(y) AVC(y) Market Price p Watanabe Econ Aggregate Supply /

5 Short-Run Profit MC(y) Kenneth s AC(y) AVC(y) Market Price p MC, AC, AVC, Price ($) / Watanabe Econ Aggregate Supply / Short-Run Profit MC(y) Jack s AC(y) AVC(y) Market Price p MC, AC, AVC, Price ($) / Watanabe Econ Aggregate Supply / Short-Run Profit Marginal condition (MR(y) = MC(y)) leads to y =. Since AVC(y = ) =, everyone earns the short-run profit: ˆπ(y = ) = TR() VC() = -=. In the long run,... Watanabe Econ Aggregate Supply /

6 Short-Run Profit Liz Kenneth Jack p y TR() AVC() / / / VC() ˆπ() AC() TC() π() Watanabe Econ Aggregate Supply / Introduction Short-Run Aggregate Supply Long-Run Aggregate Supply Determining the Number of Firms Example Fixed Factors & Economic Rent Summary Watanabe Econ Aggregate Supply / Determining the Number of Firms Firms can come and go in a perfectly competitive market. Exactly when do they step in and out of the market? Watanabe Econ Aggregate Supply /

7 Determining the Number of Firms Above AC(y ) At AC(y ) Below AC(y ) p Profit Entry/Exit # of Firms Price Goes... Watanabe Econ Aggregate Supply / Determining the Number of Firms Aggregate Demand s L (p) Eqm Price MC(y) AC(y) Market Price p Price ($) MC, AC, AVC, Price ($) Watanabe Econ Aggregate Supply / Determining the Number of Firms Aggregate Demand s L (p) s L (p)+s K (p) MC(y) AC(y) Market Price p Price ($) MC, AC, AVC, Price ($) Watanabe Econ Aggregate Supply /

8 Determining the Number of Firms Aggregate Demand s L (p) s L (p)+s K (p) MC(y) AC(y) Market Price p Price ($) s L (p)+s K (p)+s J (p) MC, AC, AVC, Price ($) Watanabe Econ Aggregate Supply / Example Example. (# of Firms in the Long Run) Suppose a typical cheesecake-producing firm has MC(y) = y ATC(y) = y + y and aggregate demand is given by AD(y) = y +. What is the smallest average total cost and y MES? (Use Proposition. in Ch). What is the number of firms operating in the market? Watanabe Econ Aggregate Supply / Example Aggregate Demand AC(y MES ) Average Cost, Price ($) Watanabe Econ Aggregate Supply /

9 Introduction Short-Run Aggregate Supply Long-Run Aggregate Supply Fixed Factors & Economic Rent Fixed Factors Market Eqm in the Presence of Fixed Resources Rent Summary Watanabe Econ Aggregate Supply / Fixed Factors Is everything really variable in the long run? What if there is a barriers to entry or exit? Taxi cabs. Liquor licensing. Watanabe Econ Aggregate Supply / Fixed Factors # of liquor license is limited even in the long run. Jack can t issue the license by himself. Watanabe Econ Aggregate Supply /

10 Market Eqm in the Presence of Fixed Resources Think of a firm that needs an operating license the license is a fixed input that is rented but not owned by the firm. If the firm makes a positive economic profit then another firm can offer the license owner a higher price for it. Economic profits are competed away, to zero. In the long-run equilibrium, each firm makes a zero economic profit and each firm s fixed cost is its payment for the issuer of the license. Watanabe Econ Aggregate Supply / Market Eqm in the Presence of Fixed Resources MC(y) Kenneth s AC(y) AVC(y) Market Price p MC, AC, AVC, Price ($) / Watanabe Econ Aggregate Supply / Rent Definition. (Economic Rent) Economic rent is the payment for an input that is in excess of the minimum payment required to have that input supplied. Inputs that are associated with economic rent are usually limited in its quantity supplied (even in the long-run). Watanabe Econ Aggregate Supply /

11 Rent Marginal Cost, Price ($) Aggregate Demand Supply Liquor License y Watanabe Econ Aggregate Supply / Rent Marginal Cost, Price ($) Aggregate Demand Supply Katy Perry y (hours of concert) Watanabe Econ Aggregate Supply / Rent Marginal Cost, Price ($) Aggregate Demand Supply Me y (hours of lecture) Watanabe Econ Aggregate Supply /

12 Introduction Short-Run Aggregate Supply Long-Run Aggregate Supply Fixed Factors & Economic Rent Consumer Surplus Summary Watanabe Econ Aggregate Supply / Consumer Surplus A little recap of Ch Consumer Surplus: Watanabe Econ Aggregate Supply / Consumer Surplus Marginal Willingness to Pay, Price ($ or cups) D C (x C ) Market Price p C Cheesecake x C (slices) Watanabe Econ Aggregate Supply /

13 y MC(y) p PS(y) st nd rd th th th th th th th Watanabe Econ Aggregate Supply / Marginal Cost MC(y) Market Price p Marginal Cost, Price ($) Watanabe Econ Aggregate Supply / Note that producer surplus is ˆπ rather than π. Producer surplus is computed by adding the differences between p and MC(y). MC(y) doesn t carry information on fixed cost. When you integrate MC(y), you ll get an arbitrary constant of integration, which corresponds to fixed cost. Watanabe Econ Aggregate Supply /

14 Example. () Suppose Jack s supply function of cheesecake is s(p) = p. What is his producer surplus when p =? How much producer surplus will be gone if p? What if his production is restricted to cheesecakes (while p = )? Watanabe Econ Aggregate Supply / Marginal Cost MC(y) Price, Marginal Cost ($) Watanabe Econ Aggregate Supply / Marginal Cost MC(y) Price, Marginal Cost ($) Watanabe Econ Aggregate Supply /

15 Marginal Cost MC(y) Price, Marginal Cost ($) Watanabe Econ Aggregate Supply / Marginal Cost MC(y) Price, Marginal Cost ($) Watanabe Econ Aggregate Supply / Introduction Short-Run Aggregate Supply Long-Run Aggregate Supply Fixed Factors & Economic Rent Summary Watanabe Econ Aggregate Supply /

16 Short-run aggregate supply Long-run aggregate supply and break even point Rent Watanabe Econ Aggregate Supply / Index AC(y), AD, see aggregate demand aggregate demand, AVC(y), consumer surplus, economic rent, marginal condition, MC(y), MR(y), ˆπ(y), π(y), producer surplus, PS(y), see producer surplus S(p), see aggregate supply function s(p), see individual supply function supply function aggregate, individual, VC(y), y MES, y SD, Watanabe Econ Aggregate Supply /