Economics 109 Lect. 4 Notes Supply and Demand 2 Opening a Restaurant?

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1 Economics 109 Lect. 4 Notes Supply and Demand 1 Entry and Exit

2 Economics 109 Lect. 4 Notes Supply and Demand 2 Opening a Restaurant?

3 Economics 109 Lect. 4 Notes Supply and Demand 3 The Restaurant Experiment Lessons To Be Learned Entry and Exit from the Industry Technology and Costs { Overhead { Marginal Costs { Capacity Limits The Short Run and Long Run { Fixed and Variable Costs in Short and Long Run { Short and Long Run Supply Curves { Short and Long Run Equilibrium

4 Firms that are not earning back their total costs may stay { the business so long as they are covering variable costs. in In the long run, as old plant and equipment wears out, all { become variable and rms that are losing money leave costs Economics 109 Lect. 4 Notes Supply and Demand 4 Free Entry and Exit in a Competitive Industry Free Entry into an industry means that any number of new with the same technology as existing rms can enter the rms industry and will do so if they think it will be protable. Free Exit from an industry means that in the long run, rms that are losing money can shut down. the industry.

5 Economics 109 Lect. 4 Notes Supply and Demand 5 Technology and Firms Fixed (overhead) costs do not depend on output level, but necessarily occurred if a rm operates at all. In this are experiment overhead costs are $20. Variable cost (marginal cost) is the cost of producing an additional unit. Variable costs change with output in the short run. Overhead costs do not. Many rms have capacity limits, at least in the short run. In long run, rms may be able to expand their capacity, by the adding to plant and equipment.

6 a rm that sells n units has average costs of experiment, A rm selling at full capacity has n = 4 and ($20+5n)/n. Economics 109 Lect. 4 Notes Supply and Demand 6 In this experiment, marginal cost is constant (at $5) up until the rm reaches its capacity of 4 customers. Average total cost is the total of overhead costs and costs divided by the number of units sold. In this marginal average costs of $10.

7 marginal cost and will not supply anything at prices exceeds marginal cost. This determines the short run supply below at full capacity, so long as the price is greater than the operate cost of a rm operating at full capacity. average Economics 109 Lect. 4 Notes Supply and Demand 7 Short and Long Run Supply Curves In the short run, when marginal cost is constant, all rms in industry will supply up to capacity so long as the price the curve for this experiment. When there is constant marginal cost and rms have xed in the long run, rms will enter the industry and capacity, The long run supply curve is a horizontal line at a height to the average cost of a rm operating at full capacity. equal

8 Economics 109 Lect. 4 Notes Supply and Demand 8 Short and Long Run Equilibrium Short run equilibrium occurs where the short run supply curve intersects the demand curve. Long run equilibrium occurs where the long run supply curve intersects the demand curve. In short run equilibrium there may be either prots or losses, on whether there is a shortage or an excess of depending capacity in the industry. In long run equilibrium, no one is losing money and no new could make money by entering the industry. rm

9 Economics 109 Lect. 4 Notes Supply and Demand 9 Short Run Supply and Demand Session 1, R1 30 Price of Meals Demand Curve Equilibrium 10 Short-Run Sup. Curve Number of Meals

10 Economics 109 Lect. 4 Notes Supply and Demand 10 Prots and Losses Session 1, Rd 1, 11 rms, 6 made prots, 5 made losses Session 1, Rd 2, 8 rms, all made small prot Session 2, Rd 1, 7 rms, all lost money Session 2, Rd 1, 6 rms, all made small prots

11 Economics 109 Lect. 4 Notes Supply and Demand 11 Short Run Supply and Demand Session 1, R2 30 Price of Meals Demand Curve Equilibrium 10 Short-Run Sup. Curve Number of Meals

12 Economics 109 Lect. 4 Notes Supply and Demand 12 Short Run Supply and Demand Session 2, R1 30 Price of Meals Demand Curve Equilibrium 10 5 Short-Run Supply Curve Number of Meals

13 Economics 109 Lect. 4 Notes Supply and Demand 13 Short Run Supply and Demand Session 2, R2 30 Price of Meals Demand Curve Equilibrium 10 5 Short-Run Supply Curve Number of Meals

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