Firm Short Run Profit Maximization &
Perfectly Competitive Supply
Lecture 18
Dr. Jennifer P. Wissink
©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved.
April 10, 2017
Announcements(micro)-Spring 2017

Prelim 2 is Thursday April 13, 7:30pm-9:00pm
– Evening prelim conflicts: Please go to Blackboard and register for Option 1
or Option 2.
– Other conflicts: Please see Prof. Wissink in person ASAP.
– Coverage: Starts with the elasticity stuff we didn’t test on prelim 1 (slide 5
lecture 11) and goes through when I say “stop” on Wednesday April 12 in
lecture 19. So stuff in chapters 5-8.
– Office Hours: See https://courses.cit.cornell.edu/econ1110jpw/help.htm
» Also remember to use the ETC, located at 475 Uris Hall
– Locations: All testing locations will be announced via Blackboard soon, so be
on the lookout.

Upcoming MEL Quizzes Prior To Prelim 2
– All due Thursday Morning. Note you can review them as soon as you submit.
– Sorry if you got any automated email from Blackboard about MEL Quiz due
dates. They were set up by the Head TAs (as I asked) and put on auto-post
before we all left for Spring Break and then I changed/extended the
dates. Even though I deleted the posts, they might have sent them to you via
email anyway. If they did, sorry to have created any confusion...
Recall Rules For Profit ( = TR-TC)
Maximization in the Short Run
 If
q* maximizes (q) = tr(q) – srtc(q) , then
– (1) mr(q*) = srmc(q*)
» the first order condition, or f.o.c.
– (2)  (q*) is a maximum and not a minimum
» the second order condition, or s.o.c
– (3) at q* it is worth operating:  (q*>0)   (q=0)
 NOTE:
This procedure is good, no matter
what type of firm considered.
Intuition:
Why mr=mc at the Profit Maximizing q*

Why? Because....
– If mr > mc at q, then…
– If mr < mc at q, then…
– If mr = mc at q, then…
“To Be Or Not To Be” Open,
The Short Run Shut Down Decision
Reality Wrinkle: Sunk &
Avoidable Fixed Costs


When q > 0, fixed costs are just that. Fixed.
When q = 0, need to rethink fixed costs
– some are sunk fixed costs
– some are avoidable fixed costs

How would shut down rule be changed?

i>clicker question: If half of your fixed costs
are avoidable fixed costs,
then would you tend to shut down
at a higher or lower market price?
A. higher
B. lower
Short Run Profit Maximization in a
Perfectly Competitive Output Market

Consider
– Structure, then
– Conduct, then
– Performance.

Recall Structure for
Perfectly Competitive Markets
–
–
–
–

(1) Many firms, and
(2) Homogeneous output, and
(3) Free entry and exit, and
(4) Full and symmetric information.
Our Example
– The Apple market, Cortland variety, of which Jonathan’s apple orchard is one
of many

Recall:
– Structure implies Jonathan is a PRICE TAKER!
Conduct: Short Run Profit Maximization
in a Perfectly Competitive Output Market

Notation Reminder
– Let q = Jonathan’s output
– Let Q = The aggregate output
of the entire apple market
– Let P = The market price for
apples

Jonathan is a “price taker”.
– So, Jonathan’s perceived
demand for HIS apples (δ)
will be the prevailing market
price P.
– So, for Jonathan
tr = P∙q
– which implies that
for Jonathan
mr = P = δ
Jonathan’s Profit Maximizing Move
When Market Price P=$528

Recall: If q* maximizes  , then
– (1) mr(q*) = srmc(q*)
– (2)  (q*) is a maximum and not a minimum.
– (3) at q* it is worth operating:  (q*>0)   (q=0)
Jonathan's Apple Farm Costs (detail)
Apples
(tons/year)
$Land
200
210
220
230
240
250
260
12,400
12,400
12,400
12,400
12,400
12,400
12,400
$Hired
Labor
54,400
58,560
63,200
68,240
73,760
80,000
86,400
$Proprietor's $Total
Cost
time
13,200
80,000
13,200
84,160
13,200
88,800
13,200
93,840
13,200
99,360
13,200
105,600
13,200
112,000
$Marginal
$Average Cost
Cost
larger delta
method
400
401
404
408
414
422
431
440
484
528
588
632
i>clicker question
If you’re looking at a table of $mc values, and none of them exactly match your $mr
value...
A.
B.
C.
D.
E.
you should guess an answer.
you should cry frantically and loudly.
you should use $mc relative to $mr to narrow down your decision to one of two quantities.
you should try to approximate something between the two quantity values in the table.
then there is no profit maximizing equilibrium quantity.
Jonathan's Apple Farm Costs (finer detail)
Apples (tons/year)
Total Cost
200
80,000
210
84,160
220
88,800
230
93,840
240
99,360
250
105,600
260
112,000
Marginal Cost (smaller
delta)
i>clicker question
Consider Purity Ice Cream and Footies Freeze in the month of January. Which
statement below is the most correct.
A.
B.
C.
D.
Graph A represents both
Graph B represents both
Graph A represents Purity and B Footies
Graph A represents Footies and B Purity
$π
A
$π
B
THE COST GRAPH for Jonathan
The Cost Graph

Does The Cost Graph always look
exactly like this?
– NO!

Suppose
– Joe’s fc=$100 and Joe’s vc=q2
0
Using The Cost Graph to Derive
Jonathan’s Short Run Supply Curve
$P
0
q*
Jonathan’s Short Run Supply Curve


So, for a perfectly
competitive firm,
the srsfirm = srmc
for all points where
srmc ≥ sravc (this assumes
that all fixed costs are
sunk).
Note that we have
confirmed the “law of
supply”!
i>clicker question
An improvement in production
technology will shift the marginal
cost curve
A. downward and decrease quantity
supplied at each price.
B. upward and increase quantity
supplied at each price.
C. upward and decrease quantity
supplied at each price.
D. downward and increase quantity
supplied at each price.
E. downward with no effect on market
supply.
0
The Perfectly Competitive
Short Run Market Supply Curve


The market supply curve is the horizontal sum of the quantities supplied by
each seller at each market price.
Market supply, thus reflects the marginal costs of each of the producers in the
market.
Reprise: The Short Run Market
Supply


How does our scratch supply curve compare to the one
we bought off the shelf?
Recall the supply function for X = mini speakers:
QS = g(PX, Pfop, Poc, S&T, N)
Where:
QS = maximum quantity that producers are willing and able to sell
PX = X’s price
Pfop = the price of factors of production
Poc = the opportunity costs
S&T = science and technology
N = number of firms in the market
END OF MATERIAL FOR PRELIM 2
Thank
goodness!