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Market demand
Sum of individual demand curves Aggregate quantity demanded at each price Arrays individual buyers in order of willingness to pay Identical goods? Product differentiation?
Supply analysis
Supply curve
How much the firm will sell at each price Assumption: price-taking firm
In the short run, fixed costs are inevitable Should not affect short run supply decisions (?)
Marginal costs
Cash costs: out-ofpocket Opportunity costs: foregone profits
Long run supply: entry & exit Recover both fixed and variable costs Fixed costs
Out-of-pocket costs Opportunity costs: return on capital
Average costs
Includes both fixed and variable costs Typical U shape Minimum of the average cost curve: Optimal long run supply point Market price must exceed price at this point Determine entry and exit Dynamics?
Supply elasticity
Flat supply curve: very sensitive to price: Elastic Steep supply curve: less sensitive: Inelastic
Market equilibrium
Interesection of market demand and supply curves Disequilibrium will cause price to adjust and yield new equilibrium Real world: series of small disequilibriums, series of price adjustments Currency markets: rapid, continuous adjustments
Profit calculation based on equilibrium price Average and marginal costs Marginal cost determines supply volume Average costs at that volume
Market adjustment
Shifts in demand and supply curves
Increase: shift to the right Decrease: shift to the left
Inelastic curves: adjustment largely through price Elastic curves: adjustment largely through quantity Short run versus long run
Perfect competition
Three assumptions:
1. Identical products 2. Many small price-taking buyers and sellers 3. Full information
Excess profits more firms enter increased supply lower price zero excess profits
Secret of long run profitability: deviations from perfect competition Few sellers or buyers
Extreme case: monopoly or monopsony Oligopoly
Collusion Cartels: incentives to cheat the cartel
Product differentiation
Special attributes: Real or imaginary
Imperfect information
Search costs protect existing relations and discourage competition