Lecture 15 Long Run Supply

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Lecture 15 - Long Run Supply

• Wissinks Words

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remarks

• Will review, revisit and extend the theory of the
  firm.
• Getting deeper and deeper behind the supply
  curve.
• Digging deeper and deeper into the derivation of
  the firms cost curves.
• Come from technology factor prices.

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on the cost curves...

• Note simple case of one variable input (labor)
  and one fixed input (capital).
• The plant managers job (cost minimization) is
  fairly straightforward.
• The cost curves pop out of the product
  curves total product ? variable cost marginal
  product ? marginal cost

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on the profit exercise...

• Short run profit maximization ?(q) tr(q) -
  srtc(q)
• pay attention to
• ? max occurs where mr ( P) srmc
• since we have a price taking firm, Pmr
• If ? gt 0, great.
• If ? lt 0, need to make sure its worth your while
  to operate in the short run.

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on the shut down rule...

• Suppose ? lt 0 at q where mrsrmc.
• Question To operate or not to operate
• Can your revenues cover your variable costs?
• Yes? Ok, then operate at a loss in the short
  run.
• No? Then shut down in the short run and see what
  happens. Your loses will be your fixed costs.
• Rule operate if tr ? vc or if P ? avc,
  otherwise shut down

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sunk and avoidable fixed costs

• Once you consider q0, fixed costs can be divided
  into those that are sunk (irretrievable) and
  those that are avoidable.
• Examples
• sunk fixed costs licensing fees, insurance
  premiums, un-subletable lease obligations.
• Avoidable fixed costs subletable lease
  obligations, idle capital you can rent to others

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• If some fixed costs are sunk, then the shut down
  rule is slightly altered.
• New Ruleoperate if tr ? (vc avoidable fixed
  costs), otherwise shut down
• The original text book rule assumes that all
  fixed costs are sunk.
• Sunk costs are hard to deal with at times.
• Example biking in Helsinki in May