Welcome to week seven of The Power of Markets course. I have to convey how impressed we continue to be with your involvement with the course. keeping up with the material, the quizzes. The quality of the comments on the threads in the various discussion fora, that you've provided and the helpfulness to each other when somebody enrolled in the course has had a question. So, very much appreciate that engagement and we encourage you to keep it up. we're going to finish off the rest of chapter nine this week, and then also cover a good portion of chapter ten. And what we're going to look at is how equilibrium gets established, in a perfectly competitive model. Both in the short run and the long run. And then will apply the model to a few settings when a tax gets applied for example by government. Who will end up bearing the burden of the tax? What will the deadweight loss be of the tax? what happens short run versus long run if a price ceiling is imposed by policy makers? We'll revisit the case of rent control. What happens if entry's limited into the market. This is, was the case in the United States prior to airline deregulation. It's also true with taxi cab licensing in most major markets round the globe. And then we'll look at free trade and why the competitive model shows it's a concept that virtually all economists agree on. And it generates the most agreement of any issue that economists are polled on, is free trade good or imports good or exports good, and what, what is the link between the two. So let's begin first by looking at Short Run equilibrium as well as the long run equilibrium, and this session will focus on the short run, equilibrium. we'll also look at how Price and Output in particular get Determined in the Short Run. Last time, at the end of last week we looked at an individual firm in the perfectly competitive setting, what a short run supply curve looks like. And remember we concluded that, the short run supply curve, is it's marginal cost curve above average variable cost. It needs to meet average variable cost, if it doesn't, it's better to shut down and operate at Q equals 0. but, so long as variable costs are met then the marginal cost indicates the firm's, the competitive firm's willingness to supply output at different prices prevailing in the market. So let's now look at the overall equilibrium in the short run. And in particular we'll turn to Figure 9.7. Say we have a case of three firms, A, B and C, each with respective to supply curves MCA, MCB, MCC. these are the portions of the respective marginal cost curves above average variable cost. the curve, let's say we look at MCC of the marginal cost curve firm, firm C below a price of P 0, the firm's supply 0. Above it it supplies out to the magnitude of the marginal cost curve, MCC. at the different prices above PC, P0. So let's look at how we derive the, total supply curve in the short run for this perfectly competitive industry, assumed there are only three firms. Below a price of P 0, none of the three firms is willing to supply anything the price hits even for the, for firm C at a point below average variable cost being met. Once you hit P 0 though it's enough to induce From C to start supplying along its marginal cost curve. And so, the total supply curve SS to this market across the three firms is just that one firm's marginal cost curve. Until price keeps rising enough to draw output from, from A, until price rises to level P1. And at that point, the marginal cost curve from firm A kicks in. And we have to add the magnitude, the horizontal magnitude from A is willing to stir into the market. And that's why there's a discontinuous jump to the right along, of overall industry supply curve SS once we hit P1. And then the curve rises at the rate at which both from A and from C are continuing to add supply into the market with higher and higher price levels. And then from B starts stirring in its output once we hit a high enough price, P 2, so that from B covers its average variable cost. And at that point we add in, there's another discontinuous jump in magnitude reflecting how much from B is willing to add to the market. So, at any point, the overall quantity on the SSS curve, on the SS curve reflects the horizontal summation of each of the individual competitive firms, how much they're willing to supply. And then to determine the equilibrium price and quanitty we look at the intersection of the demand curve and the SS curve, the horizontal summation of these individual firms. Initially the equilibrium price will be P3, and a quantity of Q. Should demand increase, lets say D prime, then that will result in a higher equilibrium price of P4 and equilibrium quantity of Q prime. And that higher overall quantity supplied along the SS curve is the result of the higher price calling for each of the 3 firms, A, B, and C, producing more output as the price rises. So, overall industry supply in the short run is the horizontal summation of individual firms supply curves, their marginal cost curves above average variable costs. And that intersection of overall industry supply is what determines in the short run, equilibrium price and quantity. In the next session will turn to what determines long run equilibrium price and quantity.
