Market Price Discovery 1 Perfect Competition Remember the

Market Price Discovery #1 Perfect Competition

Remember the firm’s supply curve? P=MR=AR

P=MR=AR Firm’s supply curve starts at shut down level of output

Profit maximizing firm will desire to produce where MC=MR P=MR=AR

Economic losses will occur beyond output OMAX, where MC > MR P=MR=AR

Forecasting Future Commodity Price Trends $7 D S $4 D = a – b. P + c. YD + e. X Own price $1 10 Disposable income Other factors

Forecasting Future Commodity Price Trends $7 D S Own price $4 Input costs S = n + m. P – r. C + s. Z $1 10 Other factors

Projecting Commodity Price $7 D S D = 10 – 6 P +. 3 YD + 1. 2 X D=S $4 S = 2 + 4 P –. 2 C + 1. 02 Z $1 10 Substitute the demand supply equations into the equilibrium condition and solve for price

Firm is a “Price Taker” Under Perfect Competition Price The Market D S The Firm Price AVC MC PE QE OMAX Quantity

If Demand Increases…… The Market Price D D 1 S The Firm Price AVC MC PE QE 10 11 Quantity

If Demand Decreases…… The Market Price D 2 D S The Firm Price AVC MC PE QE 9 10 Quantity

Firm is a “Price Taker” in the Input Market Price Labor Market D S Price The Firm MVP MIC PE QE LMAX Quantity

If Demand Increases…… Price Labor Market D S Price The Firm MVP PE MIC QE LMAX Quantity