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What did you study last time?

What did you study last time?. What are the criteria of an efficient tax system? How to evaluate some tax systems? What are the principles used to achieve equity in a tax system?. Do you know …. how to calculate profits? how to determine revenue? how to measure output/production?

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What did you study last time?

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  1. CRC Microeconomics

  2. What did you study last time? • What are the criteria of an efficient tax system? • How to evaluate some tax systems? • What are the principles used to achieve equity in a tax system? CRC Microeconomics

  3. Do you know … • how to calculate profits? • how to determine revenue? • how to measure output/production? • how to assess costs? • how to maximize profits? CRC Microeconomics

  4. 1. Profits ProfitsP = TotalRevenueTR - TotalCosts TC Input costs that require an outlay of money by the firm P*Q ExplicitCosts + Price (P) times quantity (Q) Input costs that do not require an outlay of money by the firm ImplicitCosts AccountingP = TR - ExplicitCosts EconomicP = TR - TC CRC Microeconomics

  5. 2. Revenue TR = = P * Q AverageRevenueAR = TR/Q = P Revenue per unit MarginalRevenueMR = DTR / DQ Extra revenue per extra unit CRC Microeconomics

  6. Revenue Curvesin Perfect Competition P TR The TR curve is a straight line starting from the point of origin O. TR = P * Q The AR and MR curve are also straight lines. They coincide and start where the price is. AR = MR = P. AR is the same as the demand (D) curve. P (AR=P) = MR (D) CRC Microeconomics Q

  7. Revenue Curves in Imperfect Competition P TR At the output where MR = zero, TR is maximized. The TR curve is an upside-down parabola, starting from the point of origin. The AR curve is downward- sloping, starting from a point on the vertical axis. The MR curve is also downward- sloping. It starts from the same point as AR on the vertical axis. From that point on MR < AR. (AR=P) (D) MR CRC Microeconomics Q

  8. 3. Output/Production • Production function A production function describes the relationship between output and inputs. CRC Microeconomics

  9. 3. Output/Production • Production function • Long run (when all inputs are variable.)Q = f (l, L, K), where l = land; L = labor; and K = capital • Short run (when at least one input is fixed.)Q = f (L) with fixed l and K CRC Microeconomics

  10. b. SR Output/Production TotalProductTP = = Q AverageProductAPL = Q / L Output per worker MarginalProductMPL = DQ / DL Extra output per extra worker CRC Microeconomics

  11. SR Output Curve (TP) Shut-down point Maximum output M Q S TP = Q R Relevant section Diminishing-return point Z Zero output L CRC Microeconomics

  12. SR Output Curves (AP & MP) Q R MP Relevant sections S AP M Z L CRC Microeconomics

  13. 4. Costs • Short run (when at least one input is fixed.) • Long run (when all inputs are variable.) CRC Microeconomics

  14. a. SR Costs Costs of fixed inputs Costs of variable inputs TotalCostsTC = FixedCostsFC + VariableCosts VC TC / Q = FC / Q + VC / Q AverageTotalCostATC = AverageFixedCost AFC + AverageVariableCost AVC Cost per unit MarginalCost MC = DVC / DQ = DTC / DQ Extra cost per extra unit CRC Microeconomics

  15. SR Cost Curves (TC, VC, FC) TC VC Break-even point $ B Diminishing-return point R Shut-down point S R FC Q CRC Microeconomics

  16. SR Cost Curves (ATC, AVC, MC) MC $ Relevant section ATC B AVC R S Q CRC Microeconomics

  17. b. LR Cost Curve $ There is one short-run average cost curve for each plant size. LRATC SRATC1 The long-run average total cost curve is the envelope curve. SRATCn SRATC2 SRATCn-1 SRATCe The minimum point on the lowest SRATC curve determines … Efficient Scale Q Constant Returns to Scale (CRTS) Economies of scale (IRTS) Diseconomies of scale (DRTS) CRC Microeconomics

  18. 5. Profit Maximization • Rule. The firm should produce output Q* where MR = MC • Proof P = TR - TC DP/DQ = DTR/DQ - DTC/DQ MP = MR - MC Profit maximization requires that MP = 0, i.e. MR = MC CRC Microeconomics

  19. Now you know … • how to calculate profits. • how to determine revenue. • how to measure output/production. • how to assess costs. • how to maximize profits. CRC Microeconomics

  20. What will you study next time? • What are the main characteristics of a (perfectly) competitive market? • How much should a competitive firm produce to maximize profits? • What happens in the long run in a competitive market? • How to derive the supply curve in a competitive market? CRC Microeconomics

  21. See You! Take Care! CRC Microeconomics

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