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Supply

Supply. Short- and Long-run. Short-run: fixed plant period Long-run: variable plant period. Short-run Production Relationships. Costs depend on 1) price of resources and 2) quantities of resources necessary 1) Total product (TP) 2) Marginal product (MP) MP= Δ TP/ Δ labor input

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Supply

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  1. Supply

  2. Short- and Long-run • Short-run: fixed plant period • Long-run: variable plant period

  3. Short-run Production Relationships • Costs depend on 1) price of resources and 2) quantities of resources necessary • 1) Total product (TP) • 2) Marginal product (MP) MP=ΔTP/ Δlabor input • 3) Average product (AP) AP=TP/units of labor

  4. Law of Diminishing Returns/Marginal Product • Assumes fixed tech. • “As successive units of a variable resource (say, labor) are added to a fixed resource (say, capital or land), beyond some point the extra, or marginal, product attributable to each additional unit of the variable resource will decline.” • If not, world could be fed from a flower pot

  5. TP AP Increasing Diminishing Negative MP

  6. Costs of Production • Explicit vs. implicit (accounting vs. economics) • Fixed costs: “those costs which in total do not vary with changes in output” • Variable costs: “those costs that change with the level of output” • Total costs: “sum of fixed and variable cost at each level of output”

  7. Per-Unit/Average Costs • Average Fixed Cost (AFC)= TFC/Q Decreasing • Average Variable Cost (AVC)= TVC/Q U-shaped: decreases then increases—at very low levels production is relatively inefficient high AVC; expansion specialization + efficiency (economies of scale) decreasing AVC; past a point LDMR increasing (diseconomies of scale)

  8. Average Total Cost= TC/Q= AFC + AVC Or: AFC= ATC-AVC or AVC= ATC-AFC • Marginal Cost= ΔTC/ ΔQ MC is key: this is the cost firm immediately controls and that determines production level “If the price (cost) of the variable resource remains constant, increasing marginal returns will be reflected in a declining marginal cost, and diminishing marginal returns in a rising marginal cost.”

  9. AFC

  10. Relation of MC to AVC and ATC • MC intersects AVC and ATC at minimum point • When MC less than ATC/AVC, ATC/AVC falls; when MC above ATC/AVC, ATC/AVC rises AFC unaffected

  11. Shifts in Costs • Fixed cost increase: AFC, and ATC shift upward; AVC and MC unaltered • Variable cost increase: AVC, ATC, MC shift upward; AFC unaltered

  12. Short-run Production • Firm produces at Q where MR=MC • In perfectly competitive market, MR=P • If P > ATC economic profit • If P = ATC normal profit (Break-even point) • If P < ATC loss

  13. P4 Economic Profit Break-even Point P1 Loss P2 P3: Shutdown point Q1 Q2 Q3 Q4

  14. A: consumers’ surplus B: Producers’ surplus C: Total revenue Elasticity affects surplus

  15. Price Searching If B>E producers’ gain Possible if few sellers (coordination easier)

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