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INTRODUCTION TO MICROECONOMICS

INTRODUCTION TO MICROECONOMICS. Graphs and Tables Part #3. Figure VI-1.1: An Increase in Demand in an Increasing Cost Industry. S SR. P. For an increase in demand: Start at P SR = P LR , Π = 0. S LR. $20. D. Q. 100K. The Market.

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INTRODUCTION TO MICROECONOMICS

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  1. INTRODUCTION TO MICROECONOMICS Graphs and Tables Part #3

  2. Figure VI-1.1: An Increase in Demand in an Increasing Cost Industry SSR P • For an increase in demand: • Start at PSR = PLR, Π = 0 SLR $20 D Q 100K The Market

  3. Figure VI-1.2: An Increase in Demand in an Increasing Cost Industry SSR P • For an increase in demand: • Start at PSR = PLR, Π = 0 • Increase demand • PSR > PLR, Π > 0 causes entry. SLR $35 $20 D’ D Q 100K 105K The Market

  4. Figure VI-1.3: An Increase in Demand in an Increasing Cost Industry SSR • For an increase in demand: • Start at PSR = PLR, Π = 0 • Increase demand • PSR > PLR, Π > 0 causes entry. • Entry causes S to increase. • 5. Costs also increase and • P decreases until PSR = PLRand Π = 0 (back in LR equilibrium). P S’SR SLR $35 $30 $20 D’ D 100K 105K110K Q The Market

  5. Figure VI-1.5: A Technological Change in an Increasing Cost Industry P SSR • Start at PSR = PLR, Π = 0 • SLR Shift to the Right • PSR > PLR, Π > 0 causes entry. SLR $20 S’LR $15 D Q 100K 110K The Market

  6. Figure VI-1.6: A Technological Change in an Increasing Cost Industry P SSR • Start at PSR = PLR, Π = 0 • SLR Shift to the Right • PSR > PLR, Π > 0 causes entry. • SSR Increases Until PSR= PLR, Π = 0 SLR $20 S’LR $15 D Q 100K 110K The Market

  7. Figure VI-1.3: An Increase in Demand in an Increasing Cost Industry SSR • For an increase in demand: • Start at PSR = PLR, Π = 0 • Increase demand • PSR > PLR, Π > 0 causes entry. • Entry causes S to increase. • 5. Costs also increase and • P decreases until PSR = PLRand Π = 0 (back in LR equilibrium). P S’SR SLR $35 $30 $20 D’ D 100K 105K110K Q The Market

  8. Figure VI-2.1: An Increase in Demand in an Increasing Cost Industry with Legal Entry Barriers SSR P • For an increase in demand: • Start at PSR = PLR, Π = 0; Legal Entry Barriers Imposed Here SLR $20 D Q 100K The Market

  9. Figure VI-2.2: An Increase in Demand in an Increasing Cost Industry with Legal Entry Barriers P SSR • For an increase in demand: • Start at PSR = PLR, Π = 0 • Increase demand • PSR > PLR, Π > 0 but entry is blocked so existing firms are able to earn Π > 0 . SLR $35 $20 D’ D Q 100K 105K 110K The Market

  10. Table VI-4: The Market for Wheat with Price Support

  11. Figure VI-4: The Market for Wheat with Price Supports P $26 S ES PSUP= $14 DPVT + USDA $10 DPVT $2 Q 60 80 120 Consumers pay = $14(60) = $840 USDA pays = $14(120 – 60) = $840

  12. Table VI-5: The Market for Wheat with Price Supports and Production Controls (PC)

  13. Figure VI-5: The Market for Wheat with Price Supports and Production Controls SPC= 70 P S ES $26 PSUP = $14 $10 DPVT + USDA $2 DPVT Q 60 70 80 Consumers pay $14(60) = $840 USDA pays $14(10) = $140

  14. Table VI-6: Target Prices

  15. Steps for Finding Consumer Price, PCON • 1. Find Target Price = $14 • 2. Find Quantity Supplied at P = $14. QS = 120. • 3. Find Quantity Demanded of 120. • 4. Price for QD = 120 is P = $2.

  16. Figure VI-6: The Market for Wheat with a Target Price P $26 S PTAR = $14 $10 DPVT PCON = $2 Q 80 120 • Consumers Pay Farmers $2(120) = $240 • USDA Pays Farmers ($14-$2)(120) = $1,440

  17. Figure VI-7: The Welfare Loss in a Market for Wheat with a Target Price P $26 S PTAR = $14 $10 WL DPVT PCON = $2 Q 80 120 WL = ½(b)(h) = ½ $12(40) = $240

  18. Figure VI-8a: Effect of Price Supports in the Short-Run SSR P DSR SLR ESSR PSUP Short-Run Cost To USDA P0 DLR Q

  19. Figure VI-8b: Effect of Price Supports in the Long-Run SSR S’SR P DSR SLR ESLR PSUP Long-Run Cost To USDA P0 DLR Q

  20. Explanation of Figures VI-8a and 8b • 1. Start at Social Welfare Maximum, P0 = PLR • 2. Raise price to PSUP so that PSUP > PLR, and existing firms will now have positive profits. • 3. That will attract new entry (In this case, it will mean existing farms buying up smaller farms and adding more capacity). New entry will cause the costs to rise (increasing cost industry) but prices do not fall because of the price floor. • 4. New entry continues until costs have risen enough to reduce profits to zero. (This occurs at PSUP.) • 5. Cost of price supports is larger in the LR than the SR.

  21. Figure VI-9: Effect of a Producer Subsidy • Subsidy to producers results in misallocation of resources: Too much output in subsidized Market and too little output in the Rest of Economy Farm Subsidy Rest of Economy Farm Markets Resources (Lower Valued Use) Output Increases Output Decreases Farm Subsidy in Farm Markets is equivalent to a tax on the Rest of Economy

  22. Figure VI-10: The Market for Corn--Supply and Demand Curves P S $26.00 PF = $14.00 c $10.00 b D a $2.00 Q 100K

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