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Production and costs Chapters 12 -14 Elasticity Supply & Demand PPF MRP Economic Rent Price Ceiling/Floor Total utility/ marginal utility. economic profit. = total revenue - total costs = (price)(quantity) - (explicit + implicit costs). implicit costs. includes normal profit

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Economic profit

Production and costsChapters 12 -14ElasticitySupply & DemandPPFMRPEconomic RentPrice Ceiling/FloorTotal utility/ marginal utility


Economic profit

economic profit

= total revenue - total costs

= (price)(quantity)

- (explicit + implicit costs)


Implicit costs

implicit costs

  • includes normal profit

  • so zero economic profit

    • still a normal profit


Short run vs long run

Short Run vs. Long Run

  • Short Run (SR)

    • plants, equipment fixed

    • labor inputs variable

  • Long Run (LR)

    • time frame where all inputs are variable


Marginal product mp

marginal product (MP)

  • change in TP due to one more worker

  • law of decreasing returns


Average product ap

Average Product (AP)

TP

=

labor


Economic profit

1

2

3

2

1

0

-1

AP

# workers

TP

MP

0

1

2

3

4

5

6

7

0

1

3

6

8

9

9

8

1

1.5

2

2

1.8

1.5

1.1


Total cost tc

Total Cost (TC)

  • total fixed cost (TFC)

    • does not change in SR

  • total variable cost (TVC)

    • cost of labor

  • TC = TFC + TVC


Marginal cost

Marginal Cost

  • change in TC due to one-unit increase in output (Q)


Average cost atc

Average Cost (ATC)

  • = TC/Q

  • average fixed cost (AFC)

    = (TFC/Q)

  • average variable cost (AVC)

    = (TVC/Q)

  • ATC = AFC + AVC


Economies of scale

Economies of scale

  • increase inputs 10%

    • output increase > 10%

    • ATC falls

  • natural monopoly


Diseconomies of scale

Diseconomies of scale

  • increase inputs 10%

    • output increase < 10%

    • ATC rises


Chapters 12 14

Chapters 12-14

  • characteristics of

    • perfect competition

    • monopoly

    • monopolistic competition

    • oligopoly

  • in your lecture notes!


All firms

all firms

  • maximize profit

  • MR = MC

  • if P > ATC

    • economic profit

  • if P < ATC

    • economic loss


Perfect comp monopolistic comp

perfect comp. & monopolistic comp

  • both

    • many firms

    • easy entry/exit

    • LR normal profit

  • differ

    • identical vs. differentiated product

    • demand curve


Perfect comp monopoly

perfect comp & monopoly

  • monopoly price higher

  • monopoly quantity lower

    • inefficient


Economic profit

P, MR

MC

Pm

Pc

D

MR

Q

Qm

Qc

Pm > Pc

Qm < Qc


Monopoly

consumer

surplus

P, MR

MC

Pm

deadweight

loss

D

MR

Q

producer

surplus

Qm

monopoly


Monopoly monop comp

monopoly & monop. comp.

  • both

    • downward sloping demand curve

  • differ

    • # firms

    • barriers to entry


Monopoly oligopoly

monopoly & oligopoly

  • both

    • barriers to entry

    • downward sloping demand curve

  • differ

    • # of firms


Elasticity

Elasticity

  • price elasticity

    • demand

    • supply

  • cross elasticity

  • income elasticity


What is it

what is it?

  • % change quantity

    • divided by % change in

      -- price of same good OR

      -- price of related good OR

      -- income


Elasticity of demand

elasticity of demand

% change in Qd

% change in P


Economic profit

< 1

  • inelastic

  • % change Qd < % change P

  • Qd not sensitive to change in P

  • TR rises and P increases


Perfectly elastic demand

perfectly elastic demand

  • horizontal demand curve

  • any increase in price

    • Qd falls to zero


Perfectly inelastic demand

perfectly inelastic demand

  • vertical demand curve

  • change in P, no change in Qd


Cross elasticity

cross elasticity

  • price of related goods

  • negative for complements

  • positive for substitutes


Income elasticity

income elasticity

  • change in Qd when income changes

  • negative for inferior goods

  • positive for normal goods


Shift in supply demand

Shift in Supply & Demand

  • increase -- shift right

  • decrease -- shift left

  • price of a good WILL NOT SHIFT

    • demand for that good

    • supply of that good

    • will change Qd or Qs


Shift in supply demand1

Shift in Supply & Demand

  • will change equilibrium P & Q


Example 2

Example 2

  • Market for bottled water

  • sugar is found to be harmful to health

  • what happens to equilibrium?


Which curve is affected

Which curve is affected?

  • Demand curve

    • health concerns increase

      preferences for water

    • demand shifts right


Economic profit

P

S

Equilibrium:

$10

P

D’

Q

D

Q

10

(millions bottles per day)


Economic profit

PPF


Concave ppf

concave PPF

  • increasing opportunity costs

    • resources not perfectly substitutable


Marginal revenue product mrp

Marginal Revenue Product (MRP)

  • = value of marginal product (VMP)

  • additional revenue from hiring one more unit of labor

    • price of good x MP

  • maximum firm will pay for one more unit of labor

    • wage < or = to MRP


Economic rent

Economic Rent

  • demand & supply of resource

    • price of resource

  • price of resource

    = opp. cost + any extra compensation

  • economic rent

    = extra compensation


Economic profit

Rent

S

$2500

$1200

D

Q

250

500

750

rent ceiling

= $1200

PRICE CEILING


Economic profit

Rent

S

$2500

SHORTAGE

$1200

D

Q

250

500

750

at P = $1200:

Qd = 750 units

Qs = 250 units

PRICE CEILING


Economic profit

S

wage

$7

$5

D

Q

5000

minimum wage

= $7

PRICE FLOOR


Economic profit

S

wage

$7

SURPLUS

$5

D

Q

2500

5000

7000

at w = $7:

Qd = 2500 workers

Qs = 7000 workers

PRICE FLOOR


Economic profit

Total Utility (TU)

  • total benefit from consuming good

  • increases as quantity consumed increase

    Marginal Utility (MU)

  • change in total utility from

    consuming one more of a good

  • MU falls as consumption rises


Tu is higher as curve shifts right

higher TU

lower TU

TU is higher as curve shifts right

gum

water


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