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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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slide1
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
slide7

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
slide17

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

slide24
< 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
slide33

P

S

Equilibrium:

$10

P

D’

Q

D

Q

10

(millions bottles per day)

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

slide38

Rent

S

$2500

$1200

D

Q

250

500

750

rent ceiling

= $1200

PRICE CEILING

slide39

Rent

S

$2500

SHORTAGE

$1200

D

Q

250

500

750

at P = $1200:

Qd = 750 units

Qs = 250 units

PRICE CEILING

slide40

S

wage

$7

$5

D

Q

5000

minimum wage

= $7

PRICE FLOOR

slide41

S

wage

$7

SURPLUS

$5

D

Q

2500

5000

7000

at w = $7:

Qd = 2500 workers

Qs = 7000 workers

PRICE FLOOR

slide42
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
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