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# economic profit - PowerPoint PPT Presentation

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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## PowerPoint Slideshow about 'economic profit' - telyn

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

= total revenue - total costs

= (price)(quantity)

- (explicit + implicit costs)

• includes normal profit

• so zero economic profit

• still a normal profit

• Short Run (SR)

• plants, equipment fixed

• labor inputs variable

• Long Run (LR)

• time frame where all inputs are variable

• change in TP due to one more worker

• law of decreasing returns

TP

=

labor

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 fixed cost (TFC)

• does not change in SR

• total variable cost (TVC)

• cost of labor

• TC = TFC + TVC

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

• = TC/Q

• average fixed cost (AFC)

= (TFC/Q)

• average variable cost (AVC)

= (TVC/Q)

• ATC = AFC + AVC

• increase inputs 10%

• output increase > 10%

• ATC falls

• natural monopoly

• increase inputs 10%

• output increase < 10%

• ATC rises

• characteristics of

• perfect competition

• monopoly

• monopolistic competition

• oligopoly

• maximize profit

• MR = MC

• if P > ATC

• economic profit

• if P < ATC

• economic loss

• both

• many firms

• easy entry/exit

• LR normal profit

• differ

• identical vs. differentiated product

• demand curve

• monopoly price higher

• monopoly quantity lower

• inefficient

MC

Pm

Pc

D

MR

Q

Qm

Qc

Pm > Pc

Qm < Qc

surplus

P, MR

MC

Pm

loss

D

MR

Q

producer

surplus

Qm

monopoly

• both

• downward sloping demand curve

• differ

• # firms

• barriers to entry

• both

• barriers to entry

• downward sloping demand curve

• differ

• # of firms

• price elasticity

• demand

• supply

• cross elasticity

• income elasticity

• % change quantity

• divided by % change in

-- price of same good OR

-- price of related good OR

-- income

% change in Qd

% change in P

• inelastic

• % change Qd < % change P

• Qd not sensitive to change in P

• TR rises and P increases

• horizontal demand curve

• any increase in price

• Qd falls to zero

• vertical demand curve

• change in P, no change in Qd

• price of related goods

• negative for complements

• positive for substitutes

• change in Qd when income changes

• negative for inferior goods

• positive for normal goods

• 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

• will change equilibrium P & Q

• Market for bottled water

• sugar is found to be harmful to health

• what happens to equilibrium?

• Demand curve

• health concerns increase

preferences for water

• demand shifts right

S

Equilibrium:

\$10

P

D’

Q

D

Q

10

(millions bottles per day)

• increasing opportunity costs

• resources not perfectly substitutable

• = 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

• demand & supply of resource

• price of resource

• price of resource

= opp. cost + any extra compensation

• economic rent

= extra compensation

S

\$2500

\$1200

D

Q

250

500

750

rent ceiling

= \$1200

PRICE CEILING

S

\$2500

SHORTAGE

\$1200

D

Q

250

500

750

at P = \$1200:

Qd = 750 units

Qs = 250 units

PRICE CEILING

wage

\$7

\$5

D

Q

5000

minimum wage

= \$7

PRICE FLOOR

wage

\$7

SURPLUS

\$5

D

Q

2500

5000

7000

at w = \$7:

Qd = 2500 workers

Qs = 7000 workers

PRICE FLOOR

• 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

lower TU

TU is higher as curve shifts right

gum

water