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economic profit

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

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

  2. economic profit = total revenue - total costs = (price)(quantity) - (explicit + implicit costs)

  3. implicit costs • includes normal profit • so zero economic profit • still a normal profit

  4. Short Run vs. Long Run • Short Run (SR) • plants, equipment fixed • labor inputs variable • Long Run (LR) • time frame where all inputs are variable

  5. marginal product (MP) • change in TP due to one more worker • law of decreasing returns

  6. Average Product (AP) TP = labor

  7. 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

  8. Total Cost (TC) • total fixed cost (TFC) • does not change in SR • total variable cost (TVC) • cost of labor • TC = TFC + TVC

  9. Marginal Cost • change in TC due to one-unit increase in output (Q)

  10. Average Cost (ATC) • = TC/Q • average fixed cost (AFC) = (TFC/Q) • average variable cost (AVC) = (TVC/Q) • ATC = AFC + AVC

  11. Economies of scale • increase inputs 10% • output increase > 10% • ATC falls • natural monopoly

  12. Diseconomies of scale • increase inputs 10% • output increase < 10% • ATC rises

  13. Chapters 12-14 • characteristics of • perfect competition • monopoly • monopolistic competition • oligopoly • in your lecture notes!

  14. all firms • maximize profit • MR = MC • if P > ATC • economic profit • if P < ATC • economic loss

  15. perfect comp. & monopolistic comp • both • many firms • easy entry/exit • LR normal profit • differ • identical vs. differentiated product • demand curve

  16. perfect comp & monopoly • monopoly price higher • monopoly quantity lower • inefficient

  17. P, MR MC Pm Pc D MR Q Qm Qc Pm > Pc Qm < Qc

  18. consumer surplus P, MR MC Pm deadweight loss D MR Q producer surplus Qm monopoly

  19. monopoly & monop. comp. • both • downward sloping demand curve • differ • # firms • barriers to entry

  20. monopoly & oligopoly • both • barriers to entry • downward sloping demand curve • differ • # of firms

  21. Elasticity • price elasticity • demand • supply • cross elasticity • income elasticity

  22. what is it? • % change quantity • divided by % change in -- price of same good OR -- price of related good OR -- income

  23. elasticity of demand % change in Qd % change in P

  24. < 1 • inelastic • % change Qd < % change P • Qd not sensitive to change in P • TR rises and P increases

  25. perfectly elastic demand • horizontal demand curve • any increase in price • Qd falls to zero

  26. perfectly inelastic demand • vertical demand curve • change in P, no change in Qd

  27. cross elasticity • price of related goods • negative for complements • positive for substitutes

  28. income elasticity • change in Qd when income changes • negative for inferior goods • positive for normal goods

  29. 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

  30. Shift in Supply & Demand • will change equilibrium P & Q

  31. Example 2 • Market for bottled water • sugar is found to be harmful to health • what happens to equilibrium?

  32. Which curve is affected? • Demand curve • health concerns increase preferences for water • demand shifts right

  33. P S Equilibrium: $10 P D’ Q D Q 10 (millions bottles per day)

  34. PPF

  35. concave PPF • increasing opportunity costs • resources not perfectly substitutable

  36. 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

  37. Economic Rent • demand & supply of resource • price of resource • price of resource = opp. cost + any extra compensation • economic rent = extra compensation

  38. Rent S $2500 $1200 D Q 250 500 750 rent ceiling = $1200 PRICE CEILING

  39. Rent S $2500 SHORTAGE $1200 D Q 250 500 750 at P = $1200: Qd = 750 units Qs = 250 units PRICE CEILING

  40. S wage $7 $5 D Q 5000 minimum wage = $7 PRICE FLOOR

  41. S wage $7 SURPLUS $5 D Q 2500 5000 7000 at w = $7: Qd = 2500 workers Qs = 7000 workers PRICE FLOOR

  42. 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

  43. higher TU lower TU TU is higher as curve shifts right gum water

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