Production and costs Chapters 12 14 Elasticity Supply

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

• total revenue - total costs
• (price)(quantity)
• - (explicit implicit costs)

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implicit costs

• includes normal profit
• so zero economic profit
• still a normal profit

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Short Run vs. Long Run

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

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marginal product (MP)

• change in TP due to one more worker
• law of decreasing returns

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Average Product (AP)
TP

labor
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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
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Total Cost (TC)

• total fixed cost (TFC)
• does not change in SR
• total variable cost (TVC)
• cost of labor
• TC TFC TVC

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Marginal Cost

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

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Average Cost (ATC)

• TC/Q
• average fixed cost (AFC)
• (TFC/Q)
• average variable cost (AVC)
• (TVC/Q)
• ATC AFC AVC

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Economies of scale

• increase inputs 10
• output increase gt 10
• ATC falls
• natural monopoly

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Diseconomies of scale

• increase inputs 10
• output increase lt 10
• ATC rises

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Chapters 12-14

• characteristics of
• perfect competition
• monopoly
• monopolistic competition
• oligopoly
• in your lecture notes!

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all firms

• maximize profit
• MR MC
• if P gt ATC
• economic profit
• if P lt ATC
• economic loss

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perfect comp. monopolistic comp

• both
• many firms
• easy entry/exit
• LR normal profit
• differ
• identical vs. differentiated product
• demand curve

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perfect comp monopoly

• monopoly price higher
• monopoly quantity lower
• inefficient

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Pm gt Pc
Qm lt Qc
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monopoly
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monopoly monop. comp.

• both
• downward sloping demand curve
• differ
• firms
• barriers to entry

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monopoly oligopoly

• both
• barriers to entry
• downward sloping demand curve
• differ
• of firms

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Elasticity

• price elasticity
• demand
• supply
• cross elasticity
• income elasticity

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what is it?

• change quantity
• divided by change in
• -- price of same good OR
• -- price of related good OR
• -- income

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elasticity of demand
change in Qd
change in P
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lt 1

• inelastic
• change Qd lt change P
• Qd not sensitive to change in P
• TR rises and P increases

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perfectly elastic demand

• horizontal demand curve
• any increase in price
• Qd falls to zero

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perfectly inelastic demand

• vertical demand curve
• change in P, no change in Qd

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cross elasticity

• price of related goods
• negative for complements
• positive for substitutes

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income elasticity

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

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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

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Shift in Supply Demand

• will change equilibrium P Q

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Example 2

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

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Which curve is affected?

• Demand curve
• health concerns increase
• preferences for water
• demand shifts right

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P
S
Equilibrium
10
P
D
Q
D
Q
10
(millions bottles per day)
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PPF
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concave PPF

• increasing opportunity costs
• resources not perfectly substitutable

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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 lt or to MRP

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Economic Rent

• demand supply of resource
• price of resource
• price of resource
• opp. cost any extra compensation
• economic rent
• extra compensation

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rent ceiling 1200
PRICE CEILING
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at P 1200
Qd 750 units
Qs 250 units
PRICE CEILING
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minimum wage 7
PRICE FLOOR
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at w 7
Qd 2500 workers
Qs 7000 workers
PRICE FLOOR
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• 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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TU is higher as curve shifts right
gum
water