30 Slides to More Powerful Command of Microeconomics.
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Transcript of 30 Slides to More Powerful Command of Microeconomics.
30Slides
to More Powerful
Command of Microeconomics
Remember
MR = MC
MicroeconomicsIn
Pictures
First PictureThe Production Possibilities Frontier
Tradeoffs in PicturesQuantity ofComputersProduced
Quantity ofCars Produced
3,000
1,000
2,000
2,200 A
7006003000 1,000
B Feasible but Inefficient
C
D
Infeasible Pts
ProductionPossibilitiesFrontier
EfficientPoints
Supply
Demand
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
Second PictureSupply and Demand
21 3 4 5 6 7 8 9 10 12110
$3.002.502.00
1.501.00
0.50
Equilibrium
ATCAVC
MC
Third PictureAverage-Cost and Marginal-Cost Curves
The Firm in the Short Run
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
0 2 4 6 8 10 12
Quantity of Output(glasses of lemonade per hour)
Costs
AFC
RememberThe economic goal of the firm
is to maximize profits.
Fourth Picture The Competitive Firm’s Short-Run
Supply Curve
Quantity
ATC
AVC
0
Costs
MC
If P < AVC, shut down.
If P > AVC, keep producing in the short run.
If P > ATC, keep producing at a profit.
Firm’s short-run supply curve.
Remember
MR = MCand market price is the marginal
revenue of a price-taking competitive firm
MR = P = MC
Fifth Picture The Competitive Firm’s Long-Run
Supply Curve
Quantity
MC = Long-run S
ATC
0
Costs
Firm enters if P > ATC
Firm exitsif P < ATC
Sixth PictureProfit-Maximization for a Monopoly
Monopolyprice
QuantityQMAX0
Costs andRevenue
Demand
Average total cost
Marginal revenue
Marginalcost
A
1. The intersection of the marginal-revenue curve and the marginal-cost curve determines the profit-maximizing quantity...
B
2. ...and then the demand curve shows the price consistent with this quantity.
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
RememberMR = MC
Since a monopoly must lower its price to sell more, it’s marginal
revenue is less than its price
P = AR > MR = MCP > MC
Supplyand
Demandon
Parade
An Increase in Demand
Price ofIce-Cream
Cone
2.00
0 7 Quantity ofIce-Cream Cones
Supply
Initialequilibrium
D1
1. Hot weather increasesthe demand for ice cream...
D2
2. ...resultingin a higherprice...
$2.50
103. ...and a higherquantity sold.
New equilibrium
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
S2
A Decrease in Supply
Price ofIce-Cream
Cone
2.00
0 1 2 3 4 7 8 9 11 12 Quantity ofIce-Cream Cones
13
Demand
Initial equilibrium
S1
10
1. An earthquake reducesthe supply of ice cream...
Newequilibrium
2. ...resultingin a higherprice...
$2.50
3. ...and a lowerquantity sold.
Elastic Demand: Quantity demanded responds dramatically to price
Elasticity is greater than 1
Quantity
Price
4
$51. A 22%increasein price...
Demand
100502. ...leads to a 67% decrease in quantity.
Elasticity(Q/Q) (P/P)
Elastic Demand: P Q TR Inelastic Demand: P Q TR
• Demand is more elastic when there are lots of ways to substitute.
• Demand is more elastic in the long run than in the short run.
Inelastic Supply: Quantity doesn’t respond much to price
Elasticity is less than 1
Quantity
Price
4
$51. A 22%increasein price...
110100
Supply
2. ...leads to a 10% increase in quantity.
Minimumwage
The Minimum Wage
Quantity ofLabor
0
Wage
Labor demand
Labor supply
Quantitysupplied
Quantitydemanded
Labor surplus(unemployment)
A Price Floor
Consumer Surplus and Producer Surplus
Price
Equilibriumprice
0 QuantityEquilibriumquantity
A
Supply
C
B Demand
D
E
Producersurplus
Consumersurplus
Price
0 QuantityEquilibriumquantity
Supply
Demand
Cost to sellers
Value to buyers
Value to
buyers
Cost to
sellers
Value to buyers is greater than cost to sellers.
Value to buyers is less than cost to sellers.
Efficiency of Competitive Market Equilibrium … and the Tax Wedge
The Effects of a TariffDeadweight Loss
Priceof Steel
0 Quantityof Steel
Domestic supply
Domestic demand
TariffWorld price
Q1S Q2
S Q2D Q1
D
Price without
tariff
Price with tariff
Imports without tariff
Imports with tariff
A
B
C EG
D F
Deadweight loss
QMARKE
T
Externalities and the Social Optimum
Quantity ofAluminum
0
Price ofAluminum
Demand(private value)
Supply(private cost)
Social cost
Qoptimum
Cost ofpollution
Market Equilibrium
Optimum
Remember
Marginal Benefit = Marginal Cost
Benefit What buyers are willing to pay (demand curve)
Social Cost = Private cost + Spillover cost
The Labor Market:Hire to Point Where MR = MC
VMPL = P x MPL = W(a) The Market for Apples (b) The Market for Apple Pickers
Quantity of
Apples
Quantity of Apple
Pickers
Q L
P W
0 0
Price of
Apples
Wage of
Apple Pickers
Demand
Demand
SupplySupply
The Profit Maximizing Firm
Remember
MR = MC
The Production Function:Diminishing Marginal Product Increasing Marginal Costs
00
50
100
150
200
250
300
350
0 1 2 3 4 5 6
Quantity of Apple Pickers
Qu
an
tity
of
Ap
ple
s
1
2
3
4
5
P = AR = MRfor competitivefirm
P=MR1
MC
Profit Maximization for the Competitive Firm...
Quantity0
Costsand
Revenue
ATC
AVC
QMAX
REMEMBER: MC = MR (=
P)
MC1
Q1
MC2
Q2
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
The Firm’s Short-Run Decision to Shut Down...
Quantity
ATC
AVC
0
Costs
MC
If P < AVC, shut down.
If P > AVC, keep producing in the short run.
If P > ATC, keep producing at a profit.
Firm’s short-run supply curve
Economies and Diseconomies of Scale:The Firm in the Long Run
Diseconomies
of scale
Quantity ofCars per Day
0
AverageTotalCost
ATC in long run
Economies
of scale
Constant Returnsto scale
Monopol
yprofit
Monopoly ProfitThe monopolist can earn profit in the short-run and in the long-run thanks to barriers to entry
Quantity0
Costs andRevenue
Demand
Marginal cost
Marginal revenue
QMAX
BMonopolyprice
E
Averagetotal cost D
Average total cost
C
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.