04/11/23 CRC Microeconomics 1
04/11/23 CRC Microeconomics 2
What did you study last time?
What are the criteria of an efficient tax system?
How to evaluate some tax systems?
What are the principles used to achieve equity in a tax system?
04/11/23 CRC Microeconomics 3
Do you know …
1. how to calculate profits?2. how to determine revenue?3. how to measure
output/production?4. how to assess costs?5. how to maximize profits?
04/11/23 CRC Microeconomics 4
1. Profits
Profits =
P*Q
TotalRevenue
TR-
TotalCosts
TC
ExplicitCosts
+ImplicitCosts
Accounting = TR - Explicit
Costs
Economic = TR - TC
Input coststhat requirean outlay ofmoney bythe firm
Input coststhat do not
requirean outlay ofmoney bythe firm
Price (P) timesquantity (Q)
04/11/23 CRC Microeconomics 5
2. Revenue
TR = P * Q=AverageRevenue
ARTR/Q = P=
MarginalRevenue
MRTR / Q=
Revenue perunit
Extra revenue per extra unit
04/11/23 CRC Microeconomics 6
Revenue Curvesin Perfect Competition
Q
PTR
(AR=P) = MR (D)
The TR curve is a straight linestarting from the point of origin O.
TR = P * Q
The AR and MR curve are also straight lines.They coincide and start where the price is.
AR = MR = P.AR is the same as the demand (D) curve.
P
04/11/23 CRC Microeconomics 7
Revenue Curves in Imperfect Competition
Q
PTR
(AR=P) (D)
The TR curve is an upside-downparabola, starting from the point
of origin.
The AR curve is downward-sloping, starting from a point
on the vertical axis.The MR curve is also downward-sloping. It starts from the same point
as AR on the vertical axis. From that point on MR < AR.
At the output where MR = zero, TR is maximized.
MR
04/11/23 CRC Microeconomics 8
3. Output/Production
Production functionA production function describes the relationship between output and inputs.
04/11/23 CRC Microeconomics 9
3. Output/Production
Production function• Long run (when all inputs are
variable.)Q = f (l, L, K), where l = land; L = labor; and K = capital
Short run (when at least one input is fixed.)Q = f (L) with fixed l and K
04/11/23 CRC Microeconomics 10
b. SR Output/Production
TotalProduct
TP= Q=
AverageProduct
APL
=MarginalProduct
MPL
Q / L=
Q / L
Extra outputper extraworker
Output perworker
04/11/23 CRC Microeconomics 11
SR Output Curve (TP)
0
50
100
150
200
250
0 1 2 3 4 5 6 7 8 9 101112131415161718192021
Q
L
TP = QR
SM
Z
Maximum output
Zero output
Shut-down point
Diminishing-return point
Relevant section
04/11/23 CRC Microeconomics 12
0
5
1 0
1 5
2 0
2 5
3 0
0 1 2 3 4 5 6 7 8 9 1 01 11 21 31 41 5 1 61 71 81 92 02 1
SR Output Curves (AP & MP)
Q
L
AP
MP S
R
M Z
Relevant sections
04/11/23 CRC Microeconomics 13
4. Costs
Short run (when at least one input is fixed.)
Long run (when all inputs are variable.)
04/11/23 CRC Microeconomics 14
a. SR Costs
TotalCosts
TC=
FixedCosts
FC+
VariableCosts
VC
TC / Q = FC / Q + VC / Q
AverageTotalCostATC
=Average
FixedCostAFC
+AverageVariable
CostAVC
MarginalCostMC
= VC / Q = TC / QExtra
cost perextraunit
Cost perunit
Costs of fixed inputs
Costs of variable inputs
04/11/23 CRC Microeconomics 15
0
5 0
1 0 0
1 5 0
2 0 0
2 5 0
3 0 0
0 1 2 3 4 5 6 7 8 9 1 0
SR Cost Curves (TC, VC, FC)
$
Q
VC
R
B
S
TC
FC
Shut-down point
Break-even point
Diminishing-return point
R
04/11/23 CRC Microeconomics 16
0 .0 0
1 0 .0 0
2 0 .0 0
3 0 .0 0
4 0 .0 0
5 0 .0 0
6 0 .0 0
0 1 2 3 4 5 6 7 8 9 1 0
SR Cost Curves (ATC, AVC, MC)$
Q
AVC
R
B
S
ATC
MCRelevant section
04/11/23 CRC Microeconomics 17
b. LR Cost Curve
Q
$
SRATC1
SRATC2 SRATCeSRATCn-1
LRATC
SRATCn
Efficient Scale
Economies of scale (IRTS) Diseconomies of scale (DRTS)
Constant Returns to Scale (CRTS)
There is one short-run average cost curve foreach plant size.
The long-run average total costcurve is the envelope curve.
The minimum point on the
lowest SRATC curve
determines …
04/11/23 CRC Microeconomics 18
5. Profit Maximization
Rule. The firm should produce output Q* where
MR = MC Proof
= TR - TC
Q = TR/Q - TC/Q
M = MR - MC
MR = MC
Profit maximization requires that M = 0, i.e.
04/11/23 CRC Microeconomics 19
Now you know …
1. how to calculate profits.2. how to determine revenue.3. how to measure
output/production.4. how to assess costs.5. how to maximize profits.
04/11/23 CRC Microeconomics 20
What will you study next time?
1. What are the main characteristics of a (perfectly) competitive market?
2. How much should a competitive firm produce to maximize profits?
3. What happens in the long run in a competitive market?
4. How to derive the supply curve in a competitive market?
04/11/23 CRC Microeconomics 21
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