24Slides

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

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

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.