positive and normative economics -...

70
LO3 Positive and Normative Economics Positive economics Deals with economic facts Normative economics A subjective perspective of the economy 1-1

Upload: phungbao

Post on 03-Apr-2018

233 views

Category:

Documents


4 download

TRANSCRIPT

Page 1: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

LO3

Positive and Normative Economics

• Positive economics

• Deals with economic facts

• Normative economics

• A subjective perspective of the economy

1-1

Page 2: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

LO4

Society’s Economizing Problem

• Scarce resources

• Land

• Labor

• Capital

• Entrepreneurial Ability

1-2

Page 3: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

LO5

Production Possibilities Curve

Pizzas

Ind

ust

rial

Ro

bo

ts

Attainable

0 1 2 3 4 5 6 7 8 9

14

13

12

11

10

9

8

7

6

5

4

3

2

1

Unattainable

A

B

C

D

E

U

The law of increasing opportunity costs makes the PPC concave.

1-3

Page 4: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

LO6

Present Choices, Future Possibilities

Goods for the Present

Go

od

s fo

r th

e Fu

ture

Go

od

s fo

r th

e Fu

ture

Goods for the Present

P

F

Current Curve

Current Curve

Future Curve

Future Curve

Presentville Futureville

1-4

Page 5: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

The Five Fundamental Questions

• What goods and services will be produced?

• How will the goods and services be produced?

• Who will get the goods and services?

• How will the system accommodate change?

• How will the system promote progress?

LO3 2-5

Page 6: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

The Circular Flow System

RESOURCE MARKET

•Households sell •Businesses buy

PRODUCT MARKET

•Businesses sell •Households buy

BUSINESSES

• buy resources • sell products

HOUSEHOLDS

• sell resources • buy products

LO5 2-6

Page 7: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Changes in Demand

LO1

6

5

4

3

2

1

0

Quantity Demanded (bushels per week)

Pri

ce (

pe

r b

ush

el)

P

Q

D1

2 4 6 8 10 12 14 16 18

D2

D3

3-7

Page 8: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Determinants of Demand

LO1

Table 3.1 Determinants of Demand: Factors That Shift the Demand Curve

Determinant Examples

Change in buyers’ tastes Physical fitness rises in popularity, increasing the

demand for jogging shoes and bicycles; cell phone

popularity rises, reducing the demand for land-line

phones.

Change in the number of buyers A decline in the birthrate reduces the demand for

children’s toys.

Change in income A rise in incomes increases the demand for normal

goods such as restaurant meals, sports tickets, and

necklaces while reducing the demand for inferior

goods such as cabbage, turnips, and inexpensive

wine.

Change in the prices of related

goods

A reduction in airfares reduces the demand for bus

transportation (substitute goods); a decline in the price

of DVD players increases the demand for DVD movies

(complementary goods).

Change in consumer expectations Inclement weather in South America creates an

expectation of higher future coffee bean prices,

thereby increasing today’s demand for coffee beans. 3-8

Page 9: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Changes in Supply

LO2

$6

5

4

3

2

1

0

Pri

ce (

pe

r b

ush

el)

S1

Quantity supplied (thousands of bushels per week)

2 4 6 8 10 12 14 16

P

Q

S2

S3

Change in Quantity Supplied

Change in Supply

3-9

Page 10: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Determinants of Supply

LO2

Table 3.2 Determinants of Supply: Factors That Shift the Supply Curve

Determinant Examples

Change in resource prices A decrease in the price of microchips increases the

supply of computers; an increase in the price of crude

oil reduces the supply of gasoline.

Change in technology The development of more effective wireless

technology increases the supply of cell phones.

Change in taxes and subsidies An increase in the excise tax on cigarettes reduces the

supply of cigarettes; a decline in subsidies to state

universities reduces the supply of higher education.

Change in prices of other goods An increase in the price of cucumbers decreases the

supply of watermelons.

Change in producer expectations An expectation of a substantial rise in future log prices

decreases the supply of logs today.

Change in the number of suppliers An increase in the number of tattoo parlors increases

the supply of tattoos; the formation of women’s

professional basketball leagues increases the supply

of women’s professional basketball games.

3-10

Page 11: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Efficient Allocation

• Productive efficiency • Producing goods in the least costly way

• Using the best technology

• Using the right mix of resources

• Allocative Efficiency • Producing the right mix of goods

• The combination of goods most highly valued by society

LO3 3-11

Page 12: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Government Set Prices

LO5

S P

Q

D

P0

PC

Q0

Shortage

Qd Qs

ceiling $3.50

3.00

3-12

Page 13: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Government Set Prices

LO5

S

P

Q

D

P0

Pf

Q0

Surplus

Qs Qd

floor

2.00

$3.00

3-13

Page 14: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Interpretation of Elasticity of Demand

• Ed > 1 demand is elastic

• Ed = 1 demand is unit elastic

• Ed < 1 demand is inelastic

• Extreme cases

• Perfectly inelastic

• Perfectly elastic

LO1 4-14

Page 15: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Elasticity and Total Revenue

LO2

0 1 2 3 4 5 6 7 8

0 1 2 3 4 5 6 7 8

Quantity Demanded

Quantity Demanded

Pri

ce

Tota

l Rev

enu

e (T

ho

usa

nd

s o

f D

olla

rs) $20 18 16 14 12 10

8 6 4 2

$8

7

6 5

4

3

2 1

a

b

c

d e

f g

h

Elastic Ed > 1

Unit Elastic Ed = 1

Inelastic Ed < 1

D

TR

4-15

Page 16: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Summary of Price Elasticity of Demand

LO2

Price Elasticity of Demand: A Summary

Absolute Value

of Elasticity

Coefficient Demand Is: Description

Impact on Total Revenue of a:

Price Increase Price Decrease

Greater than 1

(Ed > 1)

Elastic or

relatively

elastic

Qd changes by a

larger

percentage than

does price

Total Revenue

decreases

Total Revenue

increases

Equal to 1

(Ed = 1)

Unit or unitary

elastic

Qd changes by

the same

percentage as

does price

Total revenue

is unchanged

Total revenue

is unchanged

Less than 1

(Ed < 1)

Inelastic or

relatively

inelastic

Qd changes by a

smaller

percentage than

does price

Total revenue

increases

Total revenue

decreases

4-16

Page 17: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Determinants of Elasticity of Demand

• Substitutability • More substitutes, demand is more elastic

• Proportion of Income • Higher proportion of income, demand is more

elastic

• Luxuries vs. Necessities • Luxury goods, demand is more elastic

• Time • More time available, demand is more elastic

LO1 4-17

Page 18: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Efficiency Revisited

LO2

Pri

ce (

pe

r b

ag)

Quantity (bags)

S

Q1

P1

D

Consumer surplus

Producer surplus

5-18

Page 19: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Quantity (bags)

Pri

ce (

pe

r b

ag)

Efficiency Losses

LO2

c

S

Q1 Q2

D

b d

a

e

Efficiency loss from underproduction

5-19

Page 20: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Efficiency Losses

LO2

c

S

Q1 Q3

D

b

f

a

g

Quantity (bags)

Pri

ce (

pe

r b

ag)

Efficiency loss from overproduction

5-20

Page 21: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Government Intervention

LO4

Methods for Dealing with Externalities

Problem

Resource Allocation

Outcome Ways to Correct

Negative externalities

(spillover costs)

Overproduction of output

and therefore

overallocation of

resources

1. Private bargaining

2. Liability rules and lawsuits

3. Tax on producers

4. Direct controls

5. Market for externality rights

Positive externalities

(spillover benefits)

Underproduction of output

and therefore

underallocation of

resources

1. Private bargaining

2. Subsidy to consumers

3. Subsidy to producers

4. Government provision

5-21

Page 22: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Utility Maximizing Rule

• Consumer allocates his or her income so that the last dollar spent on each product yields the same amount of extra (marginal) utility

• Algebraically

MU of product A MU of product B

Price of A Price of B

LO2

=

6-22

Page 23: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Economic Profit

LO1

Explicit costs

Accounting costs (explicit costs

only)

Implicit costs (including a

normal profit)

Economic profit Accounting profit

Eco

no

mic

(O

pp

ort

un

ity)

C

ost

s Tota

l Re

ven

ue

7-23

Page 24: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Per-Unit, or Average, Costs

LO3

Co

sts

1 2 3 4 5 6 7 8 9 10 0 Q

50

100

150

$200

AFC

ATC AVC

AVC

AFC

7-24

Page 25: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Marginal Cost

LO3

Co

sts

1 2 3 4 5 6 7 8 9 10 0 Q

50

100

150

$200

AFC

MC

ATC AVC

AVC

AFC

7-25

Page 26: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

MC and Marginal Product

LO3

Ave

rage

Pro

du

ct a

nd

M

argi

nal

Pro

du

ct

Co

st (

Do

llars

)

MP

AP

MC AVC

Quantity of Output

Quantity of Labor

Production Curves

Cost Curves

7-26

Page 27: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Firm Size and Costs

LO4

Ave

rage

To

tal C

ost

s

ATC-1

ATC-2

ATC-3 ATC-4

ATC-5

Output

7-27

Page 28: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

The Long-Run Cost Curve

LO4

Long-run ATC

Ave

rage

To

tal C

ost

s

ATC-1

ATC-2

ATC-3 ATC-4

ATC-5

Output

7-28

Page 29: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

MES and Industry Structure

LO4

Output

Ave

rage

To

tal C

ost

s

Long-run ATC

Economies Of Scale

Constant Returns To Scale

Diseconomies Of Scale

q1 q2

7-29

Page 30: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

MES and Industry Structure

LO4

Output

Ave

rage

To

tal C

ost

s

Economies Of Scale

Diseconomies Of Scale

Long-run ATC

7-30

Page 31: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

MES and Industry Structure

LO4

Output

Ave

rage

To

tal C

ost

s Long-run ATC

Economies Of Scale

Diseconomies Of Scale

7-31

Page 32: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Four Market Models

LO1

Characteristics of the Four Basic Market Models

Characteristic

Pure

Competition

Monopolistic

Competition Oligopoly Monopoly

Number of firms A very large

number

Many Few One

Type of product Standardized Differentiated Standardized or

differentiated

Unique; no

close subs.

Control over

price

None Some, but within rather

narrow limits

Limited by mutual

inter-dependence;

considerable with

collusion

Considerable

Conditions of

entry

Very easy, no

obstacles

Relatively easy Significant

obstacles

Blocked

Nonprice

Competition

None Considerable emphasis

on advertising, brand

names, trademarks

Typically a great

deal, particularly

with product

differentiation

Mostly public

relation

advertising

Examples Agriculture Retail trade, dresses,

shoes

Steel, auto, farm

implements

Local utilities

8-32

Page 33: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Average, Total, and Marginal Revenue

• Average Revenue

• Revenue per unit

• AR = TR/Q = P

• Total Revenue

• TR = P X Q

• Marginal Revenue

• Extra revenue from 1 more unit

• MR = ΔTR/ΔQ

LO3 8-33

Page 34: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Profit Maximization: MR-MC Approach

LO3

Co

st a

nd

Re

ven

ue

$200

150

100

50

0 1 2 3 4 5 6 7 8 9 10

Output

Economic Profit MR = P

MC MR = MC

AVC

ATC

P=$131

A=$97.78

8-34

Page 35: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Shutdown Case

LO3

Co

st a

nd

Re

ven

ue

$200

150

100

50

0 1 2 3 4 5 6 7 8 9 10

Output

MR = P

MC

AVC

ATC

P=$71

V = $74

Short-Run Shut Down Point P < Minimum AVC

$71 < $74

8-35

Page 36: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Marginal Cost and Short-Run Supply

LO4

P1

0

Co

st a

nd

Re

ven

ue

s (D

olla

rs)

Quantity Supplied

MR1

P2 MR2

P3 MR3

P4 MR4

P5 MR5

MC

AVC

ATC

Q2 Q3 Q4 Q5

a

b

c

d

e

S

Shut-Down Point (If P is Below)

8-36

Page 37: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

3 Production Questions

LO3

Output Determination in Pure Competition in the Short Run

Question Answer

Should this firm produce? Yes, if price is equal to, or greater than,

minimum average variable cost. This

means that the firm is profitable or that

its losses are less than its fixed cost.

What quantity should this firm produce? Produce where MR (=P) = MC; there,

profit is maximized (TR exceeds TC by

a maximum amount) or loss is

minimized.

Will production result in economic

profit?

Yes, if price exceeds average total cost

(TR will exceed TC). No, if average

total cost exceeds price (TC will exceed

TR).

8-37

Page 38: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Firm and Industry: Equilibrium

LO4

Economic Profit

d

ATC

AVC

s = MC

$111 $111

D

S = ∑ MC’s

8 8000

8-38

Page 39: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Entry Eliminates Economic Profits

LO3

(a) Single Firm

(b) Industry

P P

q Q 0 0 100 90,000 80,000 100,000

ATC

MR

MC

$60

50

40

D1

S1

D2

$60

50

40

S2

9-39

Page 40: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Exit Eliminates Losses

LO3

(a) Single Firm

(b) Industry

P P

q Q 0 0 100 90,000 80,000 100,000

ATC

MR

MC

$60

50

40

D3

S3

D1

$60

50

40

S1

9-40

Page 41: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

LR Supply: Constant-Cost Industry

LO4

P

0 Q 90,000 100,000 110,000

Q3 Q1 Q2

$50

P1

P2

P3

S Z1 Z2 Z3

D3 D1 D2

9-41

Page 42: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

LR Supply: Increasing-Cost Industry

LO4

P

0 Q 90,000 100,000 110,000

Q3 Q1 Q2

$50 P1

S

Y1

Y2

Y3

D3 D1

D2

$40

$55 P2

P3

9-42

Page 43: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

LR Supply: Decreasing-Cost Industry

LO4

P

0 Q 90,000 100,000 110,000

Q3 Q1 Q2

$50 P1

S

X1

X2

X3

D3

D1

D2

$40

$55 P3

P2

9-43

Page 44: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Pure Competition and Efficiency

LO5

Single Firm Market

Pri

ce

Pri

ce

Quantity Quantity

0 0

P MR

D

S

Qe Qf

ATC

MC P=MC=Minimum ATC (Normal Profit)

P

Consumer Surplus

Producer Surplus

9-44

Page 45: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Monopoly Demand

• Marginal Revenue < Price

• Monopolist is a price maker

• Monopolist sets prices in elastic region of demand curve

LO2 10-45

Page 46: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Output and Price Determination

LO2

$200

150

100

50

0

$750

500

250

0

2 4 6 8 10 12 14 16 18

2 4 6 8 10 12 14 16 18

Pri

ce

Tota

l Rev

enu

e

Elastic Inelastic

Demand and Marginal-Revenue Curves

Total-Revenue Curve

D MR

TR

10-46

Page 47: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

$200

175

150

125

25

100

75

50 Pri

ce, C

ost

s, a

nd

Rev

enu

e

1 2 3 4 5 6 7 8 9 10 Quantity

Output and Price Determination

LO2

0

D

MR

ATC

MC

MR=MC A=$94

Economic Profit

Pm=$122

10-47

Page 48: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Misconceptions of Monopoly Pricing

LO2

0

Pri

ce, C

ost

s, a

nd

Rev

enu

e

Quantity

D

MR

ATC

MC

MR=MC

Loss

AVC Pm

Qm

V

A

10-48

Page 49: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Economic Effects of Monopoly

LO3

(a) Purely Competitive Market

(b) Pure Monopoly

D D

S=MC MC

P=MC= Minimum

ATC

MR

Pc

Qc

Pc

Pm

Qc Qm

Pure competition is efficient Monopoly is inefficient

a

b

c d

10-49

Page 50: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Consumer surplus

Deadweight loss

Monopoly profit

Perfect Price Discrimination vs. Single Price Monopoly

Here, the monopolist charges the same price (PM) to all buyers.

A deadweight loss results.

MC

Quantity

Price

D

MR

PM

QM

Page 51: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Regulated Monopoly

LO5

0

Pri

ce a

nd

Co

sts

(Do

llars

)

Quantity

Monopoly Price

Fair-Return Price

Socially Optimal

Price

Pr

D

r

f

b

a Pf

Pm

Qm Qf Qr

MR

MC

ATC

10-51

Page 52: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Comparing Perfect & Monop. Competition

yes none, price-taker firm has market power?

downward-

sloping horizontal D curve facing firm

differentiated identical the products firms sell

zero zero long-run econ. profits

yes yes free entry/exit

many many number of sellers

Monopolistic

competition

Perfect

competition

Page 53: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Comparing Monopoly & Monop. Competition

yes yes firm has market power?

downward-

sloping

downward-sloping

(market demand) D curve facing firm

many none close substitutes

zero positive long-run econ. profits

yes no free entry/exit

many one number of sellers

Monopolistic

competition Monopoly

Page 54: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Monopolistically Competitive

• Industry concentration

• Measured by:

• Four-firm concentration ratios

•Percentage of 4 largest firms

• Herfindahl index

• Sum of squared market shares

LO1

4-Firm CR = Output of four largest firms Total output in the industry

HI = (%S1)2 + (%S2)2 + (%S3)2 + …. + (%Sn)2

11-54

Page 55: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

The Short Run: Profit or Loss

LO2

Quantity

Pri

ce a

nd

Co

sts

MR = MC

MC

MR

D1

ATC

Economic Profit

Q1

A1

P1

0

11-55

Page 56: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

The Short Run: Profit or Loss

LO2

Quantity

Pri

ce a

nd

Co

sts

MC

MR

D2

ATC

Loss

Q2

A2

P2

0

MR = MC

11-56

Page 57: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

The Long Run: Only a Normal Profit

LO2

Quantity

Pri

ce a

nd

Co

sts

MC

MR

D3

ATC

Q3

P3= A3

0

MR = MC

11-57

Page 58: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Monopolistic Competition: Efficiency

LO2

Quantity

Pri

ce a

nd

Co

sts

MR = MC

MC

MR

D3

ATC

Q3 0

P3= A3

P=MC=Min ATC for pure competition (recall)

P4

Q4

Price is Lower

Excess Capacity at Minimum ATC

Monopolistic competition is not efficient 11-58

Page 59: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Oligopoly

• A few large producers

• Homogeneous or differentiated products

• Limited control over price

• Mutual interdependence

• Strategic behavior

• Entry barriers

• Mergers

LO3 11-59

Page 60: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

•Rule for employing resources:

• MRP = MRC

Marginal Revenue Product

= Change in Total Revenue

Unit Change in Resource Quantity

Marginal Resource

Cost =

Change in Total (Resource) Cost

Unit Change in Resource Quantity

• Marginal Revenue Product (MRP)

• Marginal Resource Cost (MRC)

Resource Demand

LO1 12-60

Page 61: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

The Least Cost Rule

• Minimize cost of producing a given output

• Last dollar spent on each resource yields the same marginal product

Marginal Product Of Labor (MPL)

Price of Labor (PL)

Marginal Product Of Capital (MPC)

Price of Capital (PC) =

LO3 12-61

Page 62: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Profit Maximizing Rule

• MRP of each resource equals its price

MRPL

PL

MRPC

PC = = 1

MRPL PL = MRPC PC = and

LO3 12-62

Page 63: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

($10) WC

($10) WC

Wag

e R

ate

(D

olla

rs)

Labor Market

Quantity of Labor

Wag

e R

ate

(Do

llars

)

Individual Firm

Quantity of Labor

QC

(1000)

0 0

d=mrp

qC

(5)

s=MRC

Competitive Labor Market

LO2

D=MRP (∑ mrp’s)

S

e b

a

c

13-63

Page 64: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

• Examples of monopsony power Monopsony Model

Wag

e R

ate

(D

olla

rs)

Quantity of Labor

0

S

MRP

MRC

c

b

a Wc

Wm

Qm Qc

LO3 13-64

Page 65: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Bilateral Monopoly Model

LO4

Wag

e R

ate

(D

olla

rs)

Quantity of Labor

D=MRP

S

Qc

Wc

Wu

Qu=Qm

MRC

Wm

a

13-65

Page 66: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Economic Rent

Acres of Land

Lan

d R

en

t (D

olla

rs)

L0

D1

D2

D3

D4

S

R1

R2

R3

0

a b

LO1 14-66

Page 67: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Loanable Funds Theory

Quantity of Loanable Funds

Inte

rest

Rat

e (

Pe

rce

nt)

0

D

S

i = 8%

F0

The equilibrium interest rate

LO2 14-67

Page 68: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

LO1

Government and the Circular Flow

(1) Costs

RESOURCE MARKET

PRODUCT MARKET

BUSINESSES

HOUSEHOLDS

(4) Goods and services

(7) Expenditures

(8) Resources

(9) Goods and services

(4) Goods and services

(10)

Goods and services

Net taxes (12)

Net taxes (11)

(3) Consumption expenditures (3) Revenues

GOVERNMENT

(1) Money income (rents, wages, interest, profits)

(2) Land, labor, capital

Entrepreneurial Ability

(2) Resources

(5) Expenditures (6) Goods and services

16-68

Page 69: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Efficiency Loss of a Tax

Pri

ce (

Pe

r B

ott

le)

Quantity (Millions of Bottles Per Month)

S

D

St

Tax $2

Tax paid by consumers

5 10 15 20 25 Q

P

14 12 10 8 6 4 2 0

Tax paid by producers

Efficiency loss (or deadweight loss)

LO3 16-69

Page 70: Positive and Normative Economics - jb-hdnp.orgjb-hdnp.org/Sarver/AP_Economics/Nat_Exam_Review/MicroReview.pdf · Positive and Normative Economics •Positive economics •Deals with

Mergers

Automobiles Blue Jeans

Autos

Glass

Blue Jeans

Denim Fabric

A C B D E F

Z Y X W V U T

Horizontal Merger

Conglomerate Merger

Vertical Merger

LO2 18-70