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Marginal Cost (MC)
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the change in total costs associated with a one-unit change in output
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marginal cost graph
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variable cost per unit
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if MC is constant, MC is the same as ...
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the additional income from selling one more unit of a good; sometimes equal to price
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marginal revenue
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No, its to maximize profits
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marginal revenue graph
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P(Q) = 2 - Q/50
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Is the goal of the firm to get the most revenue?
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R(Q) = revenue function
dr/dQ = marginal revenue = MR(Q)
dr/dQ = marginal revenue = MR(Q)
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Find the inverse demand function of Q(P) = 100 - 50P
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C(Q) = cost function
dr/dQ = marginal cost = MC(Q)
dr/dQ = marginal cost = MC(Q)
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what is the derivative of the revenue function
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where MR=MC (Qstar)
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what is the derivative of the cost function
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revenue - variable costs
(profit before fixed costs)
(profit before fixed costs)
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Where is the profit maximizing quantity?
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where MR = 0 because no more revenue can be earned from the addition of units produced
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contribution
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marginal revenue > marginal cost
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At what quantity is revenue maximized (think of MR curve alone)
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the more you produce, the more costs are
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if you produce from Q = 200 to Q = 250, and contribution goes up, what does that say about marginal revenue from between those quantities?
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time, labor, equipment, facilities
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What does an increasing MC function tell you?
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you can't make as much quantity as you might want. Qmax < Qstar.
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capacity constraints
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Go from maximum quantity, (if its below Qstar), then up to the demand curve. No different than profit maximization.
contribution is no longer a rectangle, but still is present on graph
contribution is no longer a rectangle, but still is present on graph
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what do capacity constraints do? (graphically)
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b. Keep the price the same and sell the same quantity.
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where is the price and quantity when a capacity constraint is present?
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the change in quantity demanded brought about by a change in price (new point on same curve)
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The firm in the previous questions (contribution was $980, FC was $400) learns that its rent is increasing, meaning fixed costs will be $500 per week instead of $400. How should the firm respond?
a. Shut down the business.
b. Keep the price the same and sell the same quantity.
c. Lower the price, and use the increased sales to make up for the lost profits.
d. Keep the price the same but sell more, to cover the increased fixed cost.
a. Shut down the business.
b. Keep the price the same and sell the same quantity.
c. Lower the price, and use the increased sales to make up for the lost profits.
d. Keep the price the same but sell more, to cover the increased fixed cost.
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movement of a demand curve right or left resulting from a change in one of the determinants of demand other than the price of the good
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movement along the demand curve
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1. change in income
2. change in price of a related good
3. change in customer's taste
4. change in # of buyers
5. change in future expectations of price
(BITER) buyers, income, tastes, expectations, related goods
2. change in price of a related good
3. change in customer's taste
4. change in # of buyers
5. change in future expectations of price
(BITER) buyers, income, tastes, expectations, related goods
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shift of a demand curve
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a good that is used in conjunction with another good
ex: hamburger & hamburger buns
ex: hamburger & hamburger buns
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what are the shifters of demand? whats the acronym?
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It would decrease the demand (shift left) for good B
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complement
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a good that can be used in place of another good
ex: Alaska vs Southwest airlines
ex: Alaska vs Southwest airlines
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If A and B are complements, an increase in price of good A would do what to demand of good B?
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It would increase the demand (shift right) for good B
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substitute
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world demand is different from firm demand. Because of many available substitutes, an individual oil firm has a very elastic demand curve.
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If A and B are substitutes, an increase in price of good A would do what to demand of good B?
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a buyer or seller that is unable to affect the market price.
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firm demand vs market demand (crude oil)
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quantity, price
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price taker
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commodity markets
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A price taker chooses _________ to sell, but not ____________ .
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market for primary products or raw materials e.g. steel, coal, coffee.
-lots of firms, nearly identical products
-lots of firms, nearly identical products
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where are price takers found?
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the MR curve, demand curve, and price, are all the same thing because the sale of an additional unit raises revenue by the price of the good.
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commodity markets
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a producer that can set a price for a product, rather than accepting the market price
-downward sloping demand curve
-MR is always below demand curve
-downward sloping demand curve
-MR is always below demand curve
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where is the marginal revenue curve for price takers?
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Where P=MC because you maximize where MR=MC and MR=P
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price setters
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a measure of how consumers react to a change in price
"how sensitive are buyers to changes in price"
"how sensitive are buyers to changes in price"
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at what quantity to price takers sell?
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movement along the curve. Elasticity is taken between 2 points on the same demand curve
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elasticity of demand
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Ed = % change in Qd / % change in P
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Is elasticity of demand about movement along the curve or a shift in the curve?
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the more sensitive buyers are to changes in price
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elasticity for demand equation
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perfectly elastic
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The bigger the elasticity of demand, ...
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more elastic
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a price taker (flat demand curve), has a __________ ___________ demand curve
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a percentage
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A flatter curve means what w/ respect to elasticity
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higher
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elasticity for demand is expressed as _____________
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it decreases quantity by a lot, and revenue goes down because MR>0
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we expect elasticity to be _____________ when substitutes are available
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it decreases quantity by very little, and revenue goes up because MR<0
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if Ed > 1 (elastic), how does a small increase in price affect quantity and revenue?
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it decreases quantity by the same proportion, and revenue stays about the same because MR = 0
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if Ed < 1 (inelastic), how does a small increase in price affect quantity and revenue?
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slower
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if Ed = 1 (unit elastic), how does a small increase in price affect quantity and revenue?
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a cost that has already been committed and cannot be recovered
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if demand is inelastic, (Ed < 1), quantity changes __________ than price
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how much you paid for something you are trying to sell
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sunk cost
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what you must give up to get something
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example of sunk cost
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the most desirable alternative given up as the result of a decision
-whats the best alternative (remember to use net PV when computing monthly cash flow)
-whats the best alternative (remember to use net PV when computing monthly cash flow)
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cost
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the value of all resources used to produce a good or service; opportunity cost
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opportunity cost
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TC(Q) = FC + VC(Q)
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economic cost
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MC(Q) = d(TC) / dQ
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Total Cost function, TC(Q) =
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total cost divided by quantity
TC(Q) / Q
TC(Q) / Q
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based on the total cost function, what does MC(Q) = ?
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think about profit rather than just contribution, because MC doesn't include fixed costs
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average cost (or ATC)
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profit = (P-AC) x Q
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what does using average total cost allow us to do that just MC doesn't?
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1. Find where MC = MR
2. At that Q, go up to the demand curve
3. Then from there, go up/down to ATC and you have your total profit/loss
2. At that Q, go up to the demand curve
3. Then from there, go up/down to ATC and you have your total profit/loss
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For any given Q, what does profit =
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At any point along the demand curve such that P>AC
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How do you find profit on a graph?
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the fixed cost portion of ATC gets spread out over more units, lowering the ATC to approach MC, but never reaching it
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when will a firm make profit? (Graphically)
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AC will start to increase
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At quantity increases, what happens to ATC if MC is constant?
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where AC intersects MC
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If we produce at a quantity where MC > AC, what happens to AC?
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accounting profit = TR - explicit cost
economic profit = TR - explicit cost - implicit cost
economic profit = TR - explicit cost - implicit cost
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Where is the minimum point on the AC curve?
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perfect competition and monopolistic competition
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accounting vs economic profit
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a market structure in which a large number of firms all produce the same product (perfectly elastic firm demand curve)
1. Many firms
2. Homogenous products
3. No barriers to entry/exit
4. Price-takers (firms and buyers)
(i.e. corn, wheat, fishermen, stock market)
1. Many firms
2. Homogenous products
3. No barriers to entry/exit
4. Price-takers (firms and buyers)
(i.e. corn, wheat, fishermen, stock market)
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2 types of competitive markets:
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market price
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perfect competition (characteristics)
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where demand and supply are equal
Qd = Qs
Qd = Qs
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perfect competition (graph)
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No, the firms are, but the market has a downward sloping demand curve.
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Firms in perfectly competitive markets have a demand curve at the...
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Short run: firms already in market (before entry/exit). prices and quantities can change but number of firms can not
Long run: firms enter/exit until long run equilibrium is reached (P = min-AC) and no firms wish to enter/exit
Long run: firms enter/exit until long run equilibrium is reached (P = min-AC) and no firms wish to enter/exit
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How is market price determined in perfectly competitive markets?
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total economic profit in the market is 0
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is the market perfectly elastic in perfect competition?
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how suppliers react to changes in price
-It just the firms MC curve (the slope)
-It just the firms MC curve (the slope)
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short run vs long run
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No market or firm supply curves. Also no market demand curve.
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firms enter/exit until
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q for firm, Q for market
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firm supply curve
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the horizontal sum (quantity sum) of all individual firm supply curves
for any p, add up firms q(p) to get Q(P)
for any p, add up firms q(p) to get Q(P)
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do price-setting firms have a supply curve?
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market price
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what notation do we use for firm quantity vs market quantity
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structure. no advantages. min-AC is the same.
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what does the market supply curve (short run supply curve SRS) come from?
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profits, enter, losses, exit
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all firms in perfect competition are price takers so they take _____________ as given.
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it shifts SRS right, lowering market price and raising market quantity
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in perfect competition, we should assume a similar cost ____________
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The firm produces at the minimum point of its long-run and short-run average total cost curves.
Because profits must be Zero in the long-run, the firms short-run Average costs(SAC) must equal P at the minimum SAC. In addition, in long-run eq. any economies of scale must be exhausted, and P must equal the minimum point of the long-run average cost curve (LAC).
Because profits must be Zero in the long-run, the firms short-run Average costs(SAC) must equal P at the minimum SAC. In addition, in long-run eq. any economies of scale must be exhausted, and P must equal the minimum point of the long-run average cost curve (LAC).
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if P>AC, firms make ________ and more firms will ________ . If P<AC, firms make _________ and more firms will __________ .
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yes, but economic must = 0
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if firms enter, what curve shifts?
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a curve showing the relationship between the market price and quantity supplied in the long run
-how market supply reacts to price changes as firms enter/exit
-traces out what happens to P and Q as market demand shifts
-is always more elastic than the short-run market supply curve.
-how market supply reacts to price changes as firms enter/exit
-traces out what happens to P and Q as market demand shifts
-is always more elastic than the short-run market supply curve.
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long run equilibrium in perfect competition
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there's more time for adjustment.
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in long run equilibrium, can accounting profit be positive?
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change in AC changes zero profit price, shifting LRS
could be fixed or variable change
could be fixed or variable change
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long-run market supply curve (LRS)
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change in demand leads to a supply shift to bring back the equilibrium price back to LRS curve at a different quantity
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why is LRS more elastic than SRS?
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MC function changes, firms enter/exit
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what could shift the LRS?
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price, perfectly elastic curve as long as all firms have same TC(Q) function
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what might cause a movement along LRS?
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where P = AC-min. no profit is being made in the market or by firms.
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what causes SRS to shift?
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an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal
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in the long run for perfect competition, the industry can expand to fill any level of demand w/o changing __________?
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an industry that faces higher per-unit production costs (increase in input costs) as industry output expands in the long run
-the long-run industry supply curve slopes upward
-the long-run industry supply curve slopes upward
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zero profit price
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zero profit price goes up. costs go up, zero profit price goes up, and we get an upward sloping LRS curve.
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constant cost industry
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1. if some firms have inherent cost advantages
2. as total Q expands, this puts pressure on the price of inputs so that LR costs rise for all firms
2. as total Q expands, this puts pressure on the price of inputs so that LR costs rise for all firms
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increasing cost industry
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a measure of the way quantity supplied reacts to a change in price
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under a increasing-cost industry, what happens if demand shifts outward?
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% change in quantity supplied / % change in price
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what causes an increasing cost industry?
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a market structure in which many companies sell products that are similar but not identical
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elasticity of supply
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1) many firms
2) differentiated product
3) no barriers to entry/exit
2) differentiated product
3) no barriers to entry/exit
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elasticity of supply formula
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-downward sloping firm demand
-price setters
-entry/exit shifts demand curve for firms already in market
-still choose P where MR=MC
-price setters
-entry/exit shifts demand curve for firms already in market
-still choose P where MR=MC
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monopolistic competition
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substitutes
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monopolistic competition (assumptions)
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entry/exit
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monopolistic competition (characteristics)
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firms make a profit, they sell substitute goods so other firms enter, shifts demand curve for firms already in the market to the left (decrease), decreases until P=AC and the demand curve touches AC curve.
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in monopolistic competition, firms sell products that are ___________ to each other.
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price is equal to average total cost at an output below where average total cost is minimized.
P=AC but NOT P=AC-min
P=AC but NOT P=AC-min
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long run equilibrium is determined by _________
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perfect: P=AC-min
monopolistic: P=AC
monopolistic: P=AC
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EX: if where MR=MC, demand > AC, what happens in the market?
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firm demand: downward sloping
market demand: does not exist (because they're price setters)
firm supply: does not exist
market supply: does not exist
market demand: does not exist (because they're price setters)
firm supply: does not exist
market supply: does not exist
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long run equilibrium monopolistic competition
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undefined
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difference between long run: perfect competition vs monopolistic competition
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undefined
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in monopolistic competition, describe supply and demand.
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undefined
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