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08_01T
Quantity(pianos moved Total Fixed Variable Average Average Average Marginal
per day) Costs Costs Costs Total Cost Fixed Cost Variable Cost(Q ) (TC ) (FC ) (VC ) (ATC ) (AFC ) Cost (AVC ) (MC )
0 300 300 01 450 300 150 450 300 150 1502 570 300 270 285 150 135 1203 670 300 370 223 100 123 1004 780 300 480 195 75 120 1105 900 300 600 180 60 120 1206 1,040 300 740 173 50 123 1407 1,200 300 900 171 43 128 1608 1,390 300 1,090 174 38 136 1909 1,640 300 1,340 182 33 149 250
10 1,960 300 1,660 196 30 166 32011 2,460 300 2,160 223 27 196 500
-- -- -- --
TC = FC + VC ATC = TCQ AFC =
FCQ
AVC = VCQ
Change in TC
Change in Q
Table 8.1 pg. 202 Review
Review: Profit Maximization06_08
Total costs
100
100
200
100
300
400
1 2 3 4 50
1 2 3 4 50
QUANTITY PRODUCED
QUANTITY PRODUCED
DOLLARS
Total revenue
Profits
DOLLARS
Fig 6.8
Profit Max Rule: MR=MC
Fig. 8.9
Negative Economic Profits (AVC<P<ATC)
P3
08_05
DOLLARS
QUANTITY
MC
ATC
AVC
Negative Profits
Q2
08_05
DOLLARS
QUANTITY
MC
ATC
AVC
Fig. 8.10
Shutdown Point(P < AVC)
P
Negative Profits
Q
Shutdown Point
Measuring Efficiency
• Consumer Surplus + Producer Surplus= Total Social Profit
• Deadweight Loss: The loss in total social profit due to an inefficient level of production.
• Examples: Taxes and Price Controls
07_07
Too little
Efficient
QUANTITY
PRICE
Too much
Demand
Supply
C
D
Negative producer surplus and negative consumer surplus: area C + D
QUANTITY
PRICE
Demand
Supply
A
B
QUANTITY
PRICE
Demand
Supply
Deadweight loss: area A + B
Market price
Market price
Market price
Taxation and Deadweight Loss
07_08A
Old supply curve
Demand curve
QUANTITY
PRICE
Deadweight Loss from a Sales Tax
New supply curve
S shifts up by amount of tax
P* Tax RevDWL
CS
PSPp
Pc
Qt Q*
Quantity
MC = S
ATC
Pri
ce o
r C
ost (
$)
q0
S0
D0
Q0P
rice
($)
Quantity
P0 P0
Typical Firm Industry or Market
Short Run Equilbrium
Firm: P0 = MR = MC
Industry: Qd = Qs @ P0
Long Run Equilbrium
Firm: Econ = 0
Industry: Firms @ Min LRATC
Long Run EquilibriumCondtions
(1) Many small firms Homogenous product.
(2) Identical product
(3) Perfect Information. Total Knowledge
(4) Free entry and exit.
Results Price taker with no market power. Firm believes it can sell it all
if it takes market price.
Always P=MR=MC @ min ATC
Perfectly Competitive MarketAssumptions
Quantity
MC = S
ATC
Pri
ce o
r C
ost (
$)
q0
S0
D0
Q0
Pri
ce (
$)
Quantity
Typical Firm Industry or Market
D1
Q1
P1P1
q1
S1
Long Run Competitive Equilibrium ModelDemand Shock: Shift Demand Left
Loss
Q2q2
P0P2 = P2 = P0
Quantity
MC = S
ATC
Pri
ce o
r C
ost (
$)
q0
S0
D0
Q0
Pri
ce (
$)
Quantity
Typical Firm Industry or Market
D1
Q1
P1P1
q1
S1
Q2q2
P0 P0P2 = P2 =
Long Run Competitive Equilibrium ModelDemand Shock: Shift Demand Right
Profits
What is a Monopoly?
• Many small firms
• Homogeneous Good
• Perfect Information• No Barriers to Entry or
Exit
• Small Output Compared to Industry
• Price taker
• No market power
• Is effiecient
• 1 firm • Unique product• Perfect knowledge that
firm has you• Barriers to Entry or
Exit--Blocked• Price Setter• Extreme market power• Is inefficient
Competitive Firm Monopoly
What is the Profit Maximizing Rule
10_05
Total costs
Total costs
Total revenue
Total revenue
Maximum
Maximum
QUANTITY
DOLLARS
Slope equals price.
Slope equals marginal cost.
QUANTITY
DOLLARS
Competitive Firm
Monopoly
Slope equals marginal revenue.
Slope equals marginal cost.
MR=MC
TR = P * Q
= TR - TC
TC = ATC * QQuantity
MC
ATC
Pri
ce o
r C
ost (
$)
Monopoly
DMR
QM
PM
Model of a MonopolyPositive Economic Profits
TC = ATC * Q
TR = P * QQuantity
MC
ATCPri
ce o
r C
ost (
$)
Monopoly
QM
PM
= TR - TC
DMR
Model of a MonopolyNegative Economic Profits
Model of a Monopoly Board Problem
Market: Cadet Comforters Scenario: QD = 40 - P where Q: comforters / week
TC = Q2 + 4Q + 58 P: $ / comforter
Question: (a) Calulate the MR and MC functions.
(b) Depict the following curves on a graph: D, MR, MC.
(c) Determine the equilibrium price and quantity if the firm acts like a perfectly competitive firm. Depict PPC and QPC on the graph. Calculate the firm’s profits.
(d) Determine the equilibrium price and quantity if the firm acts like a monopoly. Depict PM and QM on the graph. Calculate the firm’s profits.
Model of a MonopolyBoard Problem Solution
(a) P = 40 - Q TR = P*Q MC = dATC / dQMR = 40 - 2Q = (40 - Q)Q MC = 2Q + 4
TR = 40Q - Q2
MR = dTR / dQMR = 40 - 2Q
(b) See graph.
(c) Set P = MC: 40 - Q = 2Q + 4 P = 40 - Q 3Q = 36 = 40 - 12 Q = 12 comforters / week P = $28 / comforter
= TR - TC = (P*Q) - (Q2 + 4 Q + 58)= 336 - 250
= $86 / week
(d) Set MR = MC: 40 - 2Q = 2Q + 4 P = 40 - Q 4Q = 36 = 40 - 9 Q = 9 comforters / week P = $31 / comforter
= TR - TC = (P*Q) - (Q2 + 4 Q + 58)= 279 - 175
= $104 / week
Model of a MonopolyBoard Problem Solution
Quantity
Pri
ce o
r C
ost (
$)Cadet Comforter Firm
D = PMR
MC
PPC = 28
PM = 31
20 4000
20
40
QM
9QPC
12
Creating Money--Deposit ExpansionDeposits Loans Reserves
BankTwo 10.00 9.00 1.00BankThree 9.00 8.10 .90BankFour 8.10 7.29 .81Etc.Final Sum 100.00 90 10
The Simple Multiplier: BR=r * D, solve for D
BR/r=D or D=BR * 1/r The Simple Multiplier is 1/r
Deposits Expand to D*1/r
Deriving The Money Multiplier
• MB=CU+BR which the Fed controls
• We know that M=CU + D
• Substitute in CU=kD and we get
• M=kD+D or M= (k+1)D
• We also know that BR=r*D and that MB=CU+BR
• Substitute in and MB=kD+rD or MB=(k+r)D
• To find the link divide M by MB: (k+1)D/(k+r)D The Money Multiplier = (k+1)/(k+r)
The multiple by which the money supply changes due to a change in the monetary base.
What is the impact on I if C increases?Fig. 22.9
22_09R
2.5
5.0
7.5
0.065.062.5 67.5
C Y
(a) Consumption Share
R
2.5
5.0
7.5
0.015.012.5 17.5
I Y
(b) Investment Share
R
2.5
5.0
7.5
0.08075 85
R
2.5
5.0
7.5
0.00.0 2.5
XY
(c) Net Exports Share
-2.5PERCENT PERCENT PERCENT PERCENT
NG Y
(d)NongovernmentShare
Investment decreases as interest rates rise.
“We figure it was HERE when the recession officially began.”
Taylor p. 677
Lesson 31 Aggregate Expenditure
The Rounds of the Multiplier Process fig 26.2
26_02
BILLIONS OF
DOLLARS
111 102 93 6 854 7
300
250
200
150
100
50
0
$250 billion
ROUNDMPC = .6
• Graphically– Determine the shift in the AE Line– Determine the shift in Real GDP– Divide Real GDP Shift by AE Line Shift to get
Multiplier
• Algebraically– Derivation on page 703– Multiplier = 1 / (1-MPC)
• Example: If MPC = .8, Multiplier = 5
How to Calculate the Multiplier
45 line
BoomAE line
e
c
d
NormalAE line
RecessionAE line
INCOME OR REAL GDP
(TRILLIONS OF 1992 DOLLARS)
5.75 6.506.256.00
6.50
SPENDING(TRILLIONS OF 1992 DOLLARS)
6.25
6.00
5.75
25_11B
SPENDING
(TRILLIONS
OF 1992 DOLLARS
d
6.25
6.50
6.00
5.75
Year 1 Year 3Year 2
c
e
b
a
(Boom)
(Real GDP=potential GDP)
(Recession)
Spending BalanceRecessions and Booms fig. 25.11