BUSS1040 Mid Term
Relationship between ATC, AVC and MC
MC passes through the minimum of ATC and AVC MC is above ATC, ATC rises MC less than ATC, ATC falls MC intersects ATC at the minimum of ATC Applies to MC and AVC
Diminishing Marginal Product
MP of an input changes as increase use of input IF MP becomes progressively smaller this is diminishing marginal product
Characteristics of Perfect Competition
Many buyers and sellers Homogeneous products Consumers are indifferent as to who they purchase from All firms have access to the same technology Price taker No individual buyer or seller has sufficient market power to influence market prices Free entry and exit Firms can freely enter and exit the market in the long run There are no barriers to entry
Long Run Marginal Costs
Marginal cost of increasing output by one unit All inputs can be varied to achieve this increase
Market Equilibrium
Market is in equilibrium if at market price quantity demanded by consumers equals the quantity supplied by firms in the market Market Clearing Price If not in equilibrium there is pressure on price and quantity to move towards equilibrium price/quantity
Market Supply
Market supply curve shows quantity supplied in a market at different prices ceteris paribus Horizontal summation of the individual supply curves Individual MC curves summed horizontally Law of Supply also applies Change in quantity supplied Shifts in supply curve
Characteristics of a Monopoly
Market with a single seller Many buyers Only firm in the market has to market power to determine the price in the market that is, it is a price maker Barriers to Entry to Potential Entrants Legal or natural constraints that protect a firm from potential competitors
Comparative Static Analysis
Markets are affected by a change or event beyond the direct control of buyers or sellers in the market Analysis of effect of change or event on choices of firms or consumers in the market How choice affect market outcomes How to deal with it Assume market in question is in equilibrium Ascertain whether the change or event will affect the demand curve or supply curve of the market Curve will shift Use demand and supply diagram to compare prices and quantities traded in the market before and after the change
Welfare- Benefit to Market Participants
Markets are one of the main ways that goods and services are produced and distributed Consumers and firms will only participate in markets if it is beneficial for them At least as well off from trading than if they do not Measure and observe changes in benefits to these participants using welfare analysis
Individual Demand and Marginal Benefit
Maximum price a consumer will pay for a good is equal to the benefit they anticipate getting from the item Consumer will purchase units of the good up until the point where P = MB Maximum price a consumer will pay for a good is equal to the benefit they anticipate getting from the item P<MB for a unit of a good consumer should buy that unit because her WOP exceeds the price If P>MB consumer should not buy unit
Total Surplus
Measure total welfare of all participants in the market Consumers and producers With only consumers and producers in the market Total surplus is the sum of consumer surplus and producer surplus in market equilibrium TS = CS + PS
Issues with Elasticity
Measuring quantitative changes Different markets use different units
Deadweight Loss (DWL)
Monopoly causes a deadweight loss because it reduces output from socially efficient level Higher prices transfer surplus from consumers to producers Higher prices reduce output: this causes DWL A possible additional loss of a monopoly is rent seeking behaviour Bribing politicians to maintain government monopoly
Why are There Monopolies
Must be barriers to entry Legal Barriers to Entry Natural Barriers to Entry
Market Supply in the Short Run
No entry or exit of firms in the competitive market A firm is prevented from exiting the market by its fixed costs If a firm in the market wishes not to produce anything it shuts down No new firms can enter in the short run Hence the number of firms in the market is fixed in the short run Thus the short-run market supply results from horizontal summation of the individual firm's supply curves
Implicit Cost
Opportunities that are foregone that do not involve explicit
Fixed and Variable Costs
Short run some inputs will be fixed and some inputs will be variable Firm will have fixed and variable costs
Production function
Shows relationship between quantity of inputs used and the maximum quantity of output produced given the state of technology
Monopoly Pricing Strategies
Single-Price Monopolist Price Discrimination
Slope of PPF
Slope of the PPF is the opportunity cost of producing an additional unit of a good in terms of the other Depends on the country's productive resources Labour, capital, land etc
Welfare/Efficiency With a Monopoly
Socially Efficient Level of Output is where the marginal value to consumers (MB) equals the marginal cost of production (MC) MB = MC all gains from trade are exhausted Welfare (total surplus) maximum, competitive market output Q* Monopolist produces where MR = MC We know that for every level of output MR < MB (=P) Thus the monopolist restricts output to Qm < Q* As a result surplus is not maximised A monopolist's price is too high, reducing quantity demanded Using its market power, monopolist can create a wedge between consumers WTP and the producer's costs A deadweight loss results
Economics
Study of choice under scarcity Behaviours of individuals
Decreasing Cost Industry
Suppose that as output in an industry expands, costs for all firms fall If there are economies of scale in input markets If this is the case, following an increase in demand, as entry will continue until its no longer profitable, the new long-run equilibrium price has to be lower than the initial equilibrium price In this case the long run industry supply curve is downward sloping Decreasing cost industry
Movement Along a Demand Curve
Demand curve derived by assuming only price and quantity can change There is change in price and movement along the demand curve If there is movement downwards along the demand curve Increase in quantity demanded Movement up along the demand curve Decrease in quantity demanded
Income Elasticity
Demand for a good may also depend in part on a consumer's income Income elasticity (n) measures how sensitive the demand for a good (Q) is to changes in income (Y)
Opportunity Cost
The value of the next best foregone alternative Applies to resources used when making a choice
Intermezzo: Cross-Price Elasticity
Usefulness of responsiveness of demand to a change in the price of a related good Business multi brand product management Government impact of taxes on consumers behaviour
Firm
Using available technology, converts inputs, labour, machinery, natural resources into output that is sold in the marketplace
Importance of the Price Elasticity of Demand
Using the price elasticity of demand we can evaluate the effect on price and quantity of a change in supply Not only the direction of the effects but also the amount and its effect on revenue
Average Variable Cost
Variable cost per unit of output Due to diminished MP, AVC curve will be upward sloping AVC = VC/q
Elasticity and Revenue
We can determine from the elasticity of demand how total revenue in the market will change as price changes From the demand curve the quantity demanded in the market price Write quantity demanded as a function of price
Consumer Surplus
Welfare consumers receive from buying units of a good or service in the market Measure consumer surplus by evaluating the net value of a good or service to the consumer Given by consumers willingness to pay minus the price paid for each unit
Producer Surplus
Welfare producers receive from selling units of a good or service in the market Measured by considering net benefit of selling a good or service Given by the price the producer receives minus the cost of production for each unit bought
Income Elasticity - Normal and Luxury Goods
When 0 < η ≤ 1, if income rises by 1%, demand for the good increases by less (or, more correctly, not more) than 1%; this is a normal good. Many (if not most) goods are normal goods, for example food. If η > 1, when income rises by 1%, demand for the good increases by more than 1%; this is a luxury good. For example, caviar, sports cars, skiing holidays
Typical Short Run Cost Curve
When output is zero total cost is positive Total Cost curve rises as output increase Total Cost curve rises as at an increasing rate
Price Discrimination
is the practice of selling different units of a good or service for different price Haircuts, movies, utility bills Monopolist sets a variety of prices to maximise profits
Diseconomies of Scale
Long run average costs increase with output
Single-Price Monopolist
A firm that must sell each unit of output for same price Monopolist chooses quantity to maximise profits Monopolist who charges same price to all of its consumers Sole producer and faces all the demand in the market Faces the downward sloping market demand curve Firm has market power It can raise price and not have quantity demanded drop to zero Monopolist has to choose the price Monopolist can alter the price in the market by changing q Faces a downward sloping demand curve If it increases output by one unit the price will fall by some amount If produces more, price falls If produce less, price rises This causes a trade off for the monopolist Sell less for higher price or sell more for a lower price
Average Total Cost at Low Outputs
ATC declines while AFC dominates
What is Market Power?
Ability to affect price Low price elasticity of demand for its output can raise price and not lose customers Captures the idea that a firm can raise its prices above the level that would exist in a perfectly competitive industry and not lose all its customer
Marginal Benefit
Additional benefit received from consuming an extra unit of something
Marginal Cost
Additional cost incurred through buying one more unit of something
Monopolist and Marginal Revenue
Additional revenue that the firm received from selling one extra unit of a good Marginal revenue incorporates two effects Output Effect As you sell more units, you obtain extra revenue from the additional units sold Price Effect As you sell more units, price falls and you lose revenue on the existing units sold Hence MR is not the same as the market price MR is always below P Note there is no price effect for a competitive firm, only an output effect Price is invariant to the quantity it sells MR = P = AR is constant for any quantity supplied
Long Run
All factors of production are variable When firm's lease of factory ends it is free to decide whether or not to renew the lease for that factory
Long Run Costs
All inputs are variable If firm does not want to produce its costs are zero A firm producing positive output has more flexibility to adjust to all of its inputs Long run costs should not be higher than short run costs
Production in Long Run
Allows all inputs into production process to be variable Quantity of output changes when change the quantity of all factors in production
Total Cost
Amount a firm pays to buy the inputs of production + forgone opportunities Total opportunity cost of producing goods/services
Total revenue
Amount a firm receives for the sale of its output
Correlation
An association between two or more factors whereby the factors are observed to be increasing/decreasing together or moving in opposite directions
Supply in the Short Run
At least one of a firm's factors of production is fixed in the short run Firm has a fixed cost of production that will be incurred regardless of its output In deciding the level of output to produce in the short run a firm will ignore its fixed costs If a firm produces output, its supply curve is given by its marginal cost curve If a firm chooses not to produce output in the short run the firm shuts down
Benefit and Willingness to Pay (WTP)
Benefit consumer gets is their WTP Max price a consumer will pay for a good is equal to the benefit hey anticipate getting from the item
Long Run Average Cost
Can not be greater than short run average cost Curve will be the lower envelope of all the short run average cost curves
Causation
Change in one variable changes another
Marginal Product
Change in output when one more input is used Slope of Production Function
Income Elasticity- Inferior and Neutral Goods
Characterise good depending on income elasticity If η < 0, demand decreases when income rises.This type of good is called an inferior good. - For example, consumers might substitute away from an inferior cut of meat as income rises. If η = 0, demand is invariant to changes in income; this is a neutral good.
Key Ideas in Economics
Choice under scarcity Opportunity cost Gains from exchange/trade
Competitive Markets
Choices of individual consumers do not affect price in the market
Marginal Analysis
Compare marginal benefit of an activity with marginal cost If MB of an activity is greater than MC good if not bad Decision making is thinking at the margin
Must be barriers to entry
Competition and entry is restricted by various mechanisms
Natural Barriers to Entry
Control over an essential input not available other firms The monopolist might simply have a lower cost of production that effectively allows them to prevent other firms from entering the market Technology/level of demand make one producer more efficient than a number of producers
Sunk Costs
Costs that are not recoverable
Fixed Costs
Costs that do not vary with output When output is zero all costs are fixed costs
Variable Costs
Costs that vary with output All costs that are not fixed will be variable VC = TC - FC
Consumer Behaviour
Demand for goods and services Assume each consumer tries to maximise their well-being or benefit Subject to budget constraint
Changes in Revenue and Elasticity
Differentiate equation with respect to P in order to determine how total revenue changes in response to a small increase in price
Returns to Scale and Economies of Scale
Direct relationship between returns to scale and economies of scale Economies of scale reflect the relationship between outputs and costs Relationship arises as the production function is a mirror image of the cost function When a firm experiences increasing returns to scale, it also experiences economies of scale or falling average cost of production When a firm experiences decreasing returns to scale it also experience diseconomies of scale or increasing average cost of production When a firm experiences constant returns to scale, it experiences neither economies or diseconomies of scale. Average cost of production is constant
Caveat Regarding Pareto Efficiency
Does not imply uniqueness or fairness/equity It is possible that there is more than one market outcome in an economy that is Pareto Efficient An outcome that is Pareto Efficient is not automatically the most fair or equitable
Law of Demand
Downward slope of the demand curve means that a consumer consumes fewer units when the price is higher Negative relationship between price and quantity demanded is known as the law of demand
Change in Demand
Drawn assuming all other factors remain constant Income, tastes, price, expectations and prices of other related goods If factors change demand curve will shift in or out Shift in demand curve is change in demand Shift right Increase in demand Shift left Decrease in demand
Gains from Trade
Economic interaction Helps allocate goods to those who value them most Gains from exchange Improvements in income Production or satisfaction owing to exchange of goods Exchange is voluntary Leaves both parties better off (pareto improving trade) Depends on valuations of each of the parties Allows people to take advantage of gains from specialisation, reducing overall costs of producing an increasing output Differences in opportunity costs of production create gains from specialisation and trade Each person specialises in the good in which they have a comparative advantage
Interpretation of Elasticity of Demand
Ed > 1 demand is elastic Ed = 1 demand is unit elastic Ed < 1 demand is inelastic Extreme cases Ed = 0 demand is perfectly inelastic Ed = ∞ demand is perfectly elastic
Elasticity of Supply
Elasticity can also be applied to supply Measures how sensitive the quantity supplied of a good is to changes in price What is the proportional change in quantity supplied of a good given a 1% change in its price Midpoint method and point method for calculating supply
Short Run Cost Function
Equation that links the quantity of output with its associated production cost
Legal Barriers to Entry
Exclusive right over a goods production Patent, copyright Public franchise Government Licences
Short Run Supply Decision for a Firm
Firm should only take into account its variable costs as its fixed costs are sunk Derive the shut-down condition that a firm will shut down in the short run if total revenue is less than the variable cost If price falls below AVC, a firm will shut down If a firm does produce a positive output, it chooses the level of output in accordance with its supply curve That is, its MC curve Remember that the MC curve intersects the AVC curve at its minimum Shut down rule for a competitive firm is P < AVCMIN
Shifts in Supply
Firm supply curve is derived by assuming that only the price and quantity supplied of the product can change If any other relevant factors change Supply curve will shift Cost of inputs Technology and expectations about the future At any output price quantity supplied changes If there is a change in one of these factors there will be a change in supply Increase in supply Shifts of the supply curve to the right Decrease in supply Shifts of supply to the left
Producer Surplus and the Supply Curve
Firm's supply curve is given by its MC curve Firm PS found by calculating area between price line and firm supply curve PS of all producers in the market by calculating area between price line and market supply curve
Law of Supply
Firm's supply curve is given by its MC curve MC curve is upward sloping due to diminishing marginal product Positive relationship between the price of a good and the quantity of that good supplied Ceteris paribus, the higher the price of goods the greater the quantity supplied Positive relationship is law of supply
Total Cost
Fixed and variable costs TC = VC +FC
Average Fixed Costs
Fixed cost per unit of output AFC = FC/q
Marginal Revenue
For each unit that the firm sells is the price (P) MR = P (competitive market) If a firm supplies a quantity where P > MC for the last unit sold, profit rise when increasing its output by one unit Increase its profit since the additional revenue from selling that extra unit outweighs the MC If a firm is producing P < MC for the last unit made, the firm can increase profit by not making that last unit Extra revenue P = MR is less than extra costs incurred
Market Supply Curve in the Long Run
For the long run market supply curve, we need to account for the fact that the market responds to demand via the entry and exit of firms As noted above, in the long run price adjusts back to the minimum of average total cost, no matter what the quantity traded in the market is Taking account of exit/entry, the long run industry supply curve is horizontal at ATCmin An industry with a perfectly elastic long run industry supply curve is a constant-cost industry Unless otherwise stated, a competitive industry is assumed to be a constant-cost industry
Public Policies Towards Monopolies
Given it creates DWL, governments might try to regulate a monopoly Goal Increase competition in monopolised industries Australian Competition and Consumer Commission (ACCC) Cartels Oppose mergers Misuse of market power Price regulation Regulate price of a monopolist Two basic forms: MC-price regulation; ATC-price regulation
Production Possibility Frontier (PPF)
Graphs the output that an individual can produce with a particular set of resources Country PPF shows all combinations of goods and services that a country can produce Given resources and current state of technology
Price Maker
Has market power Faces downward-sloping D-curve for its good Not only a monopolist has market power, but whenever imperfect competition in market
Cross-Price Elasticity - Complements
If eAB < 0, an increase in the price of Good B is associated with a fall in the demand for Good A Good A and Good B complements Goods that are consumed together
Cross-Price Elasticity - Independent Goods
If eAB = 0, an increase in the price of Good B is not associated with any change in the demand for Good A They are independent goods
Cross-Price Elasticity - Substitutes
If eAB > 0 an increase in price Good B is associated with a rise in the demand for Good A Good A and B are substitutes
PPF and Opportunity Cost
If either the amount of resources available or the state of technology changes, the shape of the PPF can also change Improvement of technology could shift the curve out If improves productivity of both goods Rotate PPF out or up If new tech only improves production for one of the goods
Pareto Efficiency
If it is not possible to make someone better off without making someone else worse off Maximises total surplus
Excess Demand
If market price is below equilibrium price Quantity demanded exceeds quantity supplied Sellers do not supply enough units to meet consumer demand Upward pressure on prices Buyers compete for limited units in market Upward pressure continue until excess demand is gone
Decreasing Returns to Scale
If output increases by less than the proportional increase in all inputs
Constant Returns to Scale
If output increases by the same proportional change
Profit and Losses in the Short Run
In a competitive market, it is possible for firms to make profits, break even or incur losses in the short run If a firm is making a loss, total revenue must be less than total costs Conversely, if a firm is making profits: TR>TC, or P>ATC The difference between P and ATC at the quantity supplied is the average profit A firm will be willing to continue to sell in the short run when making a loss provided P>AVCmin Firm is better off than shutting down because the extra revenue (in excess of its variable costs) help it pay for some of its fixed costs
Increasing-Cost Industry
In a constant cost industry, entry and exit in the long run ensures that all firms earn zero profits and the price is P* = ATCmin This assume that all firms have access to the same technology and have the same cost structure and this cost structure does not change as the industry grows However, the long run industry supply curve need not be perfectly elastic The long run supply curve can instead be upward sloping this is known as increasing cost industry If potential entrants have higher costs than incumbent firms (already in the market) Some resources used in production may be available only in limited quantities (input prices rise as industry expands), thus costs for all firms rise Congestion may rise with industry output (e.g. airlines)
What is the Short Run and Long Run Concept
In relation to whether or not any of the factors of production are fixed How long it takes for all of a firm's inputs to become variable
Elimination of Profits and Losses
In the long run, firms can enter or exit depending on whether they are going to make a profit or loss When firms in the market are profitable (P < ATCMIN) firms will want to enter the market The entry of more firms into the market will progressively shift the short-run market supply curve to the right, driving the equilibrium price downwards When firms in the market are sustaining losses (P < ATCMIN) firm will tend to exit the market This shifts the short run supply curve left, pushing the equilibrium price upwards as firms leave the industry
Consumer Surplus and Demand Curve
Individual demand curve traces out consumer marginal benefit or WOP An individual CS is calculated by area between individual demand curve and price line Find CS of all consumers in market by finding area between market demand curve and price line
Cross-Price Elasticity
Interested in the relationship between demand for one good and the price of another related good Relationship examined through cross-price elasticity Measurement of how sensitive the demand for Good A (QA) is to changes in price of Good B (PB)
Explicit Cost
Involve direct payment
Ceteris Paribus
Isolate the impact of one factor, economists examine the impact of one change at a time, holding everything else constant
Average Total Cost at High Levels Output
It is upward sloping because the increasing AVC dominates U shaped curve ATC = AFC + AVC
Supply in the Long Run
Long Run: All production factors are variable Firms can exit a market/industry, new firms can start operating in a market In the Long Run, there is free entry and exit of firms in the market This means that all costs are opportunity costs A firm deciding its level of output in the long run will take into account the costs of all inputs A firm will enter or exit the market depending on its level of profit or loss in the market Market will reach its long run equilibrium when there is no longer any entry into or exit from the market This occurs when firms are making zero economic profits
Economies of Scale
Long run average costs decrease with output
Competitive Market Outcome and Efficiency
Outcome in a competitive market is Pareto Efficient For all the trades up to the competitive market equilibrium Q*, MB >= MC Consumer is willing to pay more than the extra cost required to make the item Trading all units up until Q* increases total surplus If fewer than Q* units are traded, this outcome is not Pareto efficient If more than Q* units are traded, MC > MB and all units traded beyond Q* make someone worse off Either buyer paid more than his MB Seller received a price less than her MC All potential gains from trade are exhausted No consumers left in the market with a WOP higher than any seller's MC to provide an additional unit
Increasing Returns to Scale
Output increases by more than proportional increase in all inputs
Movement along the Supply Curve
Output price changes is called a change in quantity supplied Output price is increasing there is an increase in quantity supplied Decrease in output price leads to decrease in quantity supplied
Short Run
Period of time during which at least one of the factors of production is fixed Creates Capacity constraint Each additional worker will contribute to output less and less than those hired before
Market
Place where buyers and sellers of a particular good or service meet Government plays role -Taxes, regulations
Equations for Elasticity
Point Method Midpoint Method
Interpretation of Price Elasticity of Demand
Price elasticity of demand measures how sensitive the quantity demanded of a good Qd is to changes in price P It is the proportional change in quantity demanded of a good given a 1% change in its price
Price Mechanism
Price mechanism ensures that people with highest value for the product end up with the goods and that those firms with lowest cost are the ones who make goods Actions are decentralised No one person is coordinating actions of the many parties in the market Competitive market manages to maximise total surplus
Price Elasticity of Demand Along a Straight Line Demand Curve
Price of elasticity of demand depends on the slope of the line and reference point on the curve used to calculate elasticity Price elasticity of demand changes along a linear demand curve Slope of demand curve is constant and elasticity varies because the proportional change in quantity and price varies depending on size of quantity or price at a point For every linear demand curve there is an inelastic section, a point that is unit elastic and an elastic section
If price changes in Firm Supply
Price rises so does firm MR Continues to produce until P = MC As MC is often increasing quantity supplied in market is higher when price is higher
Public Policies
Problems with price regulations MC pricing If enforce marginal costs pricing monopolist makes a loss Monopolist requires a subsidy ATC pricing, monopolist earns zero profit but there is a DWL in the market Public ownership Can be difficult to implement Public ownership alters incentives for managers Motivation of private managers may differ from public managers Assess relative success of regulation vs ownership
Monopoly and Profit Maximisation
Profits will be maximised when a monopolist sets marginal revenue equal to marginal cost MR = MC
Firm Supply
Quantity of output a firm is willing and able to supply at a certain pierce Supply curve traces out all combinations of market price and quantities that a firm is willing and able to sell at that price Firm supply curve is drawn by changing the price of output, holding everything else that is relevant constant Firm should sell up until P = MC
Scarcity
Resources are limited so that not all wants and needs can be met
Elasticity
Responsiveness of one variable to a change in another variable Compare quantitative changes across different situations by looking at proportional changes
Natural Monopoly
Results from a situation where a single firm can supply an entire market at lower cost than two or more firms could supply that market Declining (long run) average total cost implies natural monopoly Often large capital costs but low marginal cost of supply Substantial economies of scale
Zero Economic Profit
Revenues just cover opportunity costs
Supply Curve in Perfect Competition
Short Run (SR) Each firm's plant size is given Some inputs cannot be altered Number of firms in the industry is fixed Long Run Each firm can change the size of its plant All inputs can be varied Firms can enter and exit the industry
Average Total Cost
Total cost per unit output Affected by AFC and AVC
Intuition Underlying Gains From Trade
Total output increases because trade allows parties to specialise in producing the good in which they have the lower opportunity cost More output -> both parties are better off Trade creates environment for specialisation to be feasible -> increase size of economic pie Output increase can be shared to make everyone better off than without trade Trade is beneficial to individuals because it allows them to specialise in industries where they have comparative advantage Trade with others for things that would cost them more to produce personally Even if one party has the absolute advantage in production of both goods, what matters is the comparative advantages or opportunity costs of the parties
Profit
Total revenue minus total costs 𝝿 = TR - TC
Market Demand
Traces out combinations of market price and quantities that all consumers in a market are together willing and able to buy at that price Curve derived by adding together quantity demanded by each individual consumer at each price Horizontal summation of individual demand curves along q axis Law of demand holds for market demand curve and all individual demand curves which is horizontal summation Change in quantity demanded to refer to movements along the market demand curve Change in demand refer to shift in demand curve
Marginal Cost Curve
Typical MC curve is increasing in output and has positive slope Extra cost of producing another unit of output MC must go up In short run diminishing MP implies increasing MC
Average Cost Price Regulation
Under average-cost price regulation, the government sets the monopoly price at P = ATC However the monopolist will produce less than the efficient quantity so there is still some DWL However, regulation typically decreases DWL relative to the situation with no regulation at all
Marginal Cost Price Regulation
Under marginal-cost price regulation, the government sets the monopoly price at P=MC DWL = 0 Monopolist makes a loss equal to the grey shaded area and will exit the market when it can To prevent this the government will need to subsidise the monopolist that amount to prevent them from leaving the market These funds will typically have a DWL associated with them Such a subsidy could be politically unpopular
Individual Demand
Use consumer's marginal benefit curve to derive individual demand curve Quantity of a good or service that a consumer is willing and able to buy at a certain market price Traces out combinations of market price and individual demand at that price Ceteris paribus Individual demand curve is MB curve Downward sloping How much consumer is willing and able to buy at different market prices
Intermezzo: Own Price Elasticity of Demand
Why is it useful to have understanding of responsiveness of quantity demanded to a change in price Business might be interested in the effect of a price change on quantity sold, revenue and profits Governments might want to know how consumer/firm behaviour changes when a policy is put in place
Firm Supply: The Exit/Entry Decision
With free entry and exit in the long run, if a firm chooses to exit it incurs no costs (unlike the FC incurred in the short run) Hence, a firm will choose to exit the market if its total revenue is less than its total costs This means that a firm will exit if: P < ATCMIN A firm's long-run supply curve is the section of its (long run) MC that lies above (LR)ATCMIN
Excess Supply
f the market price is above equilibrium price, quantity supplied exceeds quantity demanded Sellers cannot find buyers for all units supplied Downward pressure on prices until excess of supply is eliminated
Returns to Scale
quantity of output changes when there is a proportional change in the quantity of all inputs
Accounting Profit
revenue - explicit costs
Economic Profit
revenue minus the opportunity cost of resources used; usually less than the accounting profit
