Transcript Introduction to Production and Resource Use

Slide Show #8
Microeconomic Concepts
Related to Price and
Growth
Single InputOutput
Relationships
Costs associated with levels of output
$45
P=MR=AR
Profit maximizing
level of output,
where MR=MC
11.2
Where is the firm’s
supply curve?
P=MR=AR
Marginal cost curve
above AVC curve?
P=MR=AR
Use a variable input like
labor up to the point where
the value received from the
market equals the cost of
another unit of
input, or MVP=MIC
D
C
B
E
F
G
5
H
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J
D
If you stopped at
point E on the MVP
curve, for example,
you would be
foregoing all of the
potential profit lying
to the right of that
point up to where
MVP=MIC.
C
B
E
F
G
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J
If you went beyond
the point where
MVP=MIC, you begin
incurring losses.
D
C
B
E
F
G
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Multiple Input Cost
Relationships
Least Cost Input Choice for 100 Units
At the point of tangency, we know that:
slope of isoquant = slope of iso-cost line, or…
MPPLABOR ÷ MPPCAPITAL = - (wage rate ÷ rental rate)
What Inputs to Use for a Specific Budget?
Firm can afford to
produce only 75 units
of output using C3 units
of capital and L3 units
of labor
How to Expand Firm’s Capacity
Optimal input
combination
for output=10
How to Expand Firm’s Capacity
Two options:
1. Point B ?
How to Expand Firm’s Capacity
Two options:
1. Point B?
2. Point C?
Expanding Firm’s Capacity
Optimal input
combination
for output=20
with budget FG
Optimal input
combination
for output=10
with budget DE
Expanding Firm’s Capacity
This combination
costs more to
produce 20 units
of output since
budget HI exceeds
budget FG
Expanding Firm’s Capacity
Expansion
path
The Planning Curve
The long run average cost (LAC) curve reflects
points of tangency with a series of short run
average total cost (SAC) curves. The point on the
LAC where the following holds is the long run
equilibrium position (QLR) of the firm:
SAC = LAC = PLR
where MC represents marginal cost and PLR
represents the long run price, respectively.
What can we say about the four
firm sizes in this graph?
Size 1 would lose
money at price P
Firm size 2, 3 and 4
would earn a profit
at price P….
Q3
Firm size #2’s profit
would be the area
shown below…
Q3
Firm size #3’s profit
would be the area
shown below…
Q3
Firm size #4’s profit
would be the area
shown below…
Q3
If price were to fall to
PLR, only size 3
would not lose
money; it would
break-even. Size 4
would have to down
size its operations!
Market
Price Discovery #1
Perfect
Competition
Firm is a “Price Taker”
Under Perfect Competition
Price
The Market
D
S
The Firm
Price
AVC
MC
PE
QE
OMAX
Quantity
If Demand Increases……
The Market
Price
D
D1
S
The Firm
Price
AVC
MC
PE
QE
10 11
Quantity
If Demand Decreases……
The Market
Price
D2
D
S
The Firm
Price
AVC
MC
PE
QE
9 10
Quantity
Firm is a “Price Taker” in
the Input Market
Price
Labor Market
D
S
Price
The Firm
MVP
MIC
PE
QE
LMAX
Quantity
If Demand Increases……
Price
Labor Market
D
S
Price
The Firm
MVP
PE
MIC
QE
LMAX
Quantity
Market
Price Discovery #2
Imperfect
Competition
Total revenue is equal
to the area 0PECQE,
which forms the blue
box to the left…
Notice the monopoly,
like the previous forms
of imperfect competition,
produces where MC=MR
(point A), but then reads
up to the demand curve
(point C) when setting
price PE.
Total variable costs for
the monopolist is equal
to area 0NAQE, or the
yellow box to the left.
Total fixed costs for the
monopolist is equal to
area NMBA, or the green
box to the left…
Total cost is therefore equal
to area 0MBQE, or the
green box plus the yellow
box to the left.
Finally, the economic profit
earned by the monopolist is
equal to area MPECB, or
total revenue (blue box)
minus total costs (green box
plus yellow box).