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Understanding Economic Concepts: Production, Costs, and Market Structures

This text explores key economic concepts including production and costs, elasticity of demand and supply, and market structures. Chapters 12-14 delve into the intricacies of total and marginal costs, economic rent, and price ceilings/floors. Learn about the characteristics of perfect competition, monopoly, and oligopoly, as well as the principles governing marginal product and average costs. Understand the impacts of elasticity on consumer behavior and market equilibrium, while examining the effects of supply-and-demand shifts on pricing and production outcomes.

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Understanding Economic Concepts: Production, Costs, and Market Structures

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  1. Production and costsChapters 12 -14ElasticitySupply & DemandPPFMRPEconomic RentPrice Ceiling/FloorTotal utility/ marginal utility

  2. economic profit = total revenue - total costs = (price)(quantity) - (explicit + implicit costs)

  3. implicit costs • includes normal profit • so zero economic profit • still a normal profit

  4. Short Run vs. Long Run • Short Run (SR) • plants, equipment fixed • labor inputs variable • Long Run (LR) • time frame where all inputs are variable

  5. marginal product (MP) • change in TP due to one more worker • law of decreasing returns

  6. Average Product (AP) TP = labor

  7. 1 2 3 2 1 0 -1 AP # workers TP MP 0 1 2 3 4 5 6 7 0 1 3 6 8 9 9 8 1 1.5 2 2 1.8 1.5 1.1

  8. Total Cost (TC) • total fixed cost (TFC) • does not change in SR • total variable cost (TVC) • cost of labor • TC = TFC + TVC

  9. Marginal Cost • change in TC due to one-unit increase in output (Q)

  10. Average Cost (ATC) • = TC/Q • average fixed cost (AFC) = (TFC/Q) • average variable cost (AVC) = (TVC/Q) • ATC = AFC + AVC

  11. Economies of scale • increase inputs 10% • output increase > 10% • ATC falls • natural monopoly

  12. Diseconomies of scale • increase inputs 10% • output increase < 10% • ATC rises

  13. Chapters 12-14 • characteristics of • perfect competition • monopoly • monopolistic competition • oligopoly • in your lecture notes!

  14. all firms • maximize profit • MR = MC • if P > ATC • economic profit • if P < ATC • economic loss

  15. perfect comp. & monopolistic comp • both • many firms • easy entry/exit • LR normal profit • differ • identical vs. differentiated product • demand curve

  16. perfect comp & monopoly • monopoly price higher • monopoly quantity lower • inefficient

  17. P, MR MC Pm Pc D MR Q Qm Qc Pm > Pc Qm < Qc

  18. consumer surplus P, MR MC Pm deadweight loss D MR Q producer surplus Qm monopoly

  19. monopoly & monop. comp. • both • downward sloping demand curve • differ • # firms • barriers to entry

  20. monopoly & oligopoly • both • barriers to entry • downward sloping demand curve • differ • # of firms

  21. Elasticity • price elasticity • demand • supply • cross elasticity • income elasticity

  22. what is it? • % change quantity • divided by % change in -- price of same good OR -- price of related good OR -- income

  23. elasticity of demand % change in Qd % change in P

  24. < 1 • inelastic • % change Qd < % change P • Qd not sensitive to change in P • TR rises and P increases

  25. perfectly elastic demand • horizontal demand curve • any increase in price • Qd falls to zero

  26. perfectly inelastic demand • vertical demand curve • change in P, no change in Qd

  27. cross elasticity • price of related goods • negative for complements • positive for substitutes

  28. income elasticity • change in Qd when income changes • negative for inferior goods • positive for normal goods

  29. Shift in Supply & Demand • increase -- shift right • decrease -- shift left • price of a good WILL NOT SHIFT • demand for that good • supply of that good • will change Qd or Qs

  30. Shift in Supply & Demand • will change equilibrium P & Q

  31. Example 2 • Market for bottled water • sugar is found to be harmful to health • what happens to equilibrium?

  32. Which curve is affected? • Demand curve • health concerns increase preferences for water • demand shifts right

  33. P S Equilibrium: $10 P D’ Q D Q 10 (millions bottles per day)

  34. PPF

  35. concave PPF • increasing opportunity costs • resources not perfectly substitutable

  36. Marginal Revenue Product (MRP) • = value of marginal product (VMP) • additional revenue from hiring one more unit of labor • price of good x MP • maximum firm will pay for one more unit of labor • wage < or = to MRP

  37. Economic Rent • demand & supply of resource • price of resource • price of resource = opp. cost + any extra compensation • economic rent = extra compensation

  38. Rent S $2500 $1200 D Q 250 500 750 rent ceiling = $1200 PRICE CEILING

  39. Rent S $2500 SHORTAGE $1200 D Q 250 500 750 at P = $1200: Qd = 750 units Qs = 250 units PRICE CEILING

  40. S wage $7 $5 D Q 5000 minimum wage = $7 PRICE FLOOR

  41. S wage $7 SURPLUS $5 D Q 2500 5000 7000 at w = $7: Qd = 2500 workers Qs = 7000 workers PRICE FLOOR

  42. Total Utility (TU) • total benefit from consuming good • increases as quantity consumed increase Marginal Utility (MU) • change in total utility from consuming one more of a good • MU falls as consumption rises

  43. higher TU lower TU TU is higher as curve shifts right gum water

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