# 10/22/2014CRC Microeconomics1. 10/22/2014CRC Microeconomics2 What did you study last time?  What are the criteria of an efficient tax system?  How to.

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10/22/2014CRC Microeconomics1

10/22/2014CRC Microeconomics2 What did you study last time?  What are the criteria of an efficient tax system?  How to evaluate some tax systems?  What are the principles used to achieve equity in a tax system?

10/22/2014CRC Microeconomics3 Do you know … 1.how to calculate profits? 2.how to determine revenue? 3.how to measure output/production? 4.how to assess costs? 5.how to maximize profits?

10/22/2014CRC Microeconomics4 1. Profits Profits  = P*Q Total Revenue TR - Total Costs TC Explicit Costs + Implicit Costs Accounting  = TR - Explicit Costs Economic  = TR - TC Input costs that require an outlay of money by the firm Input costs that do not require an outlay of money by the firm Price (P) times quantity (Q)

10/22/2014CRC Microeconomics5 2. Revenue TR = P * Q = Average Revenue AR TR/Q = P = Marginal Revenue MR  TR /  Q = Revenue per unit Extra revenue per extra unit

10/22/2014CRC Microeconomics6 Revenue Curves in Perfect Competition Q P TR (AR=P) = MR (D) The TR curve is a straight line starting from the point of origin O. TR = P * Q The AR and MR curve are also straight lines. They coincide and start where the price is. AR = MR = P. AR is the same as the demand (D) curve. P

10/22/2014CRC Microeconomics7 Revenue Curves in Imperfect Competition Q P TR (AR=P) (D) The TR curve is an upside-down parabola, starting from the point of origin. The AR curve is downward- sloping, starting from a point on the vertical axis. The MR curve is also downward- sloping. It starts from the same point as AR on the vertical axis. From that point on MR < AR. At the output where MR = zero, TR is maximized. MR

10/22/2014CRC Microeconomics8 3. Output/Production  Production function A production function describes the relationship between output and inputs.

10/22/2014CRC Microeconomics9 3. Output/Production  Production function Long run (when all inputs are variable.) Q = f (l, L, K), where l = land; L = labor; and K = capital  Short run (when at least one input is fixed.) Q = f (L) with fixed l and K

10/22/2014CRC Microeconomics10 b. SR Output/Production Total Product TP = Q = Average Product AP L = Marginal Product MP L  Q /  L = Q / L Extra output per extra worker Output per worker

10/22/2014CRC Microeconomics11 SR Output Curve (TP) Q L TP = Q R S M Z Maximum output Zero output Shut-down point Diminishing-return point Relevant section

10/22/2014CRC Microeconomics12 SR Output Curves (AP & MP) Q L AP MP S R MZ Relevant sections

10/22/2014CRC Microeconomics13 4. Costs  Short run (when at least one input is fixed.)  Long run (when all inputs are variable.)

10/22/2014CRC Microeconomics14 a. SR Costs Total Costs TC = Fixed Costs FC + Variable Costs VC TC / Q = FC / Q + VC / Q Average Total Cost ATC = Average Fixed Cost AFC + Average Variable Cost AVC Marginal Cost MC =  VC /  Q =  TC /  Q Extra cost per extra unit Cost per unit Costs of fixed inputs Costs of variable inputs

10/22/2014CRC Microeconomics15 SR Cost Curves (TC, VC, FC) \$ Q VC R B S TC FC Shut-down point Break-even point Diminishing-return point R

10/22/2014CRC Microeconomics16 SR Cost Curves (ATC, AVC, MC) \$ Q AVC R B S ATC MC Relevant section

10/22/2014CRC Microeconomics17 b. LR Cost Curve Q \$ SRATC 1 SRATC 2 SRATC e SRATC n-1 LRATC SRATC n Efficient Scale Economies of scale (IRTS)Diseconomies of scale (DRTS) Constant Returns to Scale (CRTS) There is one short-run average cost curve for each plant size. The long-run average total cost curve is the envelope curve. The minimum point on the lowest SRATC curve determines …

10/22/2014CRC Microeconomics18 5. Profit Maximization  Rule. The firm should produce output Q* where MR = MC  Proof  =TR-TC  Q =  TR/  Q -  TC/  Q MM =MR-MC MR=MC Profit maximization requires that M  = 0, i.e.

10/22/2014CRC Microeconomics19 Now you know … 1.how to calculate profits. 2.how to determine revenue. 3.how to measure output/production. 4.how to assess costs. 5.how to maximize profits.

10/22/2014CRC Microeconomics20 What will you study next time? 1.What are the main characteristics of a (perfectly) competitive market? 2.How much should a competitive firm produce to maximize profits? 3.What happens in the long run in a competitive market? 4.How to derive the supply curve in a competitive market?

10/22/2014CRC Microeconomics21

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