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10/22/2014CRC Microeconomics1

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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?

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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?

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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)

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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

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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

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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

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

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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

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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

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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

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

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

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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

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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

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

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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 …

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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 MM =MR-MC MR=MC Profit maximization requires that M = 0, i.e.

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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.

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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?

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Economies of Scale Chapter 13 completion. The Shape of Cost Curves Quantity of Output Costs $3.00 2.50 2.00 1.50 1.00 0.50 04268141210 MC ATC AVC AFC.

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