First Picture The Production Possibilities Frontier Tradeoffs in Pictures Quantity of Computers Produced Quantity of Cars Produced 3,000 1,000 2,000 2,200 A 700 60030001,000 B Feasible but Inefficient C D Infeasible Pts Production Possibilities Frontier Efficient Points
Supply Demand Price of Ice-Cream Cone Quantity of Ice-Cream Cones Second Picture Supply and Demand 2134567891012110 $3.00 2.50 2.00 1.50 1.00 0.50 Equilibrium
ATC AVC MC Third Picture Average-Cost and Marginal-Cost Curves The Firm in the Short Run $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 0 24681012 Quantity of Output (glasses of lemonade per hour) Costs AFC
Remember The economic goal of the firm is to maximize profits.
Fourth Picture The Competitive Firm’s Short-Run Supply Curve Quantity ATC AVC 0 Costs MC If P < AVC, shut down. If P > AVC, keep producing in the short run. If P > ATC, keep producing at a profit. Firm’s short-run supply curve.
Remember MR = MC and market price is the marginal revenue of a price-taking competitive firm MR = P = MC
Fifth Picture The Competitive Firm’s Long-Run Supply Curve Quantity MC = Long-run S ATC 0 Costs Firm enters if P > ATC Firm exits if P < ATC
S2S2 A Decrease in Supply Price of Ice-Cream Cone 2.00 012347891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10 1. An earthquake reduces the supply of ice cream... New equilibrium 2....resulting in a higher price... $2.50 3....and a lower quantity sold.
Elastic Demand: Quantity demanded responds dramatically to price Elasticity is greater than 1 Quantity Price 4 $5 1. A 22% increase in price... Demand 100 50 2....leads to a 67% decrease in quantity.
Elasticity ( Q/Q) ( P/P) Elastic Demand: P Q TR Inelastic Demand: P Q TR Demand is more elastic when there are lots of ways to substitute. Demand is more elastic in the long run than in the short run.
Inelastic Supply: Quantity doesn’t respond much to price Elasticity is less than 1 Quantity Price 4 $5 1. A 22% increase in price... 110 100 Supply 2....leads to a 10% increase in quantity.
Minimum wage The Minimum Wage Quantity of Labor 0 Wage Labor demand Labor supply Quantity supplied Quantity demanded Labor surplus (unemployment) A Price Floor
Consumer Surplus and Producer Surplus Price Equilibrium price 0Quantity Equilibrium quantity A Supply C B Demand D E Producer surplus Consumer surplus
Price 0 Quantity Equilibrium quantity Supply Demand Cost to sellers Value to buyers Cost to sellers Value to buyers is greater than cost to sellers. Value to buyers is less than cost to sellers. Efficiency of Competitive Market Equilibrium … and the Tax Wedge
The Effects of a Tariff Deadweight Loss Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Tariff World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Price without tariff Price with tariff Imports without tariff Imports with tariff A B CE G DF Deadweight loss
Q MARKE T Externalities and the Social Optimum Quantity of Aluminum 0 Price of Aluminum Demand (private value) Supply (private cost) Social cost Q optimum Cost of pollution Market Equilibrium Optimum
Remember Marginal Benefit = Marginal Cost Benefit What buyers are willing to pay (demand curve) Social Cost = Private cost + Spillover cost
The Labor Market: Hire to Point Where MR = MC VMPL = P x MPL = W (a) The Market for Apples(b) The Market for Apple Pickers Quantity of Apples Quantity of Apple Pickers QL P W 00 Price of Apples Wage of Apple Pickers Demand Supply
The Firm’s Short-Run Decision to Shut Down... Quantity ATC AVC 0 Costs MC If P < AVC, shut down. If P > AVC, keep producing in the short run. If P > ATC, keep producing at a profit. Firm’s short-run supply curve
Economies and Diseconomies of Scale: The Firm in the Long Run Diseconomies of scale Quantity of Cars per Day 0 Average Total Cost ATC in long run Economies of scale Constant Returns to scale