1. Ecological Economics Week 4 Tiago Domingos Assistant Professor Environment and Energy Section Department of Mechanical Engineering Doctoral Program and Advanced Degree in Sustainable Energy Systems Doctoral Program in Mechanical Engineering

2. Choice Assignments Normal goods Ordinary goods Substitutes

3. Profit maximization Assignments

4. Cost minimization –We want to solve the following problem –The production isoquants show that the solution must be a corner solution Assignments

5. Cost minimization –But if you did not noticed then and solved the lagrangian: –Corner solutions: Assignments This is not a possible solution since they are both Giffen goods and it is not possible to have a fixed cost unless it is explicit in the problem. It must have a corner solution

6. Cost curves (1/3) Family of cost curves Marginal cost (MC) –change in cost due to change in output

7. Cost curves (2/3) Marginal cost –marginal cost equals AVC at zero units of output –goes through minimum point of AC and AVC –this is negative (for example) when c′(y) < c(y)/y –fundamental theorem of calculus implies that

8. Cost curves (3/3) Marginal cost –geometrically: the area under the marginal cost curve gives the total variable costs. Figure 20.3. –intuitively: the marginal cost curve measures the cost of each additional unit, so adding up the marginal costs of each unit gives the variable cost

9. Firm supply Supply curves of a competitive firm –A competitive firm ignores its influence on the market price. –Two conditions: –Long run: –Short run: –The I represents the point where qq pp

10. Industry supply Industry supply curve –Let be the supply curve of firm i, so that the industry supply curve, or the market supply curve is:

11. Demand versus Supply curve –If we let be the market demand curve and the market supply curve, the equilibrium price is the price that solves the equation Market equilibrium q* p* q p

12. Consumer surplus Market equilibrium q* p* q p

13. Producer surplus Market equilibrium q* p* p q

14. Social balance –Consumer surplus + producer surplus Market equilibrium q* p* p q