30 Slides to More Powerful Command of Microeconomics

Remember MR = MC

Microeconomics In Pictures

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 ,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 $ 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 $ 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

Sixth Picture Profit-Maximization for a Monopoly Monopoly price QuantityQ MAX 0 Costs and Revenue Demand Average total cost Marginal revenue Marginal cost A 1. The intersection of the marginal-revenue curve and the marginal- cost curve determines the profit-maximizing quantity... B 2....and then the demand curve shows the price consistent with this quantity. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Remember MR = MC Since a monopoly must lower its price to sell more, it’s marginal revenue is less than its price P = AR > MR = MC P > MC

Supply and Demand on Parade

An Increase in Demand Price of Ice-Cream Cone Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream... D2D resulting in a higher price... $ and a higher quantity sold. New equilibrium Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

S2S2 A Decrease in Supply Price of Ice-Cream Cone Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S An earthquake reduces the supply of ice cream... New equilibrium 2....resulting in a higher price... $ 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 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 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 Profit Maximizing Firm Remember MR = MC

The Production Function: Diminishing Marginal Product  Increasing Marginal Costs Quantity of Apple Pickers Quantity of Apples

P = AR = MR for competitive firm P=MR 1 MC Profit Maximization for the Competitive Firm... Quantity 0 Costs and Revenue ATC AVC Q MAX REMEMBER: MC = MR (= P) MC 1 Q1Q1 MC 2 Q2Q2 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

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

Monopoly profit Monopoly Profit The monopolist can earn profit in the short-run and in the long-run thanks to barriers to entry Quantity0 Costs and Revenue Demand Marginal cost Marginal revenue Q MAX B Monopoly price E Average total cost D Average total cost C Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.