INTRODUCTION TO MICROECONOMICS Graphs and Tables Part #3

Figure VI-1.1: An Increase in Demand in an Increasing Cost Industry D S SR $20 100K The Market Q P S LR For an increase in demand: 1.Start at P SR = P LR, Π = 0

Figure VI-1.2: An Increase in Demand in an Increasing Cost Industry D S SR $20 100K 105K The Market Q P D’ $35 S LR For an increase in demand: 1.Start at P SR = P LR, Π = 0 2.Increase demand 3.P SR > P LR, Π > 0 causes entry.

Figure VI-1.3: An Increase in Demand in an Increasing Cost Industry D S SR $20 100K 105K110K The Market Q P D’ $35 S’ SR S LR $30 For an increase in demand: 1.Start at P SR = P LR, Π = 0 2.Increase demand 3.P SR > P LR, Π > 0 causes entry. 4.Entry causes S to increase. 5. Costs also increase and P decreases until P SR = P LR and Π = 0 (back in LR equilibrium).

Figure VI-1.5: A Technological Change in an Increasing Cost Industry D S SR $20 100K 110K The Market Q P S LR 1.Start at P SR = P LR, Π = 0 2.S LR Shift to the Right 3.P SR > P LR, Π > 0 causes entry. S’ LR $15

Figure VI-1.6: A Technological Change in an Increasing Cost Industry D S SR $20 100K 110K The Market Q P S LR 1.Start at P SR = P LR, Π = 0 2.S LR Shift to the Right 3.P SR > P LR, Π > 0 causes entry. 4.S SR Increases Until P SR = P LR, Π = 0 S’ LR $15

Figure VI-1.3: An Increase in Demand in an Increasing Cost Industry D S SR $20 100K 105K110K The Market Q P D’ $35 S’ SR S LR $30 For an increase in demand: 1.Start at P SR = P LR, Π = 0 2.Increase demand 3.P SR > P LR, Π > 0 causes entry. 4.Entry causes S to increase. 5. Costs also increase and P decreases until P SR = P LR and Π = 0 (back in LR equilibrium).

Figure VI-2.1: An Increase in Demand in an Increasing Cost Industry with Legal Entry Barriers D S SR $20 100K The Market Q P S LR For an increase in demand: 1.Start at P SR = P LR, Π = 0; Legal Entry Barriers Imposed Here

Figure VI-2.2: An Increase in Demand in an Increasing Cost Industry with Legal Entry Barriers D S SR $20 100K 105K 110K The Market Q P D’ $35 S LR For an increase in demand: 1.Start at P SR = P LR, Π = 0 2.Increase demand 3.P SR > P LR, Π > 0 but entry is blocked so existing firms are able to earn Π > 0.

Table VI-4: The Market for Wheat with Price Support P Q D PVT Q D PVT + USDA Q S $ ** $ $ $ $ $ $ P SUP $ $ $ $

Figure VI-4: The Market for Wheat with Price Supports P Q S D PVT $10 $26 $ P SUP = $14 D PVT + USDA ES Consumers pay = $14(60) = $840 USDA pays = $14(120 – 60) = $840

Table VI-5: The Market for Wheat with Price Supports and Production Controls (PC) P Q D PVT Q D PVT + USDA Q S Q S PC = 70 $ ** $ $ $ $ $ $ *$ $ $ $

Figure VI-5: The Market for Wheat with Price Supports and Production Controls P Q S D PVT $10 $26 $ P SUP = $14 S PC = 70 ES D PVT + USDA Consumers pay $14(60) = $840 USDA pays $14(10) = $140

Table VI-6: Target Prices P Q D PVT Q S $ ** P CON $2.00 * $ $ $ $ $ P TAR $ *120 $ $ $

Steps for Finding Consumer Price, P CON 1. Find Target Price = $14 2. Find Quantity Supplied at P = $14. Q S = Find Quantity Demanded of Price for Q D = 120 is P = $2.

Figure VI-6: The Market for Wheat with a Target Price P Q S D PVT $10 $26 P CON = $ P TAR = $14 Consumers Pay Farmers $2(120) = $240 USDA Pays Farmers ($14-$2)(120) = $1,440

Figure VI-7: The Welfare Loss in a Market for Wheat with a Target Price P Q S D PVT $10 $26 P CON = $ P TAR = $14 WL WL = ½(b)(h) = ½ $12(40) = $240

Figure VI-8a: Effect of Price Supports in the Short-Run ES SR D SR S SR S LR D LR Short-Run Cost To USDA P Q P0P0 P SUP

Figure VI-8b: Effect of Price Supports in the Long- Run ES LR D SR S SR S LR D LR P Q P0P0 P SUP S’ SR Long-Run Cost To USDA

Explanation of Figures VI-8a and 8b 1. Start at Social Welfare Maximum, P 0 = P LR 2. Raise price to P SUP so that P SUP > P LR, and existing firms will now have positive profits. 3. That will attract new entry (In this case, it will mean existing farms buying up smaller farms and adding more capacity). New entry will cause the costs to rise (increasing cost industry) but prices do not fall because of the price floor. 4. New entry continues until costs have risen enough to reduce profits to zero. (This occurs at P SUP.) 5. Cost of price supports is larger in the LR than the SR.

Figure VI-9: Effect of a Producer Subsidy Subsidy to producers results in misallocation of resources: Too much output in subsidized Market and too little output in the Rest of Economy Rest of Economy Farm Markets Farm Subsidy Resources Output Increases Output Decreases (Lower Valued Use) Farm Subsidy in Farm Markets is equivalent to a tax on the Rest of Economy

Figure VI-10: The Market for Corn-- Supply and Demand Curves P Q S D $10.00 $26.00 $ K a P F = $14.00 b c