1. Microeconomic Concepts Related to Price and Growth Slide Show #8

2. Single Input- Output Relationships

3. Costs associated with levels of output

4. Profit maximizing level of output, where MR=MC Profit maximizing level of output, where MR=MC P=MR=AR $45 11.2

5. Where is the firm’s supply curve? Where is the firm’s supply curve? P=MR=AR

6. Marginal cost curve above AVC curve? Marginal cost curve above AVC curve?

7. 5 B C D E F G H I J Use a variable input like labor up to the point where the value received from the market equals the cost of another unit of input, or MVP=MIC Use a variable input like labor up to the point where the value received from the market equals the cost of another unit of input, or MVP=MIC

8. 5 If you stopped at point E on the MVP curve, for example, you would be foregoing all of the potential profit lying to the right of that point up to where MVP=MIC. B C D E F G H I J

9. 5 If you went beyond the point where MVP=MIC, you begin incurring losses. B C D E F G H I J

10. Multiple Input Cost Relationships

11. Least Cost Input Choice for 100 Units At the point of tangency, we know that: slope of isoquant = slope of iso-cost line, or… MPP LABOR ÷ MPP CAPITAL = - (wage rate ÷ rental rate) At the point of tangency, we know that: slope of isoquant = slope of iso-cost line, or… MPP LABOR ÷ MPP CAPITAL = - (wage rate ÷ rental rate)

12. Firm can afford to produce only 75 units of output using C 3 units of capital and L 3 units of labor Firm can afford to produce only 75 units of output using C 3 units of capital and L 3 units of labor What Inputs to Use for a Specific Budget?

13. Optimal input combination for output=10 Optimal input combination for output=10 How to Expand Firm’s Capacity

14. Two options: 1. Point B ? Two options: 1. Point B ?

15. How to Expand Firm’s Capacity Two options: 1. Point B? 2. Point C? Two options: 1. Point B? 2. Point C?

16. Optimal input combination for output=10 with budget DE Optimal input combination for output=10 with budget DE Optimal input combination for output=20 with budget FG Optimal input combination for output=20 with budget FG Expanding Firm’s Capacity

17. This combination costs more to produce 20 units of output since budget HI exceeds budget FG This combination costs more to produce 20 units of output since budget HI exceeds budget FG Expanding Firm’s Capacity

18. Expansion path Expansion path

19. The Planning Curve The long run average cost (LAC) curve reflects points of tangency with a series of short run average total cost (SAC) curves. The point on the LAC where the following holds is the long run equilibrium position (Q LR ) of the firm: SAC = LAC = P LR where MC represents marginal cost and P LR represents the long run price, respectively.

20. What can we say about the four firm sizes in this graph? What can we say about the four firm sizes in this graph?

21. Size 1 would lose money at price P Size 1 would lose money at price P

22. Q3Q3 Firm size 2, 3 and 4 would earn a profit at price P…. Firm size 2, 3 and 4 would earn a profit at price P….

23. Q3Q3 Firm size #2’s profit would be the area shown below…

24. Q3Q3 Firm size #3’s profit would be the area shown below…

25. Q3Q3 Firm size #4’s profit would be the area shown below…

26. If price were to fall to down size P LR, only size 3 would not lose money; it would break-even. Size 4 would have to down size its operations! If price were to fall to down size P LR, only size 3 would not lose money; it would break-even. Size 4 would have to down size its operations!

27. Perfect Competition Market Price Discovery #1 Perfect Competition

28. Firm is a “Price Taker” Under Perfect Competition Price Quantity D S PEPE QEQE Price O MAX AVCMC The Market The Firm

29. If Demand Increases…… Price Quantity D S PEPE QEQE Price AVCMC The Market The Firm 10 11 D1D1

30. If Demand Decreases…… Price Quantity D S PEPE QEQE Price AVCMC The Market The Firm 9 10 D2D2

31. Firm is a “Price Taker” in the Input Market Price Quantity D S PEPE QEQE Price L MAX MVP MIC Labor Market The Firm

32. Price Quantity D S PEPE QEQE Price L MAX MVP MIC Labor Market The Firm If Demand Increases……

33. Imperfect Competition Market Price Discovery #2 Imperfect Competition

34. Total revenue is equal to the area 0P E CQ E, which forms the blue box to the left… Notice the monopoly, like the previous forms of imperfect competition, produces where MC=MR (point A), but then reads up to the demand curve (point C) when setting price P E. Total revenue is equal to the area 0P E CQ E, which forms the blue box to the left… Notice the monopoly, like the previous forms of imperfect competition, produces where MC=MR (point A), but then reads up to the demand curve (point C) when setting price P E.

35. Total variable costs for the monopolist is equal to area 0NAQ E, or the yellow box to the left. Total variable costs for the monopolist is equal to area 0NAQ E, or the yellow box to the left.

36. Total fixed costs for the monopolist is equal to area NMBA, or the green box to the left… Total fixed costs for the monopolist is equal to area NMBA, or the green box to the left…

37. Total cost is therefore equal to area 0MBQ E, or the green box plus the yellow box to the left. Total cost is therefore equal to area 0MBQ E, or the green box plus the yellow box to the left.

38. Finally, the economic profit earned by the monopolist is equal to area MP E CB, or total revenue (blue box) minus total costs (green box plus yellow box). Finally, the economic profit earned by the monopolist is equal to area MP E CB, or total revenue (blue box) minus total costs (green box plus yellow box).