1. INTRODUCTION TO MICROECONOMICS Graphs and Tables Part #3

2. Figure VI-1.1: An Increase in Demand in a Constant Cost Industry, Part 1 D S SR $20 100K The Market Q P S LR 1. Start at P = P LR, Π = 0

3. Figure VI-1.2: An Increase in Demand in a Constant Cost Industry, Part 2 D S SR $20 100K 105K The Market Q P S LR 1.Start at P = P LR, Π = 0 2.Increase in Demand 3. P > PLR, Π > 0 causes entry. $25

4. Figure VI-1.3: An Increase in Demand in a Constant Cost Industry D S SR $20 100K 105K110K The Market Q P D’ $25 S’ SR S LR For an increase in demand: 1.Start at P = P LR, Π = 0 2.Increase demand 3.P > P LR, Π > 0 causes entry. 4.Entry causes S to increase until P = P LR and Π = 0

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

6. Figure VI-3: An Increase in Demand in a Constant Cost Industry with Legal Entry Barriers D S $20 100K 105K110K The Market Q P D’ $25 S LR For an increase in demand: 1.Start at P = P LR, Π = 0 2.Increase demand 3.P > P LR, Π > 0 but no entry occurs because of entry barriers. Π remains positive.

7. Explanation of Figure VI-3 –(1) Entry restrictions imposed when firm is in LR equilibrium (has no effect at that point). –(2) An increase in market demand occurs because income increases or population growth occurs. –(3) Increased demand causes an increase in the market price which creates positive profits (P > P LR ). –(4) Positive profits would cause new entry but new entry cannot occur because of the legal entry barriers. These legal entry barriers create a Welfare Loss as seen in Figure VI-4 (because the supply curve cannot increase).

8. Figure VI-4: An Increase in Demand in a Constant Cost Industry with Legal Entry Barriers D S $20 100K 105K110K The Market Q P D’ $25 S LR S’ 1 2 3 Welfare Loss Analysis: 1.Entry barriers mean that consumers lose the extra CS (Areas 1, 2, and 3) that would arise from entry and price falling to $20. 2.Because of entry barriers, producers gain Areas 1 and 2 as PS. 3.Welfare loss or net loss is Area 3.

9. Table VI-1: Statistics on US Farms, 1982 Size GroupAnnual Sales # of Farms% of Total 1 $40,000< 1,709,000 71.2% 2 $40,000- $99,999 393,000 16.4% 3 $100,000+ 298,000 12.4% Total 2,400,000 100.0% Source: USDA, Economic Indicators of the Farm Sector, 1982

10. Table VI-2: Statistics on US Farms, 1982 Size Group Gross Farm Income Percent of Total Net Farm Income Average Net Income Average Net Worth 1 $27.2B 16.6% -$0.9B $17,800$131,000 2 $31.3B 19.1% $2.2B $16,200$482,400 3$105.5B 64.3% $22.7B $89,100$1.1073M Total$164.0B 100.0% $24.0B Source: USDA, Economic Indicators of the Farm Sector, 1982

11. Table VI-3: Statistics on US Farms, 1985 Size Group Annual SalesNumber of Farms Percent of Total Rural Resident $10K < 1,164,000 51.2% Small Family $10K-$40K 473,000 20.8% Sub-Total 1,637,000 72.0% Family $40K-$250K 544,000 23.9% Large Family $250K-$500K 66,000 2.9% Very Large $500K+ 27,000 1.2% Total 2,274,000 100.0%

12. Source for Table VI-3: E.C. Pasour, Agriculture and the State, Independent Institute, 1990, p. 65

13. Table VI-4: Farm Production by Size Class, 2001 Type FarmProduction Class Farms # % % of Production Rural Res< $20,0001.252M 58.0 4.6 Small Fam$20K-$49,999337K 15.6 4.7 Family$50K-$99,999 $100K-$249,999 202K 9.4 199K 9.2 6.1 13.9 Large Family $250K-$499,999 89K 4.1 13.6 Very Large$500K-$999,999 $1M+ 49K 2.3 31K 1.4 14.8 42.3

14. Source: EC Pasour and Randal Rucker, Plowshares and Pork Barrels, Independent Institute, 2005, p. 77.

15. Figure VI-5: The Instability of Farm Income P Q WHEAT D0D0 S0S0 S2S2 S1S1 400M 600M 800M $6 $10 $2 Drought Year: TR = $4B Regular Year: TR = $3.6B Bumper Crop: TR = $1.6B

16. Table VI-6: The Market for Wheat with Price Support P Q D PVT Q D PVT + USDA Q S $0.00 130 190 ** $2.00 120 180 00 $4.00 110 170 20 $6.00 100 160 40 $8.00 90 150 60 $10.00 80 140 80 $12.00 70 130 100 P SUP $14.00 60 120 $16.00 50 110 140 $18.00 40 100 160 $20.00 30 90 180

17. Figure VI-6: The Market for Wheat with Price Supports P Q S D PVT $10 $26 $2 60 80 120 P SUP = $14 D PVT + USDA ES Consumers pay $14(60) = $840 USDA pays $14(60) = $840

18. Table VI-7: 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 $0.00 130 140 ** $2.00 120 130 00 $4.00 110 120 20 $6.00 100 110 40 $8.00 90 100 60 $10.00 80 90 80 70 $12.00 70 80 100 70 *$14.00 60 70 120 70 $16.00 50 60 140 70 $18.00 40 50 160 70 $20.00 30 40 180 70

19. Figure VI-7: The Market for Wheat with Price Supports and Production Controls P Q S D PVT $10 $26 $2 60 70 80 P SUP = $14 S’ ES D PVT + USDA Consumers pay $14(60) = $840 USDA pays $14(10) = $140

20. Table VI-8: Target Prices P Q D PVT Q S $0.00 130 ** P CON $2.00 *120 00 $4.00 110 20 $6.00 100 40 $8.00 90 60 $10.00 80 $12.00 70 100 P TAR $14.00 60 *120 $16.00 50 140 $18.00 40 160 $20.00 30 180

21. Figure VI-8: The Market for Wheat with a Target Price P Q S D PVT $10 $26 $2 80 120 P TAR = $14 Consumers Pay Farmers $2(120) = $240 USDA Pays Farmers ($14-$2)(120) = $1,440

22. Figure VI-9: The Welfare Loss in a Market for Wheat with a Target Price P Q S D PVT $10 $26 $2 80 120 P TAR = $14 PG CG WL

23. Explanation of Figure VI-9 PG = Producers’ Gain Producers’ Gain is the difference between the Producers’ Surplus (PS’) with the subsidy and the Producers’ Surplus (PS) without the subsidy PS’ = ½ bh = ½(120)($14-$2) = $720 PS = ½ (80)($10-$2) = $320 So PG = PS’ – PS = $400

24. Explanation of Figure VI-9 CG = Consumers’ Gain Consumers’ Gain is the difference between the Consumers’ Surplus (CS’) with the subsidy and the Consumers’ Surplus (CS) without the subsidy CS’ = ½ bh = ½(120)($26-$2) = $1440 CS = ½ (80)($26-$10) = $640 So CG = CS’ – CS = $800

25. Explanation of Figure VI-9 CG = CS’ – CS = $800 PG = PS’ – PS = $400 Cost of Subsidy = (120)($14-$2) = $1440 Total Gains = PG + CG = $1200 Total Gains – Cost of Subsidy = Welfare Loss WL = $1200 - $1440 = - $240

26. Figure VI-10a: 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

27. Figure VI-10b: 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

28. Explanation of Figure VI-10b –(1) Since P SUP > P LR, existing firms will now have positive profits. –(2) That will attract new entry. New entry will cause costs to rise (increasing cost industry) but prices do not fall because of the price floor. –(3) New entry continues until costs have risen enough to reduce profits equal to zero. (This occurs at P SUP.) –(4) Cost of price supports is larger in the LR than the SR.

29. Table VI-9: Size of Farm and Government Payments, 2001 Value Category Farms # % Govt Payments $ % $1M+ 31K 1.4 $2.029B 9.8 $500K-$999,999 49K 2.3 $3.252B 15.7 $250K-$499,999 89K 4.1 $4.492B 21.7 $100K-249,999 199K 9.2 $5.123B 25.2 $50K-$99,999 202K 9.4 $2.224B 10.7 $20K-$49,999 336K 15.6 $1.436B 6.9 <$20K1,252K 58.0 $2.081B 10.0 All Farms2,158K 100.0$20.727B 100.0

30. Source: EC Pasour and Randal Rucker, Plowshares and Pork Barrels, Independent Institute, 2005, p. 81.

31. Table VII-1.1: Changes in Market Concentration for Dominant Firms Over Time Firm Early Share % Year Later Share % Year Standard Oil88% 189967% 1909 American Sugar Refining95% 189275% 1894 American Tin Plate95% 189954% 1912 American Tobacco93% 189976% 1903 International Harvester85% 190244% 1922

32. Table VII-1.2: Dominant Firms and Market Share Over Time Firm1962 Mkt Share1982 Mkt Share RCA ( Color TVs ) 49% 20% Boeing ( WB Jets ) 51% 60% GM ( Autos ) 52% 46% GE ( Generators ) 59% 61% IBM ( Mainframes ) 60% 68% Kodak ( Film ) 85% 65% Harley-Davidson 100% 36% Xerox ( Copiers ) 100% 42%

33. Table VII-1.1: Average and Marginal Revenue for a Monopolist/Price Searcher D = AR MR Q P $10 $5 100 50 E D = 1 E D < 1 E D > 1

34. Explanation of Figure VII-1.1 –(1) From the average-marginal relationship we note that the AR is falling (the downward-sloping demand curve) so the MR must be below it. –(2) Note that as P decreases in the elastic portion of the demand curve, TR increases so MR is positive. When P decreases in the inelastic portion of the demand curve, TR falls so MR is negative. Thus MR = 0 when TR a maximum at the unit elastic point. –(3) MR curve divides a line from the vertical axis to the demand curve in half.

35. Figure VII-1.2: Cost Curves of the Firm Q $ LRAC Q MES LRMC

36. Figure VII-1.3: Profit-Maximizing Firm Q $ LRAC LRMC D MR QmQm PmPm Π > 0

37. Figure VII-1.4: Monopolist/Price-Searcher Earns Negative Profits MR D = AR LRAC LRMC P Q QmQm AR =P m Π < 0 ATC

38. Explanation of Figure VII-1.4 –(1) P m < LRAC(Q m ) and P m < ATC m –(2) Π = TR – TC = Q(AR –ATC) < 0 –(3) Π < 0 and exit in the LR occurs. –(4) In a constant cost industry, exit will cause an increase in demand because remaining firms will have a bigger share of the market. –(5) Demand increases until the demand curve is just tangent to the LRAC. Since P m = LRAC(Q m ) now Π = 0 and exit ceases.

39. Figure VII-1.5: Inefficiency and Price Searchers LRMC LRAC D = AR MR Q P PmPm QmQm PcPc QcQc WL

40. Explanation of Figure VII-1.5 –(1) Π = 0 so price searcher in LR equilibrium –(2) Inefficient because P m > LRMC(Q m )? –(3) But this is as good as it gets.