1. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com BAB 9b Maksimisasi keuntungan

2. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Topics to be Discussed u Perfectly Competitive Markets u Profit Maximization u Marginal Revenue, Marginal Cost, and Profit Maximization u Choosing Output in the Short-Run

3. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Topics to be Discussed u The Competitive Firm’s Short-Run Supply Curve u Short-Run Market Supply u Choosing Output in the Long-Run u The Industry’s Long-Run Supply Curve

4. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Perfectly Competitive Markets u Characteristics of Perfectly Competitive Markets 1)Price taking 2)Product homogeneity 3)Free entry and exit

5. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Perfectly Competitive Markets u Price Taking –The individual firm sells a very small share of the total market output and, therefore, cannot influence market price. –The individual consumer buys too small a share of industry output to have any impact on market price.

6. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Perfectly Competitive Markets u Product Homogeneity –The products of all firms are perfect substitutes. –Examples v Agricultural products, oil, copper, iron, lumber

7. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Perfectly Competitive Markets u Free Entry and Exit –Buyers can easily switch from one supplier to another. –Suppliers can easily enter or exit a market.

8. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Perfectly Competitive Markets u Discussion Questions –What are some barriers to entry and exit? –Are all markets competitive? –When is a market highly competitive?

9. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Profit Maximization u Do firms maximize profits? –Possibility of other objectives v Revenue maximization v Dividend maximization v Short-run profit maximization

10. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Profit Maximization u Do firms maximize profits? –Implications of non-profit objective v Over the long-run investors would not support the company v Without profits, survival unlikely

11. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Profit Maximization u Do firms maximize profits? –Long-run profit maximization is valid and does not exclude the possibility of altruistic behavior.

12. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Marginal Revenue, Marginal Cost, and Profit Maximization u Determining the profit maximizing level of output – Profit ( ) = Total Revenue - Total Cost – Total Revenue (R) = Pq – Total Cost (C) = Cq – Therefore:

13. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Profit Maximization in the Short Run 0 Cost, Revenue, Profit ($s per year) Output (units per year) R(q) Total Revenue Slope of R(q) = MR

14. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com 0 Cost, Revenue, Profit $ (per year) Output (units per year) Profit Maximization in the Short Run C(q) Total Cost Slope of C(q) = MC Why is cost positive when q is zero?

15. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Marginal revenue is the additional revenue from producing one more unit of output. u Marginal cost is the additional cost from producing one more unit of output. Marginal Revenue, Marginal Cost, and Profit Maximization

16. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Comparing R(q) and C(q) – Output levels: 0- q 0 : v C(q)> R(q) –Negative profit v FC + VC > R(q) v MR > MC – Indicates higher profit at higher output 0 Cost, Revenue, Profit ($s per year) Output (units per year) R(q) C(q) A B q0q0 q*q* Marginal Revenue, Marginal Cost, and Profit Maximization

17. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Comparing R(q) and C(q) –Question: Why is profit negative when output is zero? Marginal Revenue, Marginal Cost, and Profit Maximization R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0q0 q*q*

18. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Comparing R(q) and C(q) – Output levels: q 0 - q * v R(q)> C(q) v MR > MC – Indicates higher profit at higher output – Profit is increasing R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0q0 q*q* Marginal Revenue, Marginal Cost, and Profit Maximization

19. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Comparing R(q) and C(q) – Output level: q * v R(q)= C(q) v MR = MC v Profit is maximized R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0q0 q*q* Marginal Revenue, Marginal Cost, and Profit Maximization

20. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Question –Why is profit reduced when producing more or less than q*? R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0q0 q*q* Marginal Revenue, Marginal Cost, and Profit Maximization

21. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Comparing R(q) and C(q) – Output levels beyond q * : v R(q)> C(q) v MC > MR v Profit is decreasing Marginal Revenue, Marginal Cost, and Profit Maximization R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0q0 q*q*

22. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Therefore, it can be said: –Profits are maximized when MC = MR. Marginal Revenue, Marginal Cost, and Profit Maximization R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0q0 q*q*

23. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Marginal Revenue, Marginal Cost, and Profit Maximization

24. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Marginal Revenue, Marginal Cost, and Profit Maximization

25. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u The Competitive Firm –Price taker –Market output (Q) and firm output (q) –Market demand (D) and firm demand (d) –R(q) is a straight line Marginal Revenue, Marginal Cost, and Profit Maximization

26. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Demand and Marginal Revenue Faced by a Competitive Firm Output (bushels) Price $ per bushel Price $ per bushel Output (millions of bushels) d$4 100200100 FirmIndustry D $4

27. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u The Competitive Firm –The competitive firm’s demand v Individual producer sells all units for $4 regardless of the producer’s level of output. v If the producer tries to raise price, sales are zero. Marginal Revenue, Marginal Cost, and Profit Maximization

28. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u The Competitive Firm –The competitive firm’s demand v If the producers tries to lower price he cannot increase sales v P = D = MR = AR Marginal Revenue, Marginal Cost, and Profit Maximization

29. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u The Competitive Firm –Profit Maximization v MC(q) = MR = P Marginal Revenue, Marginal Cost, and Profit Maximization

30. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Choosing Output in the Short Run u We will combine production and cost analysis with demand to determine output and profitability.

31. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com q0q0 Lost profit for q q < q * Lost profit for q 2 > q * q1q1 q2q2 A Competitive Firm Making a Positive Profit 10 20 30 40 Price ($ per unit) 01234567891011 50 60 MC AVC ATC AR=MR=P Output q*q* At q * : MR = MC and P > ATC D A B C q 1 : MR > MC and q 2 : MC > MR and q 0 : MC = MR but MC falling

32. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Would this producer continue to produce with a loss? A Competitive Firm Incurring Losses Price ($ per unit) Output AVC ATC MC q*q* P = MR B F C A E D At q * : MR = MC and P < ATC Losses = P- AC) x q * or ABCD

33. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Choosing Output in the Short Run u Summary of Production Decisions –Profit is maximized when MC = MR –If P > ATC the firm is making profits. –If AVC < P < ATC the firm should produce at a loss. –If P < AVC < ATC the firm should shut-down.

34. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com The Short-Run Output of an Aluminum Smelting Plant Output (tons per day) Cost (dollars per item) 3006009000 1100 1200 1300 1400 1140 P1P1 P2P2 Observations Price between $1140 & $1300: q = 600 Price > $1300: q = 900 Price < $1140: q = 0 Question Should the firm stay in business when P < $1140?

35. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Some Cost Considerations for Managers u Three guidelines for estimating marginal cost: 1)Average variable cost should not be used as a substitute for marginal cost.

36. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Some Cost Considerations for Managers u Three guidelines for estimating marginal cost: 2)A single item on a firm’s accounting ledger may have two components, only one of which involves marginal cost.

37. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Three guidelines for estimating marginal cost: 3)All opportunity cost should be included in determining marginal cost. Some Cost Considerations for Managers

38. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com A Competitive Firm’s Short-Run Supply Curve Price ($ per unit) Output MC AVC ATC P = AVC What happens if P < AVC? P2P2 q2q2 P1P1 q1q1 The firm chooses the output level where MR = MC, as long as the firm is able to cover its variable cost of production.

39. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Observations: – P = MR – MR = MC – P = MC u Supply is the amount of output for every possible price. Therefore: – If P = P 1, then q = q 1 – If P = P 2, then q = q 2 A Competitive Firm’s Short-Run Supply Curve

40. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Price ($ per unit) MC Output AVC ATC P = AVC P1P1 P2P2 q1q1 q2q2 S = MC above AVC A Competitive Firm’s Short-Run Supply Curve Shut-down

41. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Observations: – Supply is upward sloping due to diminishing returns. – Higher price compensates the firm for higher cost of additional output and increases total profit because it applies to all units. A Competitive Firm’s Short-Run Supply Curve

42. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Firm’s Response to an Input Price Change – When the price of a firm’s product changes, the firm changes its output level, so that the marginal cost of production remains equal to the price. A Competitive Firm’s Short-Run Supply Curve

43. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com MC 2 q2q2 Input cost increases and MC shifts to MC 2 and q falls to q 2. MC 1 q1q1 The Response of a Firm to a Change in Input Price Price ($ per unit) Output $5 Savings to the firm from reducing output

44. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com The Short-Run Production of Petroleum Products Cost ($ per barrel) Output (barrels/day) 8,0009,00010,00011,000 23 24 25 26 27 SMC How much would be produced if P = $23? P = $24-$25? The MC of producing a mix of petroleum products from crude oil increases sharply at several levels of output as the refinery shifts from one processing unit to another.

45. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Stepped SMC indicates a different production (cost) process at various capacity levels. u Observation: – With a stepped MC function, small changes in price may not trigger a change in output. The Short-Run Production of Petroleum Products

46. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u The short-run market supply curve shows the amount of output that the industry will produce in the short-run for every possible price. u Consider, for simplicity, a competitive market with three firms: The Short-Run Production of Petroleum Products

47. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com MC 3 Industry Supply in the Short Run $ per unit 024810571521 MC 1 S The short-run industry supply curve is the horizontal summation of the supply curves of the firms. Quantity MC 2 P1P1 P3P3 P2P2 Question: If increasing output raises input costs, what impact would it have on market supply?

48. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com The Short-Run Market Supply Curve u Elasticity of Market Supply

49. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Perfectly inelastic short-run supply arises when the industry’s plant and equipment are so fully utilized that new plants must be built to achieve greater output. u Perfectly elastic short-run supply arises when marginal costs are constant. The Short-Run Market Supply Curve

50. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Questions 1)Give an example of a perfectly inelastic supply. 2)If MC rises rapidly, would the supply be more or less elastic? The Short-Run Market Supply Curve

51. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com The World Copper Industry (1999) Annual ProductionMarginal Cost Country(thousand metric tons)(dollars/pound) Australia6000.65 Canada7100.75 Chile36600.50 Indonesia7500.55 Peru4500.70 Poland4200.80 Russia4500.50 United States18500.70 Zambia2800.55

52. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com The Short-Run World Supply of Copper Production (thousand metric tons) Price ($ per pound) 0200040006000800010000 0.40 0.50 0.60 0.70 0.80 0.90 MC C,MC R MC J,MC Z MC A MC P,MC US MC Ca MC Po

53. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Producer Surplus in the Short Run – Firms earn a surplus on all but the last unit of output. – The producer surplus is the sum over all units produced of the difference between the market price of the good and the marginal cost of production. The Short-Run Market Supply Curve

54. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com A D B CProducerSurplus Alternatively, VC is the sum of MC or ODCq *. R is P x q * or OABq *. Producer surplus = R - VC or ABCD. Producer Surplus for a Firm Price ($ per unit of output) OutputAVCMC0 P q*q*q*q* At q * MC = MR. Between 0 and q, MR > MC for all units.

55. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Producer Surplus in the Short-Run The Short-Run Market Supply Curve

56. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Observation –Short-run with positive fixed cost The Short-Run Market Supply Curve

57. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com D P*P*P*P* Q*Q*Q*Q* ProducerSurplus Market producer surplus is the difference between P* and S from 0 to Q *. Producer Surplus for a Market Price ($ per unit of output) OutputS

58. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Choosing Output in the Long Run u In the long run, a firm can alter all its inputs, including the size of the plant. u We assume free entry and free exit.

59. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com q1q1 A B C D In the short run, the firm is faced with fixed inputs. P = $40 > ATC. Profit is equal to ABCD. Output Choice in the Long Run Price ($ per unit of output) Output P = MR $40 SAC SMC In the long run, the plant size will be increased and output increased to q 3. Long-run profit, EFGD > short run profit ABCD. q3q3 q2q2 G F $30 LAC E LMC

60. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com q1q1 A B C D Output Choice in the Long Run Price ($ per unit of output) Output P = MR $40 SAC SMC Question: Is the producer making a profit after increased output lowers the price to $30? q3q3 q2q2 G F $30 LAC E LMC

61. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Choosing Output in the Long Run u Accounting Profit & Economic Profit – Accounting profit = R - wL – Economic profit = R = wL - rK v wl = labor cost v rk = opportunity cost of capital

62. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Choosing Output in the Long Run u Zero-Profit – If R > wL + rk, economic profits are positive – If R = wL + rk, zero economic profits, but the firms is earning a normal rate of return; indicating the industry is competitive – If R < wl + rk, consider going out of business Long-Run Competitive Equilibrium

63. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Choosing Output in the Long Run u Entry and Exit – The long-run response to short-run profits is to increase output and profits. – Profits will attract other producers. – More producers increase industry supply which lowers the market price. Long-Run Competitive Equilibrium

64. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com S1S1 Long-Run Competitive Equilibrium Output $ per unit of output $ per unit of output $40 LAC LMC D S2S2 P1P1 Q1Q1 q2q2 FirmIndustry $30 Q2Q2 P2P2 Profit attracts firms Supply increases until profit = 0

65. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Choosing Output in the Long Run u Long-Run Competitive Equilibrium 1) MC = MR 2)P = LAC v No incentive to leave or enter v Profit = 0 3) Equilibrium Market Price

66. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Choosing Output in the Long Run u Questions 1)Explain the market adjustment when P < LAC and firms have identical costs. 2)Explain the market adjustment when firms have different costs. 3) What is the opportunity cost of land?

67. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Choosing Output in the Long Run u Economic Rent – Economic rent is the difference between what firms are willing to pay for an input less the minimum amount necessary to obtain it.

68. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Choosing Output in the Long Run u An Example –Two firms A & B –Both own their land –A is located on a river which lowers A’s shipping cost by $10,000 compared to B. –The demand for A’s river location will increase the price of A’s land to $10,000

69. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Choosing Output in the Long Run u An Example –Economic rent = $10,000 v $10,000 - zero cost for the land –Economic rent increases –Economic profit of A = 0

70. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Firms Earn Zero Profit in Long-Run Equilibrium Ticket Price Season Tickets Sales (millions) LAC $7 1.0 A baseball team in a moderate-sized city sells enough tickets so that price is equal to marginal and average cost (profit = 0). LMC

71. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com 1.3 $10 Economic Rent Ticket Price $7 LAC A team with the same cost in a larger city sells tickets for $10. Firms Earn Zero Profit in Long-Run Equilibrium Season Tickets Sales (millions) LMC

72. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u With a fixed input such as a unique location, the difference between the cost of production (LAC = 7) and price ($10) is the value or opportunity cost of the input (location) and represents the economic rent from the input. Firms Earn Zero Profit in Long-Run Equilibrium

73. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u If the opportunity cost of the input (rent) is not taken into consideration it may appear that economic profits exist in the long-run. Firms Earn Zero Profit in Long-Run Equilibrium

74. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u The shape of the long-run supply curve depends on the extent to which changes in industry output affect the prices the firms must pay for inputs. The Industry’s Long-Run Supply Curve

75. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com The Industry’s Long-Run Supply Curve u To determine long-run supply, we assume: –All firms have access to the available production technology. –Output is increased by using more inputs, not by invention.

76. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com The Industry’s Long-Run Supply Curve u To determine long-run supply, we assume: –The market for inputs does not change with expansions and contractions of the industry.

77. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com A P1P1 AC P1P1 MC q1q1 D1D1 S1S1 Q1Q1 C D2D2 P2P2 P2P2 q2q2 B S2S2 Q2Q2 Economic profits attract new firms. Supply increases to S 2 and the market returns to long-run equilibrium. Long-Run Supply in a Constant-Cost Industry Output $ per unit of output $ per unit of output SLSL Q 1 increase to Q 2. Long-run supply = S L = LRAC. Change in output has no impact on input cost.

78. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u In a constant-cost industry, long-run supply is a horizontal line at a price that is equal to the minimum average cost of production. Long-Run Supply in a Constant-Cost Industry

79. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Long-Run Supply in an Increasing-Cost Industry Output $ per unit of output $ per unit of output S1S1 D1D1 P1P1 LAC 1 P1P1 SMC 1 q1q1 Q1Q1 A SLSLSLSL P3P3 SMC 2 Due to the increase in input prices, long-run equilibrium occurs at a higher price. LAC 2 B S2S2 P3P3 Q3Q3 q2q2 P2P2 P2P2 D1D1 Q2Q2

80. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u In a increasing-cost industry, long- run supply curve is upward sloping. Long-Run Supply in a Increasing-Cost Industry

81. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com The Industry’s Long-Run Supply Curve u Questions 1) Explain how decreasing-cost is possible. 2)Illustrate a decreasing cost industry. 3)What is the slope of the S L in a decreasing-cost industry?

82. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com S2S2 B SLSL P3P3 Q3Q3 SMC 2 P3P3 LAC 2 Due to the decrease in input prices, long-run equilibrium occurs at a lower price. Long-Run Supply in an Decreasing-Cost Industry Output $ per unit of output $ per unit of output P1P1 P1P1 SMC 1 A D1D1 S1S1 Q1Q1 q1q1 LAC 1 Q2Q2 q2q2 P2P2 P2P2 D2D2

83. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u In a decreasing-cost industry, long- run supply curve is downward sloping. Long-Run Supply in a Increasing-Cost Industry

84. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u The Effects of a Tax – In an earlier chapter we studied how firms respond to taxes on an input. – Now, we will consider how a firm responds to a tax on its output. The Industry’s Long-Run Supply Curve

85. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Effect of an Output Tax on a Competitive Firm’s Output Price ($ per unit of output) Output AVC 1 MC 1 P1P1 q1q1 The firm will reduce output to the point at which the marginal cost plus the tax equals the price. q2q2 t MC 2 = MC 1 + tax AVC 2 An output tax raises the firm’s marginal cost by the amount of the tax.

86. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Effect of an Output Tax on Industry Output Price ($ per unit of output) Output D P1P1 SS1SS1 Q1Q1 P2P2 Q2Q2 S S 2 = S 1 + t t Tax shifts S 1 to S 2 and output falls to Q 2. Price increases to P 2.

87. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Long-Run Elasticity of Supply 1)Constant-cost industry v Long-run supply is horizontal v Small increase in price will induce an extremely large output increase The Industry’s Long-Run Supply Curve

88. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Long-Run Elasticity of Supply 1)Constant-cost industry v Long-run supply elasticity is infinitely large v Inputs would be readily available The Industry’s Long-Run Supply Curve

89. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Long-Run Elasticity of Supply 2)Increasing-cost industry v Long-run supply is upward- sloping and elasticity is positive v The slope (elasticity) will depend on the rate of increase in input cost v Long-run elasticity will generally be greater than short-run elasticity of supply The Industry’s Long-Run Supply Curve

90. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Question: – Describe the long-run elasticity of supply in a decreasing -cost industry. The Industry’s Long-Run Supply Curve

91. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com The Long-Run Supply of Housing u Scenario 1: Owner-occupied housing – Suburban or rural areas – National market for inputs

92. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com The Long-Run Supply of Housing u Questions – Is this an increasing or a constant- cost industry? – What would you predict about the elasticity of supply?

93. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Scenario 2: Rental property – Zoning restrictions apply – Urban location – High-rise construction cost The Long-Run Supply of Housing

94. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com u Questions – Is this an increasing or a constant- cost industry? – What would you predict about the elasticity of supply? The Long-Run Supply of Housing

95. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Summary u The managers of firms can operate in accordance with a complex set of objectives and under various constraints. u A competitive market makes its output choice under the assumption that the demand for its own output is horizontal.

96. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Summary u In the short run, a competitive firm maximizes its profit by choosing an output at which price is equal to (short-run) marginal cost. u The short-run market supply curve is the horizontal summation of the supply curves of the firms in an industry.

97. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Summary u The producer surplus for a firm is the difference between revenue of a firm and the minimum cost that would be necessary to produce the profit- maximizing output. u Economic rent is the payment for a scarce resource of production less the minimum amount necessary to hire that factor.

98. nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com Summary u In the long-run, profit-maximizing competitive firms choose the output at which price is equal to long-run marginal cost. u The long-run supply curve for a firm can be horizontal, upward sloping, or downward sloping.