5. 5 of 46
INPUT MARKETS AND OUTPUT MARKETS:
THE CIRCULAR FLOW
FIGURE 3.1 The Circular Flow of Economic Activity
6.
7.
8. 8 of 29
PRICE ELASTICITY OF DEMAND
TYPES OF ELASTICITY
TABLE 5.1 Hypothetical Demand Elasticities for Four Products
PRODUCT
% CHANGE
INPRICE
(% DP)
% CHANGE
IN QUANTITY
DEMANDED
(% DQD)
ELASTICITY
(% DQD ÷ %DP)
Insulin +10% 0% 0.0 Perfectly inelastic
Basic telephone service +10% -1% -0.1 Inelastic
Beef +10% -10% -1.0 Unitarily elastic
Bananas +10% -30% -3.0 Elastic
9. 9 of 29
PRICE ELASTICITY OF DEMAND
A good way to remember the difference between the
two “perfect” elasticities is:
perfectly inelastic demand. Demand in
which quantity demanded does not
respond at all to a change in price.
perfectly elastic demand . Demand in
which quantity drops to zero at the
slightest increase in price.
10. 10 of 29
CALCULATING ELASTICITIES
TABLE 5.2 Calculating Price Elasticity with the Midpoint Formula
First, Calculate Percentage Change in Quantity Demanded (%DQD):
By substituting the numbers from Figure 5.1(a): PRICE ELASTICITY COMPARES THE
PERCENTAGE CHANGE IN QUANTITY
DEMANDED AND THE PERCENTAGE
CHANGE IN PRICE:
DEMAND IS ELASTIC
Next, Calculate Percentage Change in Price (%DP):
By substituting the numbers from Figure 5.1(a):
100%x
2/)(
-
100%x
2/)(
demandedquantityinchange
demandedquantityinchange%
21
12
21 QQ
QQ
QQ
66.7%100%x
7.5
5
100%x
2/0)15(
510
demandedquantityinchange%
100%x
2/)(
-
100%x
2/)(
priceinchange
priceinchange%
21
12
21 PP
PP
PP
40.0%-100%x
2.5
1-
100%x
2/2)3(
32
priceinchange%
40.0%-
66.7%
%
%
D
D
P
QD
DEMANDOFELASTICITYPRICE
1.67
11. 11 of 40
THE BASIS OF CHOICE: UTILITY
ALLOCATING INCOME TO MAXIMIZE UTILITY
TABLE 6.3 Allocation of Fixed Expenditure per Week Between Two Alternatives
(1)
TRIPS
TO CLUB
PER WEEK
(2)
TOTAL
UTILITY
(3)
MARGINAL
UTILITY
(MU)
(4)
PRICE
(P)
(5)
MARGINAL UTILITY
PER DOLLAR
(MU/P)
1 12 12 $3.00 4.0
2 22 10 3.00 3.3
3 28 6 3.00 2.0
4 32 4 3.00 1.3
5 34 2 3.00 0.7
6 34 0 3.00 0
(1)
BASKETBALL
GAMES
PER WEEK
(2)
TOTAL
UTILITY
(3)
MARGINAL
UTILITY
(MU)
(4)
PRICE
(P)
(5)
MARGINAL UTILITY
PER DOLLAR
(MU/P)
1 21 21 $6.00 3.5
2 33 12 6.00 2.0
3 42 9 6.00 1.5
4 48 6 6.00 1.0
5 51 3 6.00 .5
6 51 0 6.00 0
12. 12 of 40
INDIFFERENCE CURVES
Appendix
• We base the following analysis on four assumptions:
1. We assume that this analysis is restricted to goods that yield
positive marginal utility, or, more simply, that “more is better.”
2. The marginal rate of substitution is defined as MUX/MUY, or
the ratio at which a household is willing to substitute X for Y.
We assume a diminishing marginal rate of substitution.
3. We assume that consumers have the ability to choose among
the combinations of goods and services available.
4. We assume that consumer choices are consistent with a simple
assumption of rationality.
ASSUMPTIONS
13. 13 of 40
THE BASIS OF CHOICE: UTILITY
marginal utility (MU) The additional satisfaction gained by
the consumption or use of one more unit of something.
DIMINISHING MARGINAL UTILITY
total utility The total amount of satisfaction obtained from
consumption of a good or service.
law of diminishing marginal utility The more of any one
good consumed in a given period, the less satisfaction
(utility)
generated by consuming each additional (marginal) unit of
the same good.
utility The satisfaction, or reward, a product yields
relative to its alternatives. The basis of choice.
14. 14 of 40
THE BASIS OF CHOICE: UTILITY
TABLE 6.2 Total Utility and Marginal
Utility of Trips to the Club
Per Week
TRIPS
TO CLUB
TOTAL
UTILITY
MARGINAL
UTILITY
1 12 12
2 22 10
3 28 6
4 32 4
5 34 2
6 34 0
FIGURE 6.5 Graphs of Frank’s Total and
Marginal Utility
15. 15 of 40
Appendix
FIGURE 6A.1 An Indifference Curve
DERIVING INDIFFERENCE CURVES
An indifference curve is a set
of points, each point
representing a combination
of goods X and Y, all of which
yield the same total utility.
16. 16 of 40
HOUSEHOLD CHOICE IN OUTPUT MARKETS
Preferences, Tastes, Trade-Offs, and Opportunity Cost
Preferences play a key role in
determining demand. Some
people like the blues or jazz,
some like classical, while
others love country music.
As long as a household faces a limited budget—and all households ultimately do—the real cost of
any good or service is the value of the other goods and services that could have been purchased
with the same amount of money. The real cost of a good or service is its opportunity cost, and
opportunity cost is determined by relative prices.
real income Set of opportunities to
purchase real goods and services
available to a household as
determined by prices and money
income.
17. 17 of 40
HOUSEHOLD CHOICE IN OUTPUT MARKETS
FIGURE 6.3 Budget Constraint and Opportunity Set for Ann and Tom
The Budget Constraint More Formally (see p. 106 – 108)
18. 18 of 40
HOUSEHOLD CHOICE IN OUTPUT MARKETS
real income Set of opportunities to purchase
real goods and services available to a
household as determined by prices and
money income.
19. 19 of 40
INCOME AND SUBSTITUTION EFFECTS
FIGURE 6.7 Income and Substitution Effects of a Price Change
20. 20 of 40
HOUSEHOLD CHOICE IN OUTPUT MARKETS
THE EQUATION OF THE BUDGET CONSTRAINT
In general, the budget constraint can be
written:
PXX + PYY = I,
where PX = the price of X, X = the quantity of
X consumed, PY = the price of Y, Y = the
quantity of Y consumed, and I = household
income.
21. 21 of 40
HOUSEHOLD CHOICE IN OUTPUT MARKETS
FIGURE 6.4 The Effect of a Decrease in
Price on Ann and Tom’s Budget
Constraint
Budget Constraints Change When Prices Rise or Fall
(see p. 108)
The budget constraint is defined by income, wealth, and prices. Within those limits, households are
free to choose, and the household’s ultimate choice depends on its own likes and dislikes.
22. 22 of 40
Appendix
FIGURE 6A.3 Consumer Utility-Maximizing
Equilibrium
CONSUMER CHOICE
As long as indifference curves are convex to the origin, utility maximization will take place at the
point at which the indifference curve is just tangent to the budget constraint.
23. 23 of 33
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
All firms must make several basic decisions to achieve what we
assume to be their primary objective—maximum profits.
FIGURE 7.3 The Three Decisions That All Firms Must Make
1.
How much
output to
supply
2.
Which production
technology
to use
3.
How much of
each input to
demand
24. 24 of 33
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
PROFITS AND ECONOMIC COSTS
profit (economic profit) The difference between
total revenue and total cost.
profit = total revenue - total cost
total revenue The amount received from the sale of
the product (q x P).
25. 25 of 33
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
PROFITS AND ECONOMIC COSTS
total cost (total economic cost) The total of (1) out-
of-pocket costs, (2) normal rate of return on capital,
and (3) opportunity cost of each factor of
production.
economic profit = total revenue - total economic cost
The term profit will from here on refer to economic profit.
So whenever we say profit = total revenue - total cost, what
we really mean is
26. 26 of 33
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
normal rate of return A rate of return on capital that
is just sufficient to keep owners and investors
satisfied. For relatively risk-free firms, it should be
nearly the same as the interest rate on risk-free
government bonds.
Normal Rate of Return
TABLE 7.1 Calculating Total Revenue, Total Cost, and Profit
INITIAL INVESTMENT:
MARKET INTEREST RATE AVAILABLE:
$20,000
0.10 OR 10%
Total revenue (3,000 belts x $10 each) $30,000
Costs
Belts from Supplier 15,000
Labor cost 14,000
Normal return/Opportunity Cost of Capital ($20,000 x 0.10) 2,000
Total Cost $31,000
Profit = total revenue - total cost 1,000
27. 27 of 33
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
short run The period of time for which two
conditions hold: The firm is operating under a
fixed scale (fixed factor) of production, and firms can
neither enter nor exit an industry.
SHORT-RUN VERSUS LONG-RUN DECISIONS
long run That period of time for which there are no
fixed factors of production: Firms can
increase or decrease the scale of operation, and new
firms can enter and existing firms can exit the
industry.
28. 28 of 33
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
THE BASES OF DECISIONS: MARKET PRICE OF OUTPUTS,
AVAILABLE TECHNOLOGY, AND INPUT PRICES
The bases of decision making:
1. The market price of output
2. The techniques of production that are available
3. The prices of inputs
Output price determines potential revenues. The techniques
available tell me how much of each input I need, and input prices
tell me how much they will cost. Together, the available
production techniques and the prices of inputs determine costs.
29. 29 of 33
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
optimal method of production The production
method that minimizes cost.
Input prices
Determines
total revenue
Determine total cost and
optimal
method of production
Production techniquesPrice of output
Total revenue
Total cost with optimal method
= Total profit
FIGURE 7.4 Determining the Optimal Method of Production
30. 30 of 33
THE PRODUCTION PROCESS
production technology The quantitative
relationship between inputs and outputs.
labor-intensive technology Technology that
relies heavily on human labor instead of
capital.
capital-intensive technology Technology that
relies heavily on capital instead of human labor.
31. 31 of 40
Appendix
FIGURE 6A.4 Deriving a Demand Curve from Indifference Curves and Budget Constraint
DERIVING A DEMAND CURVE FROM INDIFFERENCE CURVES AND
BUDGET CONSTRAINTS
32. 32 of 33
THE PRODUCTION PROCESS
production function or total product function A
numerical or mathematical expression of a
relationship between inputs and outputs. It
shows units of total product as a function of
units of inputs.
PRODUCTION FUNCTIONS: TOTAL PRODUCT, MARGINAL
PRODUCT, AND AVERAGE PRODUCT
33. 33 of 33
THE PRODUCTION PROCESS
TABLE 7.2 Production Function
(1)
LABOR
UNITS
EMPLOYEES
(2)
TOTAL
PRODUCT
(SANDWICHES
PER HOUR)
(3)
MARGINAL
PRODUCT
OF LABOR
(4)
AVERAGE PRODUCT
OF LABOR
(TOTAL PRODUCT
LABOR UNITS)
0
1
2
3
4
5
6
0
10
25
35
40
42
42
10
15
10
5
2
0
10.0
12.5
11.7
10.0
8.4
7.0
34. 34 of 33
THE PRODUCTION PROCESS
FIGURE 7.5 Production Function for Sandwiches
35. 35 of 33
THE PRODUCTION PROCESS
Marginal Product and the Law of Diminishing Returns
marginal product The additional output that
can be produced by adding one more unit of a
specific input, ceteris paribus.
law of diminishing returns When additional units
of a variable input are added to fixed inputs after
a certain point, the marginal product of the
variable input declines.
Diminishing returns always apply in the short run, and in the short run every firm will face diminishing
returns. This means that every firm finds it progressively more difficult to increase its output as it
approaches capacity production.
36. 36 of 33
THE PRODUCTION PROCESS
Marginal Product versus Average Product
average product The average amount produced
by each unit of a variable factor of
production.
laborofunitstotal
producttotal
laborofproductaverage
37. 37 of 33
THE PRODUCTION PROCESS
FIGURE 7.6 Total Average and
Marginal Product
38. 38 of 33
THE PRODUCTION PROCESS
In general, additional capital
increases the productivity of
labor. Because capital—
buildings, machines, and so on—
is of no use without people to
operate it, we say that capital
and labor are complementary
inputs.
PRODUCTION FUNCTIONS WITH TWO VARIABLE FACTORS
OF PRODUCTION
39. 39 of 33
CHOICE OF TECHNOLOGY
TABLE 7.3 Inputs Required to Produce 100 Diapers Using
Alternative Technologies
TECHNOLOGY
UNITS OF
CAPITAL (K)
UNITS OF
LABOR (L)
A
B
C
D
E
2
3
4
6
10
10
6
4
3
2
40. 40 of 33
CHOICE OF TECHNOLOGY
TABLE 7.4 Cost-Minimizing Choice Among Alternative Technologies (100 Diapers)
(4) (5)
(1)
TECHNOLOGY
(2)
UNITS OF
CAPITAL (K)
(3)
UNITS OF
LABOR (L)
Cost = (L x PL) + (K x PK)
PL = $1
PK = $1
PL = $5
PK = $1
A
B
C
D
E
2
3
4
6
10
10
6
4
3
2
$12
9
8
9
12
$52
33
24
21
20
Two things determine the cost of production: (1) technologies that are available and (2) input prices.
Profit-maximizing firms will choose the technology that minimizes the cost of production given
current market input prices.
41. 41 of 33
ISOQUANTS AND ISOCOSTS
Appendix
NEW LOOK AT TECHNOLOGY: ISOQUANTS
TABLE 7A.1 Alternative Combinations of Capital (K) and Labor (L) Required
to Produce 50, 100, and 150 Units of Output
QX = 50 QX = 100 QX = 150
K L K L K L
A
B
C
D
E
1
2
3
5
8
8
5
3
2
1
2
3
4
6
10
10
6
4
3
2
3
4
5
7
10
10
7
5
4
3
42. 42 of 33
Appendix
Isoquant A graph
that shows all the
combinations of
capital and labor
that can be used to
produce a given
amount of output.
FIGURE 7A.1 Isoquants Showing All Combinations of Capital
and Labor That Can Be Used to Produce 50, 100,
and 150 Units of Output
43. 43 of 33
Appendix
FIGURE 7A.2 The Slope of an Isoquant Is Equal
to the Ratio of MPL to MPK
Slope of isoquant:
K
L
MP
MP
L
K
D
D
marginal rate of technical
substitution The rate at
which a firm can
substitute capital for
labor and hold output
constant.
44. 44 of 33
Appendix
FIGURE 7A.3 Isocost Lines Showing the Combinations
of Capital and Labor Available for $5, $6,
and $7
FACTOR PRICES AND
INPUT COMBINATIONS:
ISOCOSTS
isocost line A graph
that shows all the
combinations of
capital and labor
available for a given
total cost.
45. 45 of 33
Appendix
FIGURE 7A.4 Isocost Line Showing All
Combinations of Capital and
Labor Available for $25
Slope of isocost line:
K
L
L
K
P
P
PTC
PTC
L
K
D
D
/
/
46. 46 of 33
Appendix
FIGURE 7A.5 Finding the Least-Cost
Combination of Capital and Labor
to Produce 50 Units of Output
FINDING THE LEAST-COST TECHNOLOGY WITH ISOQUANTS
AND ISOCOSTS
The firm will choose the combination of inputs
that is least costly. The least costly way to
produce any given level of output is indicated
by the point of tangency between an isocost
line and the isoquant corresponding to that
level of output.
47. 47 of 33
Appendix
FIGURE 7A.6 Minimizing Cost of
Production for qX = 50, qX =
100, and qX = 150
FIGURE 7A.7 A Cost Curve Shows the
Minimum Cost of
Producing Each Level of
Output
48. 48 of 33
Appendix
K
L
K
L
P
P
MP
MP
isocostofslopeisoquantofslope
THE COST-MINIMIZING EQUILIBRIUM CONDITION
At the point where a line is just tangent to a curve, the two
have the same slope. At each point of tangency, the following
must be true:
Thus,
K
L
K
L
P
P
MP
MP
Dividing both sides by PL and multiplying both sides by MPK, we
get
K
K
L
L
P
MP
P
MP
49. 49 of 31
SHORT-RUN COSTS AND OUTPUT DECISIONS
You have seen that firms in perfectly competitive industries make
three specific decisions.
FIGURE 8.1 Decisions Facing Firms
DECISIONS are based on INFORMATION
1. The quantity of output to
supply
1. The price of output
2. How to produce that
output (which technique
to use)
2. Techniques of production
available*
3. The quantity of each
input to demand
3. The price of inputs*
*Determines production costs
50. 50 of 31
COSTS IN THE SHORT RUN
fixed cost Any cost that does not depend on
the firm’s level of output. These costs are
incurred even if the firm is producing
nothing. There are no fixed costs in the long
run.
variable cost A cost that depends on the level
of production chosen.
total cost (TC) Fixed costs plus variable costs.
51. 51 of 31
COSTS IN THE SHORT RUN
SHORT-RUN COSTS: A REVIEW
TABLE 8.5 A Summary of Cost Concepts
TERM DEFINITION EQUATION
Accounting costs Out-of-pocket costs or costs as an accountant would
define them. Sometimes referred to as explicit costs.
Economic costs Costs that include the full opportunity costs of all inputs.
These include what are often called implicit costs.
Total fixed costs Costs that do not depend on the quantity of output
produced. These must be paid even if output is zero.
TFC
Total variable costs Costs that vary with the level of output. TVC
Total cost The total economic cost of all the inputs used by a
firm in production.
TC = TFC + TVC
Average fixed costs Fixed costs per unit of output. AFC = TFC/q
Average variable costs Variable costs per unit of output. AVC = TVC/q
Average total costs Total costs per unit of output. ATC = TC/q ATC = AFC + AVC
Marginal costs The increase in total cost that results from
producing one additional unit of output.
MC = DTC/Dq
52. 52 of 31
OUTPUT DECISIONS: REVENUES, COSTS,
AND PROFIT MAXIMIZATION
TOTAL REVENUE (TR) AND MARGINAL REVENUE (MR)
P x qTR
quantityxpricerevenuetotal
total revenue (TR) The total amount that a
firm takes in from the sale of its product: the
price per unit times the quantity of output the
firm decides to produce (P x q).
marginal revenue (MR) The additional revenue
that a firm takes in when it increases output by
one additional unit. In
perfect competition, P = MR.
53. 53 of 31
OUTPUT DECISIONS: REVENUES, COSTS,
AND PROFIT MAXIMIZATION
FIGURE 8.9 Demand Facing a Typical Firm in a Perfectly Competitive Market
In the short run, a competitive firm faces a demand curve that is simply a horizontal
line at the market equilibrium price. In other words, competitive firms face perfectly
elastic demand in the short run.
54. 54 of 31
OUTPUT DECISIONS: REVENUES, COSTS,
AND PROFIT MAXIMIZATION
COMPARING COSTS AND REVENUES TO MAXIMIZE
PROFIT
The Profit-Maximizing Level of Output
FIGURE 8.10 The Profit-Maximizing Level of Output for a Perfectly Competitive Firm
55. 55 of 31
COSTS IN THE SHORT RUN
Marginal cost is the cost of one additional unit. Average variable cost is the total variable
cost divided by the total number of units produced.
TABLE 8.4 Short-Run Costs of a Hypothetical Firm
(1)
q
(2)
TVC
(3)
MC
(D TVC)
(4)
AVC
(TVC/q)
(5)
TFC
(6)
TC
(TVC + TFC)
(7)
AFC
(TFC/q)
(8)
ATC
(TC/q or AFC + AVC)
0 $ 0 $ $ $1,000 $ 1,000 $ $
1 10 10 10 1,000 1,010 1,000 1,010
2 18 8 9 1,000 1,018 500 509
3 24 6 8 1,000 1,024 333 341
4 32 8 8 1,000 1,032 250 258
5 42 10 8.4 1,000 1,042 200 208.4
500 8,000 20 16 1,000 9,000 2 18
57. 57 of 31
• average fixed cost (AFC)
• average total cost (ATC)
• average variable cost (AVC)
• fixed cost
• marginal cost (MC)
• marginal revenue (MR)
• spreading overhead
• sunk costs
• total cost (TC)
• total fixed costs (TFC), or
overhead
• total revenue (TR)
• total variable cost (TVC)
REVIEW TERMS AND CONCEPTS
total variable cost curve
variable cost
1. TC = TFC + TVC
2. AFC = TFC/q
3. Slope of TVC = MC
4. AVC = TVC/q
5. ATC = TC/q = AFC + AVC
6. TR = P x q
7. Profit-maximizing level of output for all
firms: MR = MC
8. Profit-maximizing level of output for
perfectly competitive firms:
P = MC
58.
59.
60. 60 of 36
LONG-RUN COSTS AND OUTPUT DECISIONS
We begin our discussion of the long run by looking at firms in three
short-run circumstances:
(1) firms earning economic profits,
(2) firms suffering economic losses but continuing to operate to
reduce or minimize those losses, and
(3) firms that decide to shut down and bear losses just equal to
fixed costs.
61. 61 of 36
SHORT-RUN CONDITIONS
AND LONG-RUN DIRECTIONS
breaking even The situation in which a firm is
earning exactly a normal rate of return.
Example: The Blue Velvet Car Wash
MAXIMIZING PROFITS
TABLE 9.1 Blue Velvet Car Wash Weekly Costs
TOTAL FIXED COSTS (TFC)
TOTAL VARIABLE COSTS
(TVC) (800 WASHES)
TOTAL COSTS
(TC = TFC + TVC) $ 3,600
1. Normal return to investors $ 1,000 1.
2.
Labor
Materials
$ 1,000
600
Total revenue (TR)
at P = $5 (800 x $5) $ 4,000
2. Other fixed costs
(maintenance contract,
insurance, etc.) 1,000
$ 1,600 Profit (TR TC) $ 400
$ 2,000
62. 62 of 36
SHORT-RUN CONDITIONS
AND LONG-RUN DIRECTIONS
Producing at a Loss to Offset Fixed Costs: The Blue
Velvet Revisited
TABLE 9.2 A Firm Will Operate If Total Revenue Covers Total Variable Cost
CASE 1: SHUT DOWN CASE 2: OPERATE AT PRICE = $3
Total Revenue (q = 0) $ 0 Total Revenue ($3 x 800) $ 2,400
Fixed costs
Variable costs
Total costs
+
$
$
2,000
0
2,000
Fixed costs
Variable costs
Total costs
+
$
$
2,000
1,600
3,600
Profit/loss (TR TC) $ 2,000 Operating profit/loss (TR TVC) $ 800
Total profit/loss (TR TC) $ 1,200
63. 63 of 36
SHORT-RUN CONDITIONS
AND LONG-RUN DIRECTIONS
Shutting Down to Minimize Loss
TABLE 9.3 A Firm Will Shut Down If Total Revenue Is Less Than Total Variable Cost
CASE 1: SHUT DOWN CASE 2: OPERATE AT PRICE = $1.50
Total Revenue (q = 0) $ 0 Total revenue ($1.50 x 800) $ 1,200
Fixed costs
Variable costs
Total costs
+
$
$
2,000
0
2,000
Fixed costs
Variable costs
Total costs
+
$
$
2,000
1,600
3,600
Profit/loss (TR TC): $ 2,000 Operating profit/loss (TR TVC) $ 400
Total profit/loss (TR TC) $ 2,400
Any time that price (average revenue) is below the minimum point on the average variable
cost curve, total revenue will be less than total variable cost, and operating profit will be
negative—that is, there will be a loss on operation. In other words, when price is below all
points on the average variable cost curve, the firm will suffer operating losses at any possible
output level the firm could choose. When this is the case, the firm will stop producing and
bear losses equal to fixed costs. This is why the bottom of the average variable cost curve is
called the shut-down point. At all prices above it, the marginal cost curve shows the profit-
maximizing level of output. At all prices below it, optimal short-run output is zero.
64. 64 of 36
SHORT-RUN CONDITIONS
AND LONG-RUN DIRECTIONS
LONG-RUN DIRECTIONS: A REVIEW
TABLE 9.4 Profits, Losses, and Perfectly Competitive Firm Decisions in the Long and
Short Run
SHORT-RUN
CONDITION
SHORT-RUN
DECISION
LONG-RUN
DECISION
Profits TR > TC P = MC: operate Expand: new firms enter
Losses 1. With operating profit P = MC: operate Contract: firms exit
(TR TVC) (losses < fixed costs)
2. With operating losses Shut down: Contract: firms exit
(TR < TVC) losses = fixed costs
65. Market structure and
degree of competition
• The process by which price and output are determined in the real
world is strongly affected by the structure of the market
• A market consists of all the potential buyers and sellers of a
particular product
• Market structure refers to the competitive environment in which the
buyers and sellers of a product operate.
• 4 different types of market structure:
– Perfect competition
– Monopoly
– Monopolistic competition
– Oligopoly
66. Although not every industry fits neatly into one of these categories, the
categories do provide a useful and convenient framework for thinking about
industry structure and behavior.
Characteristics of
Different Market Organizations
67.
68. 68 of 22
THE SOURCES OF MARKET FAILURE
market failure Occurs when resources are
misallocated, or allocated inefficiently. The
result is waste or lost value.
There are four important sources of market failure:
(1) imperfect market structure, or noncompetitive behavior,
(2) the existence of public goods,
(3) the presence of external costs and benefits, and
(4) imperfect information.
69. 69 of 38
PRICE AND OUTPUT DECISIONS IN PURE
MONOPOLY MARKETS
Relative to a perfectly competitive industry, a monopolist restricts output, charges higher
prices, and earns positive profits.
FIGURE 13.8 Comparison of Monopoly and Perfectly Competitive Outcomes for a
Firm with Constant Returns to Scale
70. Responsi
1. Jelaskan secara singkat dengan menggunakan diagram
pemahaman anda tentang bagaimana seorang ahli
ekonomi berpikir dan bagaimana dia merealisasikannya
2. Jelaskan secara singkat pemahaman anda tentang
elastisitas, jenis (dengan contohnya) dan faktor – faktor
yang menentukannya
3. Jelaskan secara singkat pemahaman anda tentang
Indifference Curve, Budget Constraint dan Keseimbangan
yang memaksimumkan utilitas konsumen (Consumer
Utility Maximizing Equilibrium)
4. Berikut ini tabel tentang jumlah output (Q) berikut biaya
variabel (VC) dan biaya tetapnya (FC) suatu perusahaan.
Anda diminta untuk menghitung: MC, AVC, AFC, TC, TR
dan Profit (∏) nya jika harga per unit output adalah
sebesar 15