1. The document discusses profit maximization by firms. A profit-maximizing firm chooses inputs and outputs to maximize the difference between total revenue and total costs.
2. For a firm to maximize profits, the marginal revenue from producing one more unit must equal the marginal cost of producing that unit.
3. A firm's short-run supply curve is the positively-sloped portion of its short-run marginal cost curve above the minimum of average variable cost. The firm will only produce where price exceeds average variable cost.
The fundamental principle of the classical theory is that the economy is self‐regulating. Classical economists maintain that the economy is always capable of achieving the natural level of real GDP, which is the level of real GDP that is obtained when the economy's resources are fully employed.
National output or income was determined by real factors such as capital stock, state of technology, labour supply and in no way was affected by the general price level which was determined by the quantity of money. This classical doctrine is generally referred to as classical dichotomy.
While circumstances arise from time to time that cause the economy to fall below or to exceed the natural level of real GDP, self‐adjustment mechanisms exist within the market system that work to bring the economy back to the natural level of real GDP.
The classical doctrine—that the economy is always at or near the natural level of real GDP (full employment)—is based on two firmly held beliefs:
The assumption of the full employment of labour and other productive resources
Belief that prices, wages, and interest rates are flexible.
The general over production, and hence general unemployment, is impossible.
The normal situation is stable equilibrium at full employment.
The classical economist believe that the policy of laissez-faire guaranteed normal full employment. They had great faith in free and perfect competition, efficacy of the profit motive and price mechanism to remedy the temporary ills of the economic system and ensure full employment.
Prof. Pigou says, “With perfectly free competition, there will always be at work a strong tendency for wage rates to be so related to demand that everybody is employed.”
They treated money as a mere medium of exchange. (Transaction motive)
Keynesian Aggregate demand and aggregate supply income analysisPratikMilanSahoo
This presentation describes the Keynesian model of the economy after the 1929 depression. Aggregate demand aggregate supply with equilibrium and Factors affecting the theory and criticism to Keynesian theory.
The fundamental principle of the classical theory is that the economy is self‐regulating. Classical economists maintain that the economy is always capable of achieving the natural level of real GDP, which is the level of real GDP that is obtained when the economy's resources are fully employed.
National output or income was determined by real factors such as capital stock, state of technology, labour supply and in no way was affected by the general price level which was determined by the quantity of money. This classical doctrine is generally referred to as classical dichotomy.
While circumstances arise from time to time that cause the economy to fall below or to exceed the natural level of real GDP, self‐adjustment mechanisms exist within the market system that work to bring the economy back to the natural level of real GDP.
The classical doctrine—that the economy is always at or near the natural level of real GDP (full employment)—is based on two firmly held beliefs:
The assumption of the full employment of labour and other productive resources
Belief that prices, wages, and interest rates are flexible.
The general over production, and hence general unemployment, is impossible.
The normal situation is stable equilibrium at full employment.
The classical economist believe that the policy of laissez-faire guaranteed normal full employment. They had great faith in free and perfect competition, efficacy of the profit motive and price mechanism to remedy the temporary ills of the economic system and ensure full employment.
Prof. Pigou says, “With perfectly free competition, there will always be at work a strong tendency for wage rates to be so related to demand that everybody is employed.”
They treated money as a mere medium of exchange. (Transaction motive)
Keynesian Aggregate demand and aggregate supply income analysisPratikMilanSahoo
This presentation describes the Keynesian model of the economy after the 1929 depression. Aggregate demand aggregate supply with equilibrium and Factors affecting the theory and criticism to Keynesian theory.
Cost-plus pricing: Simplistic strategy that guarantees that price is higher than the estimated average cost
Studies of pricing behavior suggest that many managers who use cost-plus pricing do not price optimally.
Definition of Markup: Markup = (Price – Cost)/Cost where Cost here is cost per unit
The short-run equilibrium in monopolistic competition is Identical to short-run equilibrium under monopoly
As entry and exit of firms from the product group shifts individual firms’ demand curves, long-run equilibrium occurs where profit is equal to zero.
A market is perfectly competitive if
There are large number of sellers and buyers of the commodity – therefore no individuals can influence price
Homogeneous products across all firms in the industry.
Perfect mobility of resources.
All the economic agents (consumers, producers, factor owners) in the market have perfect knowledge of present and future prices and costs
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
Latino Buying Power - May 2024 Presentation for Latino CaucusDanay Escanaverino
Unlock the potential of Latino Buying Power with this in-depth SlideShare presentation. Explore how the Latino consumer market is transforming the American economy, driven by their significant buying power, entrepreneurial contributions, and growing influence across various sectors.
**Key Sections Covered:**
1. **Economic Impact:** Understand the profound economic impact of Latino consumers on the U.S. economy. Discover how their increasing purchasing power is fueling growth in key industries and contributing to national economic prosperity.
2. **Buying Power:** Dive into detailed analyses of Latino buying power, including its growth trends, key drivers, and projections for the future. Learn how this influential group’s spending habits are shaping market dynamics and creating opportunities for businesses.
3. **Entrepreneurial Contributions:** Explore the entrepreneurial spirit within the Latino community. Examine how Latino-owned businesses are thriving and contributing to job creation, innovation, and economic diversification.
4. **Workforce Statistics:** Gain insights into the role of Latino workers in the American labor market. Review statistics on employment rates, occupational distribution, and the economic contributions of Latino professionals across various industries.
5. **Media Consumption:** Understand the media consumption habits of Latino audiences. Discover their preferences for digital platforms, television, radio, and social media. Learn how these consumption patterns are influencing advertising strategies and media content.
6. **Education:** Examine the educational achievements and challenges within the Latino community. Review statistics on enrollment, graduation rates, and fields of study. Understand the implications of education on economic mobility and workforce readiness.
7. **Home Ownership:** Explore trends in Latino home ownership. Understand the factors driving home buying decisions, the challenges faced by Latino homeowners, and the impact of home ownership on community stability and economic growth.
This SlideShare provides valuable insights for marketers, business owners, policymakers, and anyone interested in the economic influence of the Latino community. By understanding the various facets of Latino buying power, you can effectively engage with this dynamic and growing market segment.
Equip yourself with the knowledge to leverage Latino buying power, tap into their entrepreneurial spirit, and connect with their unique cultural and consumer preferences. Drive your business success by embracing the economic potential of Latino consumers.
**Keywords:** Latino buying power, economic impact, entrepreneurial contributions, workforce statistics, media consumption, education, home ownership, Latino market, Hispanic buying power, Latino purchasing power.
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
NO1 Uk Rohani Baba In Karachi Bangali Baba Karachi Online Amil Baba WorldWide...Amil baba
Contact with Dawood Bhai Just call on +92322-6382012 and we'll help you. We'll solve all your problems within 12 to 24 hours and with 101% guarantee and with astrology systematic. If you want to take any personal or professional advice then also you can call us on +92322-6382012 , ONLINE LOVE PROBLEM & Other all types of Daily Life Problem's.Then CALL or WHATSAPP us on +92322-6382012 and Get all these problems solutions here by Amil Baba DAWOOD BANGALI
#vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore#blackmagicformarriage #aamilbaba #kalajadu #kalailam #taweez #wazifaexpert #jadumantar #vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore #blackmagicforlove #blackmagicformarriage #aamilbaba #kalajadu #kalailam #taweez #wazifaexpert #jadumantar #vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore #Amilbabainuk #amilbabainspain #amilbabaindubai #Amilbabainnorway #amilbabainkrachi #amilbabainlahore #amilbabaingujranwalan #amilbabainislamabad
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
If you are looking for a pi coin investor. Then look no further because I have the right one he is a pi vendor (he buy and resell to whales in China). I met him on a crypto conference and ever since I and my friends have sold more than 10k pi coins to him And he bought all and still want more. I will drop his telegram handle below just send him a message.
@Pi_vendor_247
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
Key Features of USDA Loans:
Zero Down Payment: USDA loans require no down payment, making homeownership more accessible.
Competitive Interest Rates: These loans often come with lower interest rates compared to conventional loans.
Flexible Credit Requirements: USDA loans have more lenient credit score requirements, helping those with less-than-perfect credit.
Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
Property Search: Look for properties in eligible rural or suburban areas.
Loan Application: Submit your application, including financial and personal information.
Processing and Approval: The lender and USDA will review your application. If approved, you can proceed to closing.
USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
2. 2
The Nature of Firms
• A firm is an association of individuals
who have organized themselves for the
purpose of turning inputs into outputs
• Different individuals will provide different
types of inputs
– the nature of the contractual relationship
between the providers of inputs to a firm
may be quite complicated
3. 3
Contractual Relationships
• Some contracts between providers of
inputs may be explicit
– may specify hours, work details, or
compensation
• Other arrangements will be more
implicit in nature
– decision-making authority or sharing of
tasks
4. 4
Modeling Firms’ Behavior
• Most economists treat the firm as a
single decision-making unit
– the decisions are made by a single
dictatorial manager who rationally pursues
some goal
• usually profit-maximization
5. 5
Profit Maximization
• A profit-maximizing firm chooses both
its inputs and its outputs with the sole
goal of achieving maximum economic
profits
– seeks to maximize the difference between
total revenue and total economic costs
6. 6
Profit Maximization
• If firms are strictly profit maximizers,
they will make decisions in a “marginal”
way
– examine the marginal profit obtainable
from producing one more unit of hiring one
additional laborer
7. 7
Output Choice
• Total revenue for a firm is given by
R(q) = p(q)q
• In the production of q, certain economic
costs are incurred [C(q)]
• Economic profits () are the difference
between total revenue and total costs
(q) = R(q) – C(q) = p(q)q –C(q)
8. 8
Output Choice
• The necessary condition for choosing the
level of q that maximizes profits can be
found by setting the derivative of the
function with respect to q equal to zero
0)('
dq
dC
dq
dR
q
dq
d
dq
dC
dq
dR
9. 9
Output Choice
• To maximize economic profits, the firm
should choose the output for which
marginal revenue is equal to marginal
cost
MC
dq
dC
dq
dR
MR
10. 10
Second-Order Conditions
• MR = MC is only a necessary condition
for profit maximization
• For sufficiency, it is also required that
0
)('
**
2
2
qqqq
dq
qd
dq
d
• “marginal” profit must be decreasing at
the optimal level of q
11. 11
Profit Maximization
output
revenues & costs
R
C
q*
Profits are maximized when the slope of
the revenue function is equal to the slope of
the cost function
The second-order
condition prevents us
from mistaking q0 as
a maximum
q0
12. 12
Marginal Revenue
• If a firm can sell all it wishes without
having any effect on market price,
marginal revenue will be equal to price
• If a firm faces a downward-sloping
demand curve, more output can only be
sold if the firm reduces the good’s price
dq
dp
qp
dq
qqpd
dq
dR
qMR
])([
)(revenuemarginal
13. 13
Marginal Revenue
• If a firm faces a downward-sloping
demand curve, marginal revenue will be
a function of output
• If price falls as a firm increases output,
marginal revenue will be less than price
14. 14
Marginal Revenue
• Suppose that the demand curve for a sub
sandwich is
q = 100 – 10p
• Solving for price, we get
p = -q/10 + 10
• This means that total revenue is
R = pq = -q2/10 + 10q
• Marginal revenue will be given by
MR = dR/dq = -q/5 + 10
15. 15
Profit Maximization
• To determine the profit-maximizing
output, we must know the firm’s costs
• If subs can be produced at a constant
average and marginal cost of $4, then
MR = MC
-q/5 + 10 = 4
q = 30
16. 16
Marginal Revenue and
Elasticity
• The concept of marginal revenue is
directly related to the elasticity of the
demand curve facing the firm
• The price elasticity of demand is equal
to the percentage change in quantity
that results from a one percent change
in price
q
p
dp
dq
pdp
qdq
e pq
/
/
,
17. 17
Marginal Revenue and
Elasticity
• This means that
pqe
p
dq
dp
p
q
p
dq
dpq
pMR
,
1
11
– if the demand curve slopes downward,
eq,p < 0 and MR < p
– if the demand is elastic, eq,p < -1 and
marginal revenue will be positive
• if the demand is infinitely elastic, eq,p = - and
marginal revenue will equal price
19. 19
The Inverse Elasticity Rule
• Because MR = MC when the firm
maximizes profit, we can see that
pqe
pMC
,
1
1
pqep
MCp
,
1
• The gap between price and marginal
cost will fall as the demand curve facing
the firm becomes more elastic
20. 20
The Inverse Elasticity Rule
pqep
MCp
,
1
• If eq,p > -1, MC < 0
• This means that firms will choose to
operate only at points on the demand
curve where demand is elastic
21. 21
Average Revenue Curve
• If we assume that the firm must sell all
its output at one price, we can think of
the demand curve facing the firm as its
average revenue curve
– shows the revenue per unit yielded by
alternative output choices
22. 22
Marginal Revenue Curve
• The marginal revenue curve shows the
extra revenue provided by the last unit
sold
• In the case of a downward-sloping
demand curve, the marginal revenue
curve will lie below the demand curve
23. 23
Marginal Revenue Curve
output
price
D (average revenue)
MR
q1
p1
As output increases from 0 to q1, total
revenue increases so MR > 0
As output increases beyond q1, total
revenue decreases so MR < 0
24. 24
Marginal Revenue Curve
• When the demand curve shifts, its
associated marginal revenue curve
shifts as well
– a marginal revenue curve cannot be
calculated without referring to a specific
demand curve
25. 25
The Constant Elasticity Case
• We showed (in Chapter 5) that a
demand function of the form
q = apb
has a constant price elasticity of
demand equal to b
• Solving this equation for p, we get
p = (1/a)1/bq1/b = kq1/b where k = (1/a)1/b
26. 26
The Constant Elasticity Case
• This means that
R = pq = kq(1+b)/b
and
MR = dr/dq = [(1+b)/b]kq1/b = [(1+b)/b]p
• This implies that MR is proportional to
price
27. 27
Short-Run Supply by a
Price-Taking Firm
output
price SMC
SAC
SAVC
p* = MR
q*
Maximum profit
occurs where
p = SMC
28. 28
Short-Run Supply by a
Price-Taking Firm
output
price SMC
SAC
SAVC
p* = MR
q*
Since p > SAC,
profit > 0
29. 29
Short-Run Supply by a
Price-Taking Firm
output
price SMC
SAC
SAVC
p* = MR
q*
If the price rises
to p**, the firm
will produce q**
and > 0
q**
p**
30. 30
Short-Run Supply by a
Price-Taking Firm
output
price SMC
SAC
SAVC
p* = MR
q*
If the price falls to
p***, the firm will
produce q***
q***
p***
Profit maximization
requires that p =
SMC and that SMC
is upward-sloping
< 0
31. 31
Short-Run Supply by a
Price-Taking Firm
• The positively-sloped portion of the
short-run marginal cost curve is the
short-run supply curve for a price-taking
firm
– it shows how much the firm will produce at
every possible market price
– firms will only operate in the short run as
long as total revenue covers variable cost
• the firm will produce no output if p < SAVC
32. 32
Short-Run Supply by a
Price-Taking Firm
• Thus, the price-taking firm’s short-run
supply curve is the positively-sloped
portion of the firm’s short-run marginal
cost curve above the point of minimum
average variable cost
– for prices below this level, the firm’s profit-
maximizing decision is to shut down and
produce no output
33. 33
Short-Run Supply by a
Price-Taking Firm
output
price SMC
SAC
SAVC
The firm’s short-run
supply curve is the
SMC curve that is
above SAVC
34. 34
Short-Run Supply
• Suppose that the firm’s short-run total cost
curve is
SC(v,w,q,k) = vk1 + wq1/k1
-/
where k1 is the level of capital held
constant in the short run
• Short-run marginal cost is
/
1
/)1(
1),,,( kq
w
q
SC
kqwvSMC
35. 35
Short-Run Supply
• The price-taking firm will maximize profit
where p = SMC
pkq
w
SMC
/
1
/)1(
• Therefore, quantity supplied will be
)1/()1/(
1
)1/(
pk
w
q
36. 36
Short-Run Supply
• To find the firm’s shut-down price, we
need to solve for SAVC
SVC = wq1/k1
-/
SAVC = SVC/q = wq(1-)/k1
-/
• SAVC < SMC for all values of < 1
– there is no price low enough that the firm will
want to shut down
37. 37
Profit Functions
• A firm’s economic profit can be
expressed as a function of inputs
= pq - C(q) = pf(k,l) - vk - wl
• Only the variables k and l are under the
firm’s control
– the firm chooses levels of these inputs in
order to maximize profits
• treats p, v, and w as fixed parameters in its
decisions
38. 38
Profit Functions
• A firm’s profit function shows its
maximal profits as a function of the
prices that the firm faces
]),([),(),,(
,,
lll
ll
wvkkpfMaxkMaxwvp
kk
39. 39
Properties of the Profit
Function
• Homogeneity
– the profit function is homogeneous of
degree one in all prices
• with pure inflation, a firm will not change its
production plans and its level of profits will keep
up with that inflation
40. 40
Properties of the Profit
Function
• Nondecreasing in output price
– a firm could always respond to a rise in the
price of its output by not changing its input
or output plans
• profits must rise
41. 41
Properties of the Profit
Function
• Nonincreasing in input prices
– if the firm responded to an increase in an
input price by not changing the level of that
input, its costs would rise
• profits would fall
42. 42
Properties of the Profit
Function
• Convex in output prices
– the profits obtainable by averaging those
from two different output prices will be at
least as large as those obtainable from the
average of the two prices
wv
ppwvpwvp
,,
22
),,(),,( 2121
43. 43
Envelope Results
• We can apply the envelope theorem to
see how profits respond to changes in
output and input prices
),,(
),,(
wvpq
p
wvp
),,(
),,(
wvpk
v
wvp
),,(
),,(
wvp
w
wvp
l
44. 44
Producer Surplus in the
Short Run
• Because the profit function is
nondecreasing in output prices, we know
that if p2 > p1
(p2,…) (p1,…)
• The welfare gain to the firm of this price
increase can be measured by
welfare gain = (p2,…) - (p1,…)
45. 45
Producer Surplus in the
Short Run
output
price SMC
p1
q1
If the market price
is p1, the firm will
produce q1
If the market price
rises to p2, the firm
will produce q2
p2
q2
46. 46
The firm’s profits
rise by the shaded
area
Producer Surplus in the
Short Run
output
price SMC
p1
q1
p2
q2
47. 47
Producer Surplus in the
Short Run
• Mathematically, we can use the
envelope theorem results
,...)(,...)(
)/()(gainwelfare
12
2
1
2
1
pp
dppdppq
p
p
p
p
48. 48
Producer Surplus in the
Short Run
• We can measure how much the firm
values the right to produce at the
prevailing price relative to a situation
where it would produce no output
49. 49
Producer Surplus in the
Short Run
output
price SMC
p1
q1
Suppose that the
firm’s shutdown
price is p0
p
0
50. 50
Producer Surplus in the
Short Run
• The extra profits available from facing a
price of p1 are defined to be producer
surplus
1
0
)(,...)(,...)(surplusproducer 01
p
p
dppqpp
51. 51
Producer surplus
at a market price
of p1 is the
shaded area
Producer Surplus in the
Short Run
output
price SMC
p1
q1
p
0
52. 52
Producer Surplus in the
Short Run
• Producer surplus is the extra return that
producers make by making transactions
at the market price over and above what
they would earn if nothing was
produced
– the area below the market price and above
the supply curve
53. 53
Producer Surplus in the
Short Run
• Because the firm produces no output at
the shutdown price, (p0,…) = -vk1
– profits at the shutdown price are equal to the
firm’s fixed costs
• This implies that
producer surplus = (p1,…) - (p0,…)
= (p1,…) – (-vk1) = (p1,…) + vk1
– producer surplus is equal to current profits
plus short-run fixed costs
54. 54
Profit Maximization and
Input Demand
• A firm’s output is determined by the
amount of inputs it chooses to employ
– the relationship between inputs and
outputs is summarized by the production
function
• A firm’s economic profit can also be
expressed as a function of inputs
(k,l) = pq –C(q) = pf(k,l) – (vk + wl)
55. 55
Profit Maximization and
Input Demand
• The first-order conditions for a maximum
are
/k = p[f/k] – v = 0
/l = p[f/l] – w = 0
• A profit-maximizing firm should hire any
input up to the point at which its marginal
contribution to revenues is equal to the
marginal cost of hiring the input
56. 56
Profit Maximization and
Input Demand
• These first-order conditions for profit
maximization also imply cost
minimization
– they imply that RTS = w/v
57. 57
Profit Maximization and
Input Demand
• To ensure a true maximum, second-
order conditions require that
kk = fkk < 0
ll = fll < 0
kk ll - kl
2 = fkkfll – fkl
2 > 0
– capital and labor must exhibit sufficiently
diminishing marginal productivities so that
marginal costs rise as output expands
58. 58
Input Demand Functions
• In principle, the first-order conditions can
be solved to yield input demand functions
Capital Demand = k(p,v,w)
Labor Demand = l(p,v,w)
• These demand functions are
unconditional
– they implicitly allow the firm to adjust its
output to changing prices
59. 59
Single-Input Case
• We expect l/w 0
– diminishing marginal productivity of labor
• The first order condition for profit
maximization was
/l = p[f/l] – w = 0
• Taking the total differential, we get
dw
w
f
pdw
l
l
l
60. 60
Single-Input Case
• This reduces to
w
fp
l
ll1
• Solving further, we get
ll
l
fpw
1
• Since fll 0, l/w 0
61. 61
Two-Input Case
• For the case of two (or more inputs), the
story is more complex
– if there is a decrease in w, there will not
only be a change in l but also a change in
k as a new cost-minimizing combination of
inputs is chosen
• when k changes, the entire fl function changes
• But, even in this case, l/w 0
62. 62
Two-Input Case
• When w falls, two effects occur
– substitution effect
• if output is held constant, there will be a
tendency for the firm to want to substitute l for k
in the production process
– output effect
• a change in w will shift the firm’s expansion
path
• the firm’s cost curves will shift and a different
output level will be chosen
63. 63
Substitution Effect
q0
l per period
k per period
If output is held constant at q0 and w
falls, the firm will substitute l for k in
the production process
Because of diminishing
RTS along an isoquant,
the substitution effect will
always be negative
64. 64
Output Effect
Output
Price
A decline in w will lower the firm’s MC
MC
MC’
Consequently, the firm
will choose a new level
of output that is higher
P
q0 q1
65. 65
Output Effect
q0
l per period
k per period
Thus, the output effect
also implies a negative
relationship between l
and w
Output will rise to q1
q1
66. 66
Cross-Price Effects
• No definite statement can be made
about how capital usage responds to a
wage change
– a fall in the wage will lead the firm to
substitute away from capital
– the output effect will cause more capital to
be demanded as the firm expands
production
67. 67
Substitution and Output
Effects
• We have two concepts of demand for
any input
– the conditional demand for labor, lc(v,w,q)
– the unconditional demand for labor, l(p,v,w)
• At the profit-maximizing level of output
lc(v,w,q) = l(p,v,w)
68. 68
Substitution and Output
Effects
• Differentiation with respect to w yields
w
q
q
qwv
w
qwv
w
wvp cc
),,(),,(),,( lll
substitution
effect
output
effect
total effect
69. 69
Important Points to Note:
• In order to maximize profits, the firm
should choose to produce that output
level for which the marginal revenue is
equal to the marginal cost
70. 70
Important Points to Note:
• If a firm is a price taker, its output
decisions do not affect the price of its
output
– marginal revenue is equal to price
• If the firm faces a downward-sloping
demand for its output, marginal
revenue will be less than price
71. 71
Important Points to Note:
• Marginal revenue and the price
elasticity of demand are related by the
formula
pqe
pMR
,
1
1
72. 72
Important Points to Note:
• The supply curve for a price-taking,
profit-maximizing firm is given by the
positively sloped portion of its marginal
cost curve above the point of minimum
average variable cost (AVC)
– if price falls below minimum AVC, the
firm’s profit-maximizing choice is to shut
down and produce nothing
73. 73
Important Points to Note:
• The firm’s reactions to the various
prices it faces can be judged through
use of its profit function
– shows maximum profits for the firm given
the price of its output, the prices of its
inputs, and the production technology
74. 74
Important Points to Note:
• The firm’s profit function yields
particularly useful envelope results
– differentiation with respect to market price
yields the supply function
– differentiation with respect to any input
price yields the (inverse of) the demand
function for that input
75. 75
Important Points to Note:
• Short-run changes in market price
result in changes in the firm’s short-run
profitability
– these can be measured graphically by
changes in the size of producer surplus
– the profit function can also be used to
calculate changes in producer surplus
76. 76
Important Points to Note:
• Profit maximization provides a theory
of the firm’s derived demand for inputs
– the firm will hire any input up to the point
at which the value of its marginal product
is just equal to its per-unit market price
– increases in the price of an input will
induce substitution and output effects that
cause the firm to reduce hiring of that
input