Microeconomic Graph Review

1
Microeconomic Graph Review
2
Cost Analysis
3
Total Cost Curves
TC
400
VC
350
300
TC VC FC
250
Total cost
200
150
100
FC
50
0
2
4
6
8
10
20
30
Quantity of earrings
4
Per Unit Output Cost Curves
MC
ATC
AVC
AFC
5
A Typical Long-Run Average Total Cost Curve
64
Constant returns to scale
62
Economies of scale
Diseconomies of scale
60
58
B
56
Costs per unit
ATC
C
A
54
Minimum efficient level of production
52
50
48
1
1
12
13
14
15
16
17
18
19
20
Q
6
Relationship Between Average and Marginal Costs
Area A
Area C
ATC
MC
60
50
AVC
40
Costs per unit
30
20
10
0
Quantity
1
2
3
4
5
6
7
8
9
7
PERFECTCOMPETITION

• Chapter 11

8
Market Demand Versus Individual Firm Demand Curve
Market
Firm
Market supply
Price
Individual firm demand
10
A
B
C
8
6
4
Market demand
2
0
10
20
30
Quantity

1,000
3,000
2,000
9
Marginal Cost, Marginal Revenue, and Price
MC
P D MR
10
The Firms Supply Curve is the MC Curve Above AVC
Marginal cost
61
60
Cost
50
A
40
35
30
20
19.50
10
0
11
Profit Maximization Using Total Cost and Total
Revenue Curves
TC
TR
Loss
Profit 45
12
Determining Profits Graphically
MC
MC
MC
Price
Price
Price
65
65
65
60
60
60
55
55
55
ATC
50
50
50
ATC
45
45
45
40
40
40
D
A
P MR
Loss
P MR
35
35
35
Profit
P MR
B
30
30
30
ATC
AVC
25
25
25
AVC
C
AVC
E
20
20
20
15
15
15
10
10
10
5
5
5
0
0
0
1
2
3
4
5
6
7
8
9
10
12
1
2
3
4
5
6
7
8
9
10
12
1
2
3
4
5
6
7
8
9
10
12
Quantity
Quantity
Quantity
Profit case
Loss case
Zero profit case
13
The Shutdown Decision
MC
ATC
Loss
P MR
AVC
4
Quantity
2
6
8
14
Long-Run Competitive Equilibrium
MC
SRATC
LRATC
P MR
0
15
Market Response to an Increase in Demand
Firm
Market
Price
MC
S0SR
S1SR
AC
B
B
9
C
Profit
7
SLR
7
A
A
D1
D0
0
12
10
0
Quantity
700
1,200
16
MONOPOLY

• Chapter 12

17
Equilibrium Price and Quantity
18
Equilibrium Price and Quantity
MC
MR MC at approximately 4 units
D
MR
19
Comparison of Monopoly and Pure Competition
MC
Price
Monopolist price 24 (MRMC)
Monopoly output is lower and price is higher
than in pure competition.
36
Competitive Price 20.50 (PMC)
24
20.50
12
D
0
1
2
3
4
5
6
7
8
9
10
MR
20
A Monopolist Maximizing Profit
MC
Profit is P-ATC (A-B) at output QM.
Monopolist charges price PM from A on the demand
curve.
Price
ATC
Monopolist produces output QM where MRMC.
Profit
CM
D
MR
Quantity
0
21
Breaking Even
MC
Price
ATC

• Produce QM where
• MR MC

• Price (PM) ATC

• Profit 0

D
MR
Quantity
0
22
Minimizing Losses
MC
Price
ATC

• Produce QM, where
• MR MC.

B
CM
A
PM

• Price (PM) lt Cost (CM)

Loss

• Loss CM PMBA

D
MR
Quantity
0
QM
23
Welfare Loss

• B and D welfare loss or
• deadweight loss

Price
MC

• C transfer from consumer
• surplus to monopolist

PC

• A opportunity cost of
• diverted resources

MR
D
0
QC
Quantity
24
Natural Monopoly

• One firm producing Q1 has average cost C1.

• If two firms share the market, each produces
• Q1/2 and has average cost C2.

• Three firms each producing Q1/3 have
• averagecost C3.

C3
Average Cost
C2
C1
ATC
0
Quantity
Q?
Q½
Q1
25
Natural Monopoly

• A natural monopolist produces QM and
• charges PM and earns a profit.

Profit

• If the government regulates a competitive
• solution where PMC, the monopolist
• charges PC and produces QC for a loss.

PM
CM
Average Cost
CC
ATC
Loss
PC
MC
MR
D
QM
QC
0
Quantity
26
MONOPOLISTIC COMPETITION, OLIGOPOLY, AND
STRATEGIC PRICING

• Chapter 13

27
Equilibrium in Monopolistic Competition
Profit maximizing output is where MRMC.
MC
Price
ATC
PM
At equilibrium PATC and economic profits are
zero.
MR
D
0
Quantity
28
Comparing Perfect and Monopolistic Competition
Perfect competition
Monopolistic competition
Price
MC
MC
ATC
ATC
PC
D
MR
D
Quantity
0
29
The Kinked Demand Curve
a
b
MC0
P
MR1
c
MC1
D1
d
D2
Q
MR2
30
Why Are Prices Sticky?

• Informal collusion is an important reason why
  prices are sticky.
• Another is the kinked demand curve.
• If a firm increases price, others wont go along,
  so demand is very elastic for price increases.
• If a firm lowers price, other firms match the
  decrease, so demand is inelastic for price
  decreases.

31
The Payoff Matrix of Strategic Pricing Duopoly
A Does not cheat
A Cheats
A 200,000
B Does not cheat
B 75,000
B 75,000
A 0
B Cheats
B 200,000
B 0
32
Comparison of Market Structures
Structure
Characteristics
33
Lorenz Curve of U.S. Income, 2003
C
100
J
Percentage of Total Family Income
Cumulative Percentage of Total Family Income
Income Quintile
80
60
3.4
3.4
I
Cumulative percentage of income
8.7
12.1
B
40
14.8
26.9
H
A
23.4
50.3
G
20
F
49.8
100.0
0
20
40
60
80
100
34
Distribution of Income Before After Taxes and
Transfers, 2003

• After-transfer income is somewhat closer to being
  evenly distributed.
• The increase in equality may come at the cost of
  a reduction in the total amount of income earned
  by society.

Before taxes and transfers
35
Producer and Consumer Surplus
10
CS ½(5x5) 12.5 Area of blue triangle
9

Consumer Surplus
S
8
PS ½(5x5) 12.5 Area of red triangle
7
6
Price
5
The combination of producer and consumer surplus
is maximized at market equilibrium.
4
3
Producer Surplus
2
D
1
0
10
9
8
7
6
5
4
3
2
1
Quantity
36
Producer and Consumer Surplus
Combined consumer and producer surplus
decreases when price is above equilibrium.
If price is 6, Consumer Surplus CS 1/2
(4x4) 8
10
9

S
8
7
6
Lost surplus ½(2x1) 1
Price
5
4
Producer Surplus gains 2x4 8 units of lost
consumer surplus
3
2
D
1
0
10
9
8
7
6
5
4
3
2
1
Quantity
37
Costs of Taxation
A per unit tax t paid by the suppliers shifts the
supply curve from S0 to S1 and in- creases price
to P1 and decreases quantity to Q1.
Price
Consumer surplus
S1
S0
A
Consumer surplus is ABC before the tax and A
after the tax.
B
C
Deadweight loss
P0
E
Producer surplus is DEF before the tax and F
after the tax.
D
F
D
Government revenueBD
Deadweight lossCE
Q0
Quantity
38
Who Bears the Tax Burden?
Demand is elastic Equal burden
Demand is inelastic Larger consumer burden
S1
D
D
70
70
tax
S0
S0
60
60
50
50
Price of luxury boats
Price of luxury boats
40
40
590

0
0

500
600
510
600
Quantity of luxury boats
Quantity of luxury boats
39
Who Bears the Tax Burden?
Tax burden is independent of who pays the tax.
Supplier pays the tax- Supply shifts
Consumer pays the tax- Demand shifts
70
S
60
D0
50
Price of luxury boats
tax
40
D1

0
510
600
Quantity of luxury boats
40
Effect of a Price Ceiling
S
A
C
B
P0
D
E
P1
Price ceiling
F
Transferred to consumers
D
Q1
Q0
41
Effect of a Price Floor
S
A
C
B
P0
Welfare loss
D
E
F
Transferred to producers
D
Q0
42
A Negative Externality
S1 Marginal social cost
S Marginal private cost
The competitive price, P0, is too low and the
quantity, Q0, is too high to maximize welfare.
D Marginal social benefit
43
A Positive Externality
S Marginal private and social cost
D1 Marginal social benefit
The competitive price, P0, and quantity, Q0, are
too low to maximize welfare.
D0 Marginal private benefit
44
Regulation through Taxation
Marginal social cost
A tax on pollution that includes the social cost
of the negative externality will cause
individuals to reduce the quantity of the
pollution-causing activity to a level, Q1.
Marginal private cost
Efficient tax
Marginal social benefit