Introduction to Economics Lecture 3 PDF

uct io n Welfare Analysis od In onomics t r Curtis & Irvine: ch.5.1 – 5.3 to Ec 3 u r e OpenStax College: ch.8 Lect consumer surplus:...

uct io n Welfare Analysis od In onomics t r Curtis & Irvine: ch.5.1 – 5.3 to Ec 3 u r e OpenStax College: ch.8 Lect consumer surplus: Social Efficiency / Social Surplus producer surplus: ly M P up p S CS social surplus: P PS De ma nd M deadweight loss: 0 Q  Social Efficiency / Social Surplus Marginal Marginal BENEFIT HIGHER COST HIGHER ! Supply = WILLINGNES TO PRODUCE P upply = the marginal cost ! S P De ma nd Demand = WILLINGNES TO PAY = the expected benefit of unit ! ! ! 0 Q1 Q2 Q3 Q4 Q5 Q Textbook: Ch.5  PRICE CEILING PRICE FLOOR ss ss P P ply Lo M Lo ply M p up S t u t S igh igh CS we we PRICE FLOOR CS ad ad P De De PS P De PRICE CEILING De PS ma nd M ma nd M 0 0 Q Q  Market Structures Perfect Monopolistic Competition Oligopoly Monopoly Competition NUMBER OF many many few one FIRMS SIMILARITY OF same, same or differentiated unique PRODUCTS homogenous different small or SIZE OF FIRMS small large very large moderate BARRIERS TO none Low high high ENTRY  Perfect Competition & Welfare Analysis Curtis & Irvine: ch.9 OpenStax College: ch.8 RVI E W OVE ALL THE MARKET STRUCTURES WE ARE STUDYING HAVE… SAME ASSUMPTIONS ABOUT FIRMS: firm’s motivation: PROFIT MAXIMISATION Profit = Total Revenue – Total Cost TOTAL MARKET DEMAND STRUCTURE: Market demand is downward sloping Price­ then Quantity Demanded ¯  REVIEW Marginal Cost & Average Cost Curves Cost MC, AC MC AC Q  A Perfectly Competitive Market A perfectly competitive market must meet the following requirements: – many firms; each firm is insignificant in overall output – firms’ products are standardised (homogenous products) T ake rs ” “Price s & sellers b u y er – full information b o th about products, technology, price – many buyers in the market – free entry & exit for potential new firms  Market Demand Versus Individual Firm Demand for the market M each typical firm within ly pp P P Su DemandF Demand curve for the De m market is downward an dM 0 sloping, but Q 0 Q each firm’s demand No firm can control the price. curve is perfectly = Each firm is a PRICE TAKER. elastic (horizontal).  Short Run Profit Maximisation Each firm takes the market price; demand curve for each individual firm is PERFECTLY ELASTIC (horizontal demand curve) Consider why for each firm: MR = P Profit Maximisation: MC = MR \ MC = P short-run: each firm can make an economic profit  SHORT RUN MCSR C,R ACSR P SM Pm Df = π MR f = AR f DM 0 Q 0 Q*f Q  Decision Making… always optimal production is where: MC = MR If you are making losses: If you cover your variable costs (TR > TVC), worth continuing, IN THE SHORT-RUN (temporarily producing at a loss is less of a loss than shutting down) If you cannot cover your Variable costs, then shutdown even in the short-run! If a firm is producing, then it should produce where marginal revenue equals marginal cost.  & then the Long-Run CONSIDER LONG-RUN ANALYSIS: If economic profits: New firms will enter any new firms will market where economic profits are positive (π>0); enter the industry Some firms will exit any Results: market where economic profits are negative (π