ECON Week 6 Notes
ECON Week 6 Notes ECON 2010
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This 13 page Class Notes was uploaded by jared.stein Notetaker on Sunday October 2, 2016. The Class Notes belongs to ECON 2010 at University of Colorado at Boulder taught by Dr. Charles A M de Bartolome in Fall 2016. Since its upload, it has received 5 views. For similar materials see Principles of Microeconomics in Microeconomics at University of Colorado at Boulder.
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Date Created: 10/02/16
9/28/16 Lecture 15: I. Society A. Increase in Society’s Well Being 1. Society’s benefit from change = $ gift which gives same increase in well being 2. MB Sociand D Socicurves are the same (like with individuals) a. Can calculate how much net benefit society gains from market by summing NB gained “one unit at a time” 3. If some buyers like entertainment more, why do all buyers have the same MB? a. Tom - “wild and crazy” gets: • High MB on first units • Buys until MB = $5/unit • Buys 20 units b. Susan - “quiet and shy” • Low MB on first units • Buys until MB = $5/unit • Buys 10 units c. Tom buys 20 units and his marginal benefit on 20th unit is $5/unit Susan buys 10 units and her marginal benefit on 10th unit is $5/unit d. Tom likes entertainment more so Tom gets more benefit from 1st, 2nd, … unit and buys more 4. Society’s MB Curve a. Stack individual D or MB to get society MB market b. To draw D curve: • At price $5/unit • Tom buys units until MB = $5/unit buys 30 units • Susan Buy units until MB = $5/unit buys 30 units • Richard buy units until MB = $5/unit buys 30 units e. If price = 5, Qark= 60 and everybody has MB = 5 f. To draw MB soccurve: • When Q=60, everybody as MB = $5/unit • If extra unit is produced and given to Tom Tom’s benefit increased 5 Susans benefit increased 0 Richard’s benefit increased 0 Society’s benefit increased 5 • If extra unit produced given to Susan: Tom’s benefit increased 0 Susans benefit increased 5 Richard’s benefit increased 0 Society’s benefit increased 5 society individual • MB of extra unit = MB getting the unit, If 60 units produced, all individuals have same MB, MB soci= MB Soci= $5/unit • market g. To draw D curve: • At price $10/unit • Tom buys units until MB = $10/unit buys 12 units • Susan buys units until MB = $10/unit buys 6 units • Richard buys units until MB = $10/unit buys 18 units • • To draw MB soccurve When Q=36 everybody has MB = $10/units • If extra unit produced and given to Sam • Tom’s benefit increased 10 • Susan’s benefit increased 0 • Richard’s benefit increased 0 Society’s benefit 10 • If extra unit produced and given to Susan • Tom’s benefit increased 10 • Susan’s benefit increased 0 • Richard’s benefit increased 0 Society’s benefit 10 society individual • MB of extra unit = MB getting the unit. If 36 units produced, all individuals have same MB, MB soc= MB indi= $10/unit Although MB socand D marcurves have different interpretations, lines are same B. What is Society’s Net Benefit from Buying when Price is $5 1. Marginal Analysis “One unit at a time” a. Interpret market D curve as MB socicurve • Society’s net = Net benefit to + Net benefit to + ... person getting person getting 1st unit 2nd unti = MB soci- p + MB soci- p + … of moving margin of moving margin 0 → 1 1 → 2 = 12.5 + 11.5 = Area of 1st + area of 2nd rectangle rectangle = area of ABE = ½(60)12.5 = 375 ($ per month) b. Important Points market • D curve tells us society’s benefit of getting more • Can value benefit gained by using markets • Not “good” but “better by” as if given $375/month C. Consumer Surplus (Net Benefit) of price reduction 1. At price 10 - society’s net benefit from buying = △ABC = ½(36)7.5 = 135 2. At price 5 - society’s net benefit from buying = △ADE = ½(60)12.5 = 375 3. If price falls 10 → 5, buyers gain net benefit BCED, 240 • BCFD because original purchases cost less ($180) • CFE is net benefit from new purchases ($60) 4. People’s well being improved “as if” they had been given $240 D. Application of Consumer Surplus 1. What is society’s net benefit from buying when price is $5 a. Using marginal analysis: “one unit at a time” b. The market D curve is also the MB soccurve c. Society’s net = Net benefit to person + Net benefit to person + ... benefit gained getting 1st unit getting 2nd unit society society = MB -$ price + MB - $ price + .... d. (part c above) is same as: Moving margin then.. Moving margin (again) and again... 0 → 1 1→ 2 = 12.5 + 11.5 +.... = area of 1st + area of 2nd +.... Rectangle rectangle = area of △ABE = ½(60)12.5 = 375 ($/month) e. Important points market • D curve tells us how society’s benefit of getting more • We can value benefit gains by using markets: • Society it not “good” but “better by” (insert net benefit) 2. Consumer Surplus (Net Benefit) of price reduction a. At price $10- society’s net benefit from buying = △ABC = ½(36)7.5 = 135 b. At price $5- society’s net benefit from buying = △ADE = ½(60)12.5 = 375 c. If price falls $10 → $5, buyers gain net benefit BCED, 240 • BCFD because original purchase cost less ($180) • CFE is net benefit from new purchases ($60) d. People’s well being improved as if they had been given $240 3. Application of consumer surplus a. Evaluation of price ceiling for apartments b. Market outcome: Market Equilibrium Price = $3000/month Quantity = 240 apts. c. Consumer benefit from renting 240 apts at $3000/month • D curve is the same as MB curve • Net Benefit = net benefit + net benefit + ..... + net benefit 1st apt. 2nd apt. 240th apt. = area of △ABE = ½ (6,000-3,000)240 = 360,000 ($/month) 4. Price ceiling at $2,000/month a. Shortage: 320 - 80 = 240 • Consumer benefit from renting 80 apts. At $2,000/month b. D curve is same as MB curve Net Benefit = net benefit + net benefit + ..... + net benefit 1st apt. 2nd apt. 80th apt. = area of AFGH = ½ (4,000 + 3,000)80 = $280,000 ($/month) 9/30/16 Lecture 16: I. Firm Decision-Making and Societal Gains A. Firm Decision Making 1. Difference between Mankiw and Me a. Each firm makes at most 1 unit, b. Each firm can produce any number does it produce or not? By choosing of units: how many does it make? By whether to produce choosing how much to produce B. Manager decision making 1. What are managers trying to do when choosing how much to make a. Manager's Objective: To make as much profit as possible b. How does manager do this?: Choosing how much to produce c. Operating profit: =revenue - (variable) cost =Producer surplus 2. What are managers concerns a. What is my revenue? b. What are my costs? 3. How does revenue change as firm makes more a. Ex: firm making soup cans. Market Price = $2/can b. With competitive market, because firms is small • It feels it can sell more output without the market price changing • Without having to lower its price c. Revenue = price*quantity • As margin moved and firm makes extra unit, revenue goes up by price ($2), slope = 2 4. How does cost change as firm makes more a. Cost • As firm produces more output, uses more inputs, cost increases • Join points to form a curve • Curve is upward sloping • Slope of cost curve is cost of extra unit - the marginal 5. Marginal Cost a. If Q=0 first unit • Firm has lots of unused machines • Workers are very productive • To make first unit, hire only few workers • Extra cost associated with producing extra unit is low • Low marginal cost b. If Q is larger • Machines are already being used • Workers are less productives • To make cost associated with producing extra unit is higher • Higher marginal cost c. Cost Curve has increasing steepness • As output increases, costs incurred to make extra unit (marginal cost) increases • Law of Increasing Marginal Cost C. Smooth Curve: 1. Must make 1m cans 2. Can make ½m cans 3. Can make ¼m cans 4. Firms not restricted to producing whole units a. As smaller units allowed, points get closer together • If very small fractional units allowed, points become a curve b. As fractional units get smaller, units on either side of consumer unit have approx. same marginal cost • We assume this unless told otherwise D. Choosing How Much to Make 1. Put revenue and cost curves together b. Profit = revenue - cost • This is the distance between the curves c. To make profit as large as possible, managers continue to increase output until: • Distance between revenue and cost curves is greatest • Slope of revenue curve equals the slope of cost curve (Price = marginal cost) • In this case that’s at 40m soup cans per year E. Using Marginal Decision-Making 1. What is manager’s decision process by which s/he decides: a. How much to produce b. How much gives the highest profit 2. Use Marginal Decision-Making a. The margin is the line which separates the number of cans produced from the number of cans not-produced. b. Manager starts with margin at 0 cans and then considers increasing output 1 unit at a time • Extra profit if 1 = Extra revenue gained - extra cost incurred more can made and sold • Profit = price - marginal cost c. Top Curve: • If marginal cost < price, slope of revenue curve exceeds slope of cost curve. • Making the extra unit increases distance betweens lines (increases profit) • Move margin 0 → 1 d. Bottom Curve • Marginal cost < price • making the extra unit increases profit • Move margin 0 → 1 3. After first unit is made, manager considers increasing output 1 → 2 a. Top curve: • If marginal cost < price, slope of revenue curve exceeds slope of cost curve. • Making the extra unit increases distance betweens lines (increases profit) • Move margin 1 → 2 b. Bottom Curve: • Marginal cost < price • making the extra unit increases profit • Move margin 1 → 2 c. Continue “one at a time” until Q = 39,999,999 (price = MC) • If one more unit made, profit unchanged • Do it d. If making more than 60 units, MC > price • If made one less unit, money saved would exceed money forgone and profit increases • Do it • Keep going until price = marginal cost: if managers made extra unit, profit unchanged • Produce less if marginal cost exceeds price until MC = Price F. MC and S Curve are same Curve for Firms 1. Marginal Cost 2. Supply Curve 3. To draw curve a. Firm make all units for which MC < price or until MC = price b. If price = 1, makes all units until MC =1 and Q = 40 c. Curves have different interpretations but ultimately the same 4. KEY INSIGHT: MC and S curves are linked because of manager’s decision- making II. Operating Cost A. What is (operating) Profit of Firm if Price is $1/can 1. Operating profit = Producer surplus 2. a. Profit of 1st unit + profit of 2nd unit +..+ profit of 40th unit = p - MC + p - MC + …. + p - MC of 1st unit of 2nd unit of 40th unit = .8 + .79 + … + 0 = sum of rectangles = area of △ = ½(.8)40 = 16 (m$/week)
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