Week 7 Notes
Week 7 Notes PAM 2000
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This 4 page Class Notes was uploaded by Eunice on Saturday March 12, 2016. The Class Notes belongs to PAM 2000 at Cornell University taught by McDermott, E in Fall 2015. Since its upload, it has received 20 views. For similar materials see Intermediate Microeconomics in Political Science at Cornell University.
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Date Created: 03/12/16
PAM 2000 McDermott Spring 2016 March 8, 2016 solving kinked budget constraints o there will be tangency at each BC use the two optimality conditions to solve o check the kinks to see if their optimal COLA o Leontief: just as well of they would be worse of even with COLA when: the consumer’s preferred bundle doesn’t match the CPI’s implicit preference ratio of bundle o any other preferences: COLA makes the consumer better of o what conditions lead to worse of? firms o determine optimal level of production marginal cost: additional cost of producing one additional unit of a good (also the derivative of total cost) MC = ∆TC/∆Q = ∆VC/∆Q = w∆L/∆Q = w/(∆Q/∆L) = w/MPL Q: quantity VC: variable cost TC: total cost (fixed + variable) L: labor MPL: marginal product of labor o if diminishing, costs are increasing fixed cost (usually capital) vs. variable cost (VC) o VC: costs that change with the production of every additional unit (usually labor, exception being cases like union contracts) o MC curve cross AC curve at its minimum o profit maximization profit = total revenue – total cost discussion of firms as price takers (they don’t decide the price) profit (π) π = P(Q) – C(Q) o price: P o cost: C o quantity: Q π = TR – TC = P(Q) – F – VC o =Q(p-((TC)/Q)) o F: fixed costs price = AVC, firm is breaking even o >, profit o <, loss slide 16 for graphical representation decisions o output decision: firm produces, what output level (Q) maximizes its profits/minimizes losses o shutdown decision: is it more profitable to produce or shut down π < 0 when P < AVC + AFC if p<AVC, shut down p=AVC, π = F p = ATC, π = 0 o SR if firm is making a loss and price < AVC if AVC < F and π is positive then continue production in the short run so fixed costs can be paid of even if not with an optimal level of production marginal revenue (MR) is price for profit taking firms (derivative of total revenue) to determine whether increasing production is profitable, see if MR > MC o profit is maximized where MC = MR P>MC, next unit is profitable, increase production P=MC, keep production constant P<MC, production not optimal, reduce o producer surplus slide 14 for graphic representation March 10, 2016 perfect competition o short run v. long run long run: entry/exit decision no fixed costs P>ATC, positive profits so firms enter P<ATC, positive profits so firms exit in LR equilibrium, P=ATC, profits=0 assuming there are no barriers to entry long run: firms don’t lose money because if they did they will have exited shutdown decision in the short run based on fixed cost revenue < VC, shutdown o p<AVC o o supply first law of supply: as price increases, quantity supplied increases, ceteris paribus same as the MC curve above the ATC curve elasticity market supply function (aggregate supply function) o total quantity of good that’ll be suppled at each price o sum of all individual firm supply functions price elasticity of supply o amount producers will change the quantity suppled in response to a change in price o ε=%∆Q /%sP positive value if o ε= infinite, perfectly elastic infinity> ε>1 : elastic supply o ε=0, perfectly inelastic 1> ε>0 : inelastic supply second law of supply: the more time that producers have to react to a price change, the more elastically it’ll be supplied monopoly o governments creates monopoly patents o monopolies occur if a firm is more efficient or is superior in technology/production the firm controls an essential facility: a scarce resource rivals need o natural monopoly the firm can produce the total output of the market at a lower cost than other firms governments allow monopolies to public utilities o barriers to entry often it’s the government patent: an exclusive right granted to the inventor to sell a new product, process, substance, design for a fixed period of time o profit maximization no close substitutes in the market for a monopoly monopoly is the price maker MR=MC still applies MR curve has twice the slope of monopoly demand curve o deadweight loss: the total surplus that isn’t captured due to an efficient equilibrium not being reached efficient market: (perfectly competitive) allocation of goods will make it so that the marginal benefit of society is the same as marginal cost returns to input o increasing: you get more the more you put in monopolies are like this o decreasing: you get less back each time you put in more
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