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by: Julia Metz V

EconPrinciplesMicro ECON001

Marketplace > Georgetown University > Economcs > ECON001 > EconPrinciplesMicro
Julia Metz V

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Class Notes
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This 18 page Class Notes was uploaded by Julia Metz V on Monday October 12, 2015. The Class Notes belongs to ECON001 at Georgetown University taught by ArikLevinson in Fall. Since its upload, it has received 47 views. For similar materials see /class/221915/econ001-georgetown-university in Economcs at Georgetown University.


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Date Created: 10/12/15
Economics 001 Principles of Microeconomics Professor Arik Levinson Lecture 13 7 Firms 7 cost in the shortrun A diagram of the economy mm 3 W and gunman semees S Firms Three economic supply decisions Firms Assume pro t maximization 1rPerTC Inputs factors ofproduction Outputs pr d cts 1 Whether to produce 2 How much to produce 3 How to produce Costs a purchased and rented factors b imputed costs opportunity costs 7 using own time 7 rms39 own equity 7 durable assets censuetanunskttteetwutketwnbmneatnszntnnnpetveattnanvbttnanv Plentttul tubs WDYKWQ tn a tadnvvt betng a ebnsttuettbn tabbtett ubtng mtldmre ete sne tsthmkmg at upetattng an tee eteatn can an rne Matt tn Wasntnutbn DC sne nas ubne sbtne mve lgalmgt anu knbwatne tuttbvn g Auseu eatt masssunu rne eatt nu set one teat tatet tut about mun sne nas mun tn tne bantt eatntnu 5 tntetest tnten ate ean mves1 tn tne eatt uttne mnnevtnvthe atttne bank wtt ename net tmt eatn wH cast net u nun sne ubes nut neeu tn uttee a t 5 wt gwe nettne tee aeatn vteektv t 7 One Veav s wann buttbwtne tnbnev tuttnts because Haagenrnaz tn amnee at nets e sne an setttnat tee aeatn btsaztnnn What IS ha Imal ma mm m nnemnnu the IEE mam can fur nne year along Imn attnum all unnnnunuytnsst Production and costs in the short run 0 DN Short run time period in which some factors are E 7 xed factors hard to change 7 xed factors do not depend on output Q 0 TC TFCTVC Costs AC TCQ AFC7TFCQ AVC7TVCQ MC ATCAQATVCAQ MR ATIUAQPgtltAQAQ for now Two parts of the shortrun production decision 0 I produce at all 7 TRgtTVC 7 implies 7 can be negative in the SR 0 2 how much Example A pizza business 0 rent 100 day fixed costs 0 P 10 each 0 AVC 5 per pizza 0 Sundays slow only sell 10 pizzas Sunday production decision 0 TRlOgtltlO100 TVClOgtlt550 TC10050150 7LTR7TC1007150 750 Shutdown price rule 1 0 Stay open if TR gt TVC PgtltQ gt TVC P gt TVCQ 7 AVC P gt AVC IN C 0515 AC TcQ AFCTFCQ AvcTvcQ MC ATCAQATVCAQ MR ATRAQPXAQAQ fur nuw Example A sweater factory Wage 25day m L g Tvc EAFCAVCATCM 25 1 4 25 2 1U 25 3 13 25 4 15 25 5 15 Example A sweater factory wage szsday Relahunshp Between Tutal Fmduct and Tutal Cust 7quot w 31 E r TFC g Tvc E AFC AVC ATC m E U 25 n n 25 E 1 525 e c 25 4 25 511 525 525125 5 1 417 25 1m 5m 75 25a sun 75m 1 233 e 25 13 75 mm 192 577 759 1 1250 25 15 mm 125 157 557 an 2500 5 1 3 2 5 25 15 125 15m 155 781 938 whmww 1 an e 155 m 9511551de ShortRunCost ShortRun Cost m e Remw me gaphwnhcast 3 and eaxxsandampulan WNW M m we mdyvu39ve gut a 39heTVCc drawn 3 w 111mm 5quot r 7 u e mm rm am back m mm m m ma TFC wu39ve gunhz TC cuve 5 WC and m 15 am Mu113 55 m1 IL ShortRun Cost Marginal Cost Marginal oost MC is the increase in total cost that results from a one unit increase in total roduet 7 Over the output range with Increasing marginal returns rnarginal eost falls as output increases 7 Over the output range with diminishing marginal returns rnarginal eostnses as output inereases ShortRun Cost Average Cost 7 Average cost rneasur es can be den39ved from each oftlie total eost measures 7 Average xed cost AFC is total xed eost 39t of output 7 Average variable cost A VC is total variable cost per unit o ou u 7 Average total cost A TC is total cost per unit of output rATCZAFCJrAVC ShunRun C 051 is Arc in is cotpu twmateu Pcrduy s m ouipot Minn payday Pelt 2 of the production decision marginal analysis cost of additional sweater MC ATC A Q bene t of additional sweater p MR 7 MIRgtMC produee anotlner sweater e ifMIRltMC produee fewer sweaters The two production decisions Sumt Supply Curve I4 The Effect ofa Change in InputPIices Ano39her View ofProduction Costs may Cumeam um 11 1am sways p21 am 12 mm mm Pmduct E a 1 a 1 z c 2 1n g D 3 13 u E o 15 r 5 1e Oulput Sweam Cumeam Total Product 0 um uHabuv Sweaters p21 day paydav M avg m1 1 Tum Pmum Pmduct g 15 A a E m a 1 o B a 5 c 2 1n 3 D D 3 13 2 u 1 2 3 4 5 E 5 1 Labor per day F 5 5 SWEatevCumEanx UmtsuHabuv Jackets MarginzlPrndu payday p21 day Mavgma Aveng a ma Pvuduct Pvuduct Pvuducl v i 6 4 g 4 E 1 A E A an 22 g s C 2 m 3 5 an n 2 A 6 D 3 13 2 4 33 E 4 15 1 3 75 Lzhor w my Marginal AverageProduct Egmmbmmu Marginal and Average Product Laborperday Io Economics 001 Principles of Microeconomics Professor Arik Levinson Lecture 22 7 poverty and inequality 7 income redistribution r Lorenz curves 7 leaky buckets a W Poverty Lyndon Johnson39s quotWar on Povertyquot Thrifty food plan TFP Of cial de nition ofpoveny 3XTFP 7 the quotpoverty linequot 7 families of4 w income lt 3169 in 1964 7 20614 in 2006 Poverty today 2006 123 ofAmericans 37 million 7 kids n 7 old people 94 7 whites 82 7 African Americans 243 7 Hispanic 206 7 married couples 49 Measu rig Econom c Inequ The Dislllllu l il I Incume Fl me 18 1 shuwslhe distribution oi income across he 1 06 million hausehuids iii the United 39 States In 2001 wasuring Economic Inequality The punres2 at me population in mm received only rmquot 35nrmeiniai H I IHCDmE V middieZUoi U Iherereived145 ullntai mmm Thenciiasum received 5Ul of luial income Inequality Mean family income by quintile 2003 dollars er anes Secnnd mun Fnunh nghes mm mm mm mm min 1m mu 27795 ms man mm mm 3555 295m 1935 mi mos 1m alarm was znnn mm 135n3 aim li 3mm 5mm man mm mm mi 328 53m 79m 53322 Inequality 4n an uffamdies Inequality Mean family income by quimile 2003 dollars 55115 555555 5155555 55555 1155 mm mu mu mu 155 5 5 122 17 5 255 15 5 1555 55 115 175 212 15 7 1555 5 5 1 5 7 5 1 1 1555 1 5 115 15 5 215 151 1555 1 5 155 15 5 255 11 5 1995 06 m1 158 32 a 5 Farm wealth umme 2555 1 5 55 15 1 227 17 7 l 4 g 2555 15 55 155 255 175 1995 00 00 40 no 850 Lorenz cu1ves 3151 5555151551 AAEi 5 uf IUD lEIEI 15555555 15555555 ur weath ur weath 5U 5U weath I I I ZEI 8U lEIEI zu 4n uffamihes o5 cuemuunvnrus 555555555 555quot The Distribution of Income by Selected Family Characteristics in 1994 i IN Income redistribution 0 1 Progressive income taxes 7 richer people pay a higher percentage of their incomes in taxes 0 2 Income maintenance cash transfers 7 Social Security 7 Unemployment insurance 7 TANF formerly AFDC 3 Transfers in kind 7 Medicaid Food Stamps housing Scale of income redistribution 0 lowest 20 of population earns 4 of market income 7 13 a er adding transfers and subtracting taxes 0 highest 20 ofpopulation earns 49 of market income 7 31 a er adding transfers and subtracting taxes Income Redistribution Cumulative ni39incmne a waami Cumulative ni39 families Leaky buckets equity V ef ciency 0 Income redistribution diminishes efficiency 0 Size of the quotpiequot depends on how it is divided 0 l administrative costs 0 2 efficiency incentive cosm The Welfare Trap Examplea mom and 2 kids in PA in 1996 I l earns zero 7 505 2year 7 Foodstamps 7 2166 7 Medicaid 2300 7 TOTAL 9518 I 2 earns 7000 7 net earnings 7 7000 7 Food stamps 7 1881 7 AFDC 0 7 Medicaid 0 7 Tax and S S 7975 7 TOTAL 7906 The welfare trap income after taxes and transfers transfers W Market income it Traditional Programs Nu dieribuLinn ncnme after redistrihu nn Market Incume ncnme after redistrihu nn A Negative Income TaX Nu dieribuLinn Market Incume Comparing Traditional Programs and a Negative Income TaX Nu dislribuliun Incnme after rmimihu nn Market Incume I43 Economics 001 Principles of Microeconomics Professor Arik Levinson Leetuie 4 7Eflieieney 7Paieto ef cien cY 7Consuinei and piodueei surplus 7Deadweiglitloss 3 Definitions of Efficiency Engineering ef ciency 7 output per unit of input 7 example niiles pei gallon Production ef ciency 7 eannot produce inoie of one good without prndu ng less nfanntliei good using innieinnu 7 points on the PPF Definitions of Efficiency Economic ef ciency orPareto e iciency 7 eannot make any one person better offwithout making anotliei personw e off Note that this is not the textbook deflnition The textbook definition An e icient allocation ofresources occurs o s and seiviees that people value inost 39 lil 7 Resources aie alloeated ef ciently wlien it is not possible to produce a ood oi seiviee without giving up some otliei good oi seiviee thatis valued inoi 39 7 Ef ciency is based on value and people39s piereienees deteiinine value Efficiency underlying concepts Maiginal bene t is the bene t that a peison ieeeives rioin co suining one inoie unit ofa good oi seiviee 7 measured as the maximum amnunt th at aneisonis Willing to gve up oi one addmnnai unit Principle afdecreasmgmargmal benefit 7 inaiginal bene t deeie ases as consumptinnimieases Marginal cost is the opportunity cost of producing one more unit ofagood or service 7 ineasuied as the value ofthe best alteinative foregone Principle ufiricreasirig marginal curt 7 inaiginal cost ineieases as the q tity produced ineieases Efficiency and Inefficiency Efficiency depends upon a comparison of marginal cost and marginal benefit 0 Three possibilities 7 marginal bene t exceeds marginal cost 7 marginal cost exceeds marginal bene t 7 marginal bene t equals marginal cost Another way of thinking about Demand Consumer Surplus Willingness wpw Another way of thinking about Supply Willingness rovide producer Surplus Another way of thinking about Market Equilibria sum of CSPS Willingness rov ide The Efficient Quantity of Pizza N u N o o Margnal cast and marginal bene t dollars worth nfgnnds and services 3 u 0 5 10 15 20 Quantity thuusands ufpizzas per day The Efficient Quantity of Pizza 93 3 gig 20 520 1115 375 310 SE RE 23 5 MB 0 5 10 15 20 Quantity thuusands ufpizzas per day The Efficient Quantity of Pizza HHNN ellcu E a Marglnal cast and magnal bene t dollars wnitln nfgnnds ann servlces u MB 0 5 10 15 20 Quantity Lhuusands ufplzzas per day The Efficient Quantity of Pizza gilytha us In easepmdu Inn N u N o Pizza cqslsmnre man it is vz1ued Decrease pruduc un u o Marglnal cast and magnal bene t dollars wnitln nfgnnds ann servlces u 15 20 Quantity Lhuusands ufplzzas per day The Efficient Quantity of Pizza N u Enlclent quantity M C ur pizza N o Margnal cast and inaiginal bene t dollars worth nfgnnds and services Another way of seeing the efficient quantity of pizza N Margnal cast and inaiginal bene t dollars worth nfgnnds and services MB an Qiianu39ty High Quantity 10 5 MB 0 5 10 15 20 Quantity unuusanus ufplzzas per day At the market equilibrium QSQD MC MB 0 Welfare the sum of CSPS is maximized en ceiling Deadweight Loss and Rent Control Deadweight Loss DN Deadweight Loss The decrease in consumer and roducer surplus resulting from an inef cient level of production IJs Economics 001 Principles of Microeconomics Professor Arik Levinson Lecture 6 7 Elasticity 7 Price elasticity ofDemand 7 Income elasticity W 7 Cross piee elasticity Elasticity example Bovine Growth Hormone BGH 7 increases milk prod uction fe and indistinguishable from other milk Why are dairy farmers opposed DN Revenue Price x Quantity Revenue change depends on quotsteepnessquot of demand curve Demand curve shallow D memo farmers favor BGH 1 Milk Demand curve steep P2051101 farmers Oppose BGH Q1 Q2 Milk DN Price elasticity of demand mg 77 o AJAPD Arc Elasticity of Demand Q2 7 Q1 1 7 75Q1Q27 7AQXP1P2 17D P2 P1 AP Q1Q2 1 P 201 2 DN Demandis price elastic if nDgt1 DN Demandis price inelastic if TDlt1 Figure 52 A StraightLine Demand Curve 1 in 1451111 1551111 Q sun isun Figure 5 3 Three Demand Curves wiui Constant Elasticity 11 pm Di 7 com o qmoiy mnsu imm Total revenue and Th Ifdemand is elastic a 1 peioem price cut increases the quantity sold by moi 1m 1 percent and to revenue increases 11 demand is inelastic a 1 peioem price on increases the quantity sold byless 1m 1 percent and total revenue decreases Ifdemandis unitary elastic a 1 peioem piioe cut increases the quantity sold by 1 percent and total nue remains un anged Long run v short run nD Dmn o M IN Examples of demand elasticity 0 public transport 04 0 food 04 0 gas 05 0 clothing 06 0 beef 10 0 automobiles 21 0 hats 30 Elasticity of Demand Across Countries 0 The elasticity of demand for food is estimated to be 08 in India Nigeria and Tanzaniaimuch higher than in the U S 0 In those three countries a 10 increase in the price of food will lead to an 8 drop in quantity 0 The amount spent on food will rise by 2 DN Price elasticity of supply AQS 77s AP DN Income elasticity of demand AQD 77y AY Income elasticity can be positive or negative Suppose income increases a quotnormalquot good an quotinferiorquot good Income of Demand 39Nurmal 1 E E E E a 3 o o lb Examples of income elasticity 0 whole milk 05 0 potatoes 02 0 wine inFrance 01 0 food 02 0 poultty 03 0 gas 1 0 wine in US 14 0 restaurant meals 24 DN Crossprice elasticity AQA 77AB APB DN Goods are substitutes if nABgt0 DN Goods are complements if 11 ABlt0 Crossmprice Elasticity of Demand Prlce ofWalkmans Dn Quantity of Walkman Cross Elasticity of Demand Prlce ofWalkmans Quantity of Walkman Cross Elasticity of Demand Pnce ofWalkmans acom n i rise Negatlve cruss39elastmity Quantity of Walkman IJk


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