Graphs and Charts

Micro

Marginal Analysis

• Marginal- the addition of one more unit

• Marginal Cost- the additional cost incurred from the consumption of the next unit

• Marginal Benefit- the additional benefit received from the consumption of the next unit

MC

MB

MB=MCStop Here

MB>MC consume

MB<MC don’t consume

Price

Quantity

Production Possibility Curve

• Points on the curve represents some max output combination of two products– Outside curve are points that

are unattainable (currently)– Inside curve are points that

fail to maximize available resources

• It is curved b/c of the Law of Increasing Costs– As more of a good is

produced, the greater its opportunity costs

A

B

C

Pizza

SANDWICHEES

Advantage

• Bakery Pizza Parlor

Opp. Costs Opp. Costs

Pastries Crusts Pastries Crust

10 0 5 0

0 5 0 10

1 PastryCosts

1 crust costs

1 pastry costs

1 crust costs

½ Crust 2 Pastries

2 crusts ½ pastry

Absolute Advantage- Being able to produce more of a good

Comparative Advantage- Being able to produce a good at lower opportunity costs

Specialize- focus resources on goods for which they have a comparative advantage

Economic Growth• The ability to produce a larger

total output over time• An increase in the quantity of

resources– Acquiring another over

• An increase in the quality of existing resources– Acquiring the best assistants in

the city

• Technological advancements in production– Electric mixers over hand

mixers• Piz

za

• SANDWICHEES

Demand

• Law- when the price of a good rises, consumers decrease their quantity demanded for that good

• Quantity Demanded– Price change when other

factors are constant– Move along the demand

curve Quantity

Price

D1

q1

p1

q2

p2

Change In Demand• When determinants other than

price affect demand– Consumer income– The price of substitute good

• If price of x falls demand for Y decreases

– The Price of complementary goods• The price of x falls demand for y

increases

– Consumer Expectations about future prices of lemonade

– Number of Buyers in the market for the good

• Increase in demand= rightward shift• Decrease in demand= leftward shift

D1 D2D3

q3 q1 q2

p

Supply

• Law- when the price of a good rises, suppliers increase their quantity supplied for that good

• Quantity supplied-– When the price of a

good changes and all other factors are held constant, the supply curve is held constant Q1 q2

p1

p2

Change in Supply

• When determinants other that price change the supply curve shifts– The cost of an input to the

production– Technology and productivity – Producer expectations

about future prices– Price of other goods that

can be produced– Number of firms in the

industry

S1

S2S3

p

q3 q1 q2

Equilibrium

• QS=QD– Where to two curves

intersect

• Shortage– QD>QS– Excess demand

• Surplus– QS>QD– Excess Supply

• There’s a return to equilibrium in the long-run Qe

Pe

Shortage

Surplus

1.25

.25

40 120

Price Elasticity of Demand

• Ed= (% in QD of Good x)/ (% in the price of good x)

• Price Elastic Ed>1• Price inelastic Ed<1• Unit elastic Ed=1

• When dealing with elasticity you must use percentage change

3

3

Ed>1Ed=1

Ed<1

Demand curve= P=6-Qd

Qd

P

Elasticity

Perfectly Elastic Perfectly Inelastic

Ed=0Ed=∞

Price Elasticity of Supply• Es= (%∆ in QS of X)/(%∆ in P

of X)• How elastic? Depends on

time– SR-More inelastic

• Graph intersects the x-axis

– LR- Elastic• Graph intersects the y-axis

– Unit Elastic• Intersects the origin (0,0)

– The less steep the supply curve the more elastic suppliers are in response to change in price

S-sr

S-lr

Excise Taxes• Per unit tax on

production– Respond as if

the marginal cost of producing each unit has risen by the amount of the tax

Price Elasticity of Demand

GovernmentRevenue

Decrease in consumption

Incidence of tax paid by consumers

Incidence of tax paid by suppliers

Ed=∞ The least The most 0% 100%

Ed>1 Falling Sizeable <50% >50%

Ed<1 Rising Minimal >50% <50%

Ed=1 The most Zero 100% 0%

Excise Taxes: Demand

Perfectly Elastic Perfectly InelasticSt

S0

T

p0

p0-T

Reve

nue

q0q1

T

s0

ST

Revenue

P0

P0+T

D

Q0

D

Excise Taxes: Supply

Perfectly Elastic

D

S0

STTax Rev. T

P0+T

P0

Horizontal supply curve shifts up by the amount of the Tax.

Equilibrium quantity decreases to Q1.

Government collects tax revenue= T*Q1

Consumers pay entire burden of tax

Q1 Q0

Excise Tax: Perfectly Inelastic Supply

• Can’t charge a higher price b/c that would create a surplus

• Firms pay T government for each of the Q0 units that are sold

• Consumers continue to pay P0

• Producers carry entire burden of Tax

P0

P0-T

Tax Revenue

S0

D0

Q0

Dead Weight Loss

• The net benefit sacrificed by society when an excise tax is used– Large decrease in

quantity below the untaxed outcome

– The loss increases as the demand or supply curves get more elastic

D

W

L

D0

S0

ST

p0

P0+T

Price Floors

• Government sets the price above equilibrium– That’s min price a good

can be sold for– Minimum Wage

• Creates a permanent surplus

P0

PF

Surplus

MC>MB

Qd Q0 Qs

S0

D0

Price Ceiling

• Feel the market equilibrium price is too high

• Creates a permanent shortage

• Price is set below equilibrium

S0

D0

Qs Qe Qd

Shortage

MB>

MC

Pe

Pc

Economies of Scale

• Economies of Scale– Advantages of an

increased plant size– Downward Part of LRAC

• Long-Run Average Cost

• Constant Returns to scale– LRAC is constant over a

variety of plant sizes

• Diseconomies of Scale– Rising part of the LRAC– Firm becomes too large

Economies Constant DiseconomiesOf Scale Returns to of Scale Scale

LRAC

Q

P

Perfect Competition

• Many small and independent producers and consumers• No barriers to entry or exit• Firms are price takers

– D=Pe

• SR Profit– D,Price>ATC

• SR Loss – ATC>D,Price

MC

ATC

D=P=MR=AR

qe

P

Profit

Shutdown Point

• When to shutdown– P>/=AVC produce where MR=MC– P<AVC shut down q=0

ShutDownPoint

MC ATC

AVC

D=P=MR=AR

Long-Run Adjustment

• In the short-run firms will exit or enter the market depending if there are profits to be made

• In the long-run you break even– Normal Profit

• P=ATC– No entry or exit in the long-run

MCATC

AVC

D=P=MR=AR

Qe

Pe

Monopoly

• Single Producer• No close substitutes• Barriers to entry• Market power• Demand curve– Follows the law of demand

• Price>MR• Set output level where MR=MC. • At this level of output– Monopolist sets the price from the demand curve MR D

MC

ATCPm

ATC

Profit

Qm

Monopolistic Competition

• Relatively large number of firms• Differential products• Easy entry and exit• Profit Maximization– MR=MC

MC

ATC

D

MR

Pmc

ATC

Profit

Qmc

Long-Run Mon. Comp.

• If there are profits to be made– Firms will enter• Profits will be eroded

– The ATC curve will be tangent to the demand curve

MC

ATC

D

MR

Qmc Qatc

Pmc

Payoff Matrix• Dominant Strategy:– You choose the same location no matter What the otherPerson does

150, 180 130, 120

120, 130 140, 110

Maintain Fare Lower Fare

Maintain Fare

Lower Fare

City Wheels

EASY

RIDE

Factor Markets

Factor Demand

• Marginal Revenue Product of labor– What the next unit of labor

(or factor) brings to the firm– What are you worth to an

employer– Total Revenue/

Resource Quantity– MR*MP (assuming Perfect

competition)– P*MP – View it as marginal benefit

• Marginal Resource Cost – How much cost the firm

incurs from using an additional unit of an input.

– When hiring labor, MRC=Wage

– in Total Resource Cost/ in Resource Quantity

– Employers will hire when MRP=MRC=Wage

MRP as Demand for Labor & Wages

• Demand of labor– Downward sloping– MRP– As price (wage) increase,

less are hired

• Supply of labor– Perfectly elastic and

equal to the wage– Firm can employ all the

workers it desires at the going market wage

W=Supply

MRP=D

10

Derived Demand

• Demand for labor is derived from the demand for the goods produced by the input

• D, P, MRP, Hiring of labor at current wage

• Monopoly market employs fewer workers than the competitive market

S

DD

Labor Demand

Increases if• Demand for product increases• Labor becomes more

productive• Price of substitute resource falls

– Output Effect>Substitute Effect

• Price of substitute resource rises– SE>OE

• Price of a complementary resource falls

Decreases if• Demand for product decreases• Labor becomes less productive• Price of substitute resource falls

– Output Effect<Substitute Effect

• Price of substitute resource rises– SE<OE

• Price of a complementary resource rises

Least Cost Rule

• Just like the maximizing utility rule

• MPl/Pl=MPk/PkSituation Firm will Which

causesAnd Until

MPl/Pl>MPk/Pk

L K

MPl MPk MPl/Pl=MPk/Pk

MPl/Pl<MPk/Pk

K L

MPk MPl MPl/Pl=MPk/Pk

Public Goods, Externalities and the role of government

Goods

Public• Nonrival

– More than one can consume

• Nonexcludable– Can consume even if you did

not pay for it

• Free Rider Problem– Realize that you can consume

a good without paying for it, so you put the cost on others

Private• Rival

– One person can consume

• Excludable– Consumers who don’t pay for

the good are excluded from consumption

Spillover Benefits• The benefits received from a

third party who has not purchased the good– Positive externality

• Market demand– Captures private benefits– Not the 3rd party benefits

• Optimal amount is – Q social– Not Q market– Society wants more than the

market provides• Underallocation of resources

D private

D social

Qmkt

Spillover benefits

Qsocial

Subsidies

• How to move production to Q social– Give the consumer a

voucher to increase demand to D social

• Provide a subsidy equal to the spillover benefits

D private

D Subs

Qmkt Qsocial

S

Ssubs

Pollution & Spillover Costs

• When the consumption of a good creates a cost for a third party– Spillover costs– Negative externality

• Not all of the costs of production are captured by the supply curve

• Overallocation of resources– Too much of a bad thing

S social

S private

Spillover Costs

QmktQ social

Pollution Taxes

• Internalize social costs on the producer/consumer who is creating the negative externality through a tax– Inward shift in the

private supply curve– Increase price, QD

decreases

S social

S private

Pollution tax

QmktQ social

Equity• Measuring income distribution

– Quintiles• Highest income to the lowest income

divided into fifths

• Lorenz curve– Graphical distribution of income

• Closer to the line, closer to perfect equality

• Gini Coefficient– Area of the gap between the perfect

equality line and the Lorenz curve– Area A/(Area A + Area B)– Closer the coefficient is to zero the

more equal the distribution– Closer to one, more unequal

distribution

100

A

B

Perfect Equality

% of Families

Percent of income

Taxes

• Marginal Tax rate– Rate paid on the last

dollar earned– Taxes due/ Taxable

income

• Average Tax Rate– Proportion of total

income paid to taxes– Total taxes due/total

taxable income

• Progressive tax– As income increases, the

average tax rate increases• Federal income tax

• Regressive tax– As income increases, the

average tax rate decreases• Sales tax

• Proportional Tax– Constant tax rate is applied

regardless of income• Corporate taxes

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