10/22/2014CRC Microeconomics1. 10/22/2014CRC Microeconomics2 What did you study last time? What are the criteria of an efficient tax system? How to.

04/11/23 CRC Microeconomics 1


What did you study last time?

What are the criteria of an efficient tax system?

How to evaluate some tax systems?

What are the principles used to achieve equity in a tax system?


Do you know …

1. how to calculate profits?2. how to determine revenue?3. how to measure

output/production?4. how to assess costs?5. how to maximize profits?


1. Profits

Profits =

P*Q

TotalRevenue

TR-

TotalCosts

TC

ExplicitCosts

+ImplicitCosts

Accounting = TR - Explicit

Costs

Economic = TR - TC

Input coststhat requirean outlay ofmoney bythe firm

Input coststhat do not

requirean outlay ofmoney bythe firm

Price (P) timesquantity (Q)


2. Revenue

TR = P * Q=AverageRevenue

ARTR/Q = P=

MarginalRevenue

MRTR / Q=

Revenue perunit

Extra revenue per extra unit


Revenue Curvesin Perfect Competition

Q

PTR

(AR=P) = MR (D)

The TR curve is a straight linestarting from the point of origin O.

TR = P * Q

The AR and MR curve are also straight lines.They coincide and start where the price is.

AR = MR = P.AR is the same as the demand (D) curve.

P


Revenue Curves in Imperfect Competition

Q

PTR

(AR=P) (D)

The TR curve is an upside-downparabola, starting from the point

of origin.

The AR curve is downward-sloping, starting from a point

on the vertical axis.The MR curve is also downward-sloping. It starts from the same point

as AR on the vertical axis. From that point on MR < AR.

At the output where MR = zero, TR is maximized.

MR


3. Output/Production

Production functionA production function describes the relationship between output and inputs.


3. Output/Production

Production function• Long run (when all inputs are

variable.)Q = f (l, L, K), where l = land; L = labor; and K = capital

Short run (when at least one input is fixed.)Q = f (L) with fixed l and K


b. SR Output/Production

TotalProduct

TP= Q=

AverageProduct

APL

=MarginalProduct

MPL

Q / L=

Q / L

Extra outputper extraworker

Output perworker


SR Output Curve (TP)

0

50

100

150

200

250

0 1 2 3 4 5 6 7 8 9 101112131415161718192021

Q

L

TP = QR

SM

Z

Maximum output

Zero output

Shut-down point

Diminishing-return point

Relevant section


0

5

1 0

1 5

2 0

2 5

3 0

0 1 2 3 4 5 6 7 8 9 1 01 11 21 31 41 5 1 61 71 81 92 02 1

SR Output Curves (AP & MP)

Q

L

AP

MP S

R

M Z

Relevant sections


4. Costs

Short run (when at least one input is fixed.)

Long run (when all inputs are variable.)


a. SR Costs

TotalCosts

TC=

FixedCosts

FC+

VariableCosts

VC

TC / Q = FC / Q + VC / Q

AverageTotalCostATC

=Average

FixedCostAFC

+AverageVariable

CostAVC

MarginalCostMC

= VC / Q = TC / QExtra

cost perextraunit

Cost perunit

Costs of fixed inputs

Costs of variable inputs


0

5 0

1 0 0

1 5 0

2 0 0

2 5 0

3 0 0

0 1 2 3 4 5 6 7 8 9 1 0

SR Cost Curves (TC, VC, FC)

$

Q

VC

R

B

S

TC

FC

Shut-down point

Break-even point

Diminishing-return point

R


0 .0 0

1 0 .0 0

2 0 .0 0

3 0 .0 0

4 0 .0 0

5 0 .0 0

6 0 .0 0

0 1 2 3 4 5 6 7 8 9 1 0

SR Cost Curves (ATC, AVC, MC)$

Q

AVC

R

B

S

ATC

MCRelevant section


b. LR Cost Curve

Q

$

SRATC1

SRATC2 SRATCeSRATCn-1

LRATC

SRATCn

Efficient Scale

Economies of scale (IRTS) Diseconomies of scale (DRTS)

Constant Returns to Scale (CRTS)

There is one short-run average cost curve foreach plant size.

The long-run average total costcurve is the envelope curve.

The minimum point on the

lowest SRATC curve

determines …


5. Profit Maximization

Rule. The firm should produce output Q* where

MR = MC Proof

= TR - TC

Q = TR/Q - TC/Q

M = MR - MC

MR = MC

Profit maximization requires that M = 0, i.e.


Now you know …

1. how to calculate profits.2. how to determine revenue.3. how to measure

output/production.4. how to assess costs.5. how to maximize profits.


What will you study next time?

1. What are the main characteristics of a (perfectly) competitive market?

2. How much should a competitive firm produce to maximize profits?

3. What happens in the long run in a competitive market?

4. How to derive the supply curve in a competitive market?


10/22/2014CRC Microeconomics1. 10/22/2014CRC Microeconomics2 What did you study last time? What are the criteria of an efficient tax system? How to.

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tr q tc q

output q

trtc q

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tc q extra cost

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