Transcript BAB 9b Maksimisasi keuntungan nuhfil hanani : web site : www.nuhfil.com, email : [email protected].

BAB 9b
Maksimisasi
keuntungan
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Topics to be Discussed
 Perfectly
 Profit
Competitive Markets
Maximization
 Marginal
Revenue, Marginal Cost,
and Profit Maximization
 Choosing
Output in the Short-Run
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Topics to be Discussed
 The
Competitive Firm’s Short-Run
Supply Curve
 Short-Run
 Choosing
Market Supply
Output in the Long-Run
 The
Industry’s Long-Run Supply
Curve
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Perfectly Competitive Markets
 Characteristics
of Perfectly
Competitive Markets
1) Price taking
2) Product homogeneity
3) Free entry and exit
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Perfectly Competitive Markets
 Price
Taking
– The individual firm sells a very
small share of the total market
output and, therefore, cannot
influence market price.
– The individual consumer buys too
small a share of industry output to
have any impact on market price.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Perfectly Competitive Markets
 Product
Homogeneity
– The products of all firms are
perfect substitutes.
– Examples
Agricultural
products, oil,
copper, iron, lumber
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Perfectly Competitive Markets
 Free
Entry and Exit
– Buyers can easily switch from one
supplier to another.
– Suppliers can easily enter or exit a
market.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Perfectly Competitive Markets
 Discussion
Questions
– What are some barriers to entry
and exit?
– Are all markets competitive?
– When is a market highly
competitive?
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Profit Maximization
 Do
firms maximize profits?
– Possibility of other objectives
Revenue
maximization
Dividend
maximization
Short-run
profit maximization
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Profit Maximization
 Do
firms maximize profits?
– Implications of non-profit objective
Over
the long-run investors
would not support the company
Without
profits, survival unlikely
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Profit Maximization
 Do
firms maximize profits?
– Long-run profit maximization is
valid and does not exclude the
possibility of
altruistic
behavior.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Marginal Revenue, Marginal Cost,
and Profit Maximization
 Determining
the profit maximizing
level of output
– Profit ( ) = Total Revenue - Total
Cost
– Total Revenue (R) = Pq
– Total Cost (C) = Cq
– Therefore:
 (q)  R(q)  C (q)
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Profit Maximization in the Short Run
Total Revenue
Cost,
Revenue,
Profit
($s per year)
R(q)
Slope of R(q) = MR
0
Output (units per year)
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Profit Maximization in the Short Run
C(q)
Cost,
Revenue,
Profit
$ (per year)
Total Cost
Slope of C(q) = MC
Why is cost positive when q is zero?
0
Output (units per year)
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Marginal Revenue, Marginal Cost,
and Profit Maximization
 Marginal
revenue is the additional
revenue from producing one more
unit of output.
 Marginal
cost is the additional cost
from producing one more unit of
output.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Marginal Revenue, Marginal Cost,
and Profit Maximization

Comparing R(q) and
C(q)
–
Output levels: 0q0:
C(q)>
Cost,
Revenue,
Profit
($s per year)
C(q)
A
R(q)
B
– Negative profit
FC
+ VC > R(q)
MR
> MC
–
Indicates higher profit
at higher output
R(q)
0
q0
q*
 (q)
Output (units per year)
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Marginal Revenue, Marginal Cost,
and Profit Maximization

Comparing R(q) and
C(q)
– Question: Why is
profit negative when
output is zero?
Cost,
Revenue,
Profit
$ (per year)
C(q)
A
R(q)
B
0
q0
q*
 (q)
Output (units per year)
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Marginal Revenue, Marginal Cost,
and Profit Maximization

Comparing R(q) and
C(q)
–
Output levels: q0 q*
R(q)>
MR
–
–
Cost,
Revenue,
Profit
$ (per year)
C(q)
A
C(q)
R(q)
B
> MC
Indicates higher profit
at higher output
Profit is increasing
0
q0
q*
 (q)
Output (units per year)
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Marginal Revenue, Marginal Cost,
and Profit Maximization

Comparing R(q) and
C(q)
–
Output level: q*
R(q)=
MR
Cost,
Revenue,
Profit
$ (per year)
C(q)
A
C(q)
= MC
R(q)
B
Profit
is
maximized
0
q0
q*
 (q)
Output (units per year)
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Marginal Revenue, Marginal Cost,
and Profit Maximization
 Question
– Why is profit
reduced when
producing more
or less than q*?
Cost,
Revenue,
Profit
$ (per year)
C(q)
A
R(q)
B
0
q0
q*
 (q)
Output (units per year)
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Marginal Revenue, Marginal Cost,
and Profit Maximization

Comparing R(q) and C(q)
–
Output levels
beyond q*:
R(q)>
MC
Cost,
Revenue,
Profit
$ (per year)
C(q)
A
C(q)
> MR
R(q)
B
Profit is
decreasing

0
q0
q*
 (q)
Output (units per year)
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Marginal Revenue, Marginal Cost,
and Profit Maximization
 Therefore,
it can be
said:
Cost,
Revenue,
Profit
$ (per year)
C(q)
– Profits are
maximized when
MC = MR.
A
R(q)
B
0
q0
q*
 (q)
Output (units per year)
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Marginal Revenue, Marginal Cost,
and Profit Maximization
  R-C
R
MR 
q
C
MC 
q
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Marginal Revenue, Marginal Cost,
and Profit Maximization
Profits are maximized w hen:
 R C


 0 or
q q q
MR  MC  0 so that
MR(q)  MC(q)
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Marginal Revenue, Marginal Cost,
and Profit Maximization
 The
Competitive Firm
– Price taker
– Market output (Q) and firm output
(q)
– Market demand (D) and firm demand
(d)
hananiis
: weba
sitestraight
: www.nuhfil.com, email
: [email protected]
–nuhfil
R(q)
line
Demand and Marginal Revenue Faced
by a Competitive Firm
Price
$ per
bushel
Price
$ per
bushel
Firm
$4
d
Industry
$4
D
100
200
Output
(bushels)
100
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Output
(millions
of bushels)
Marginal Revenue, Marginal Cost,
and Profit Maximization
 The
Competitive Firm
– The competitive firm’s demand
Individual
producer sells all units
for $4 regardless of the
producer’s level of output.
If
the producer tries to raise price,
sales are zero.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Marginal Revenue, Marginal Cost,
and Profit Maximization
 The
Competitive Firm
– The competitive firm’s demand
If
the producers tries to lower
price he cannot increase sales
P
= D = MR = AR
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Marginal Revenue, Marginal Cost,
and Profit Maximization
 The
Competitive Firm
– Profit Maximization
MC(q)
= MR = P
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Choosing Output in the Short Run
 We
will combine production and cost
analysis with demand to determine
output and profitability.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
A Competitive Firm
Making a Positive Profit
MC
Price
60
($ per
unit)
50
40
Lost profit for
q q < q*
A
D
Lost profit for
q2 > q*
ATC
C
B
AVC
30
At q*: MR = MC
and P > ATC
q1 : MR > MC and
q2: MC > MR20
and
q0: MC = MR but
MC falling
10
0
AR=MR=P
  (P - AC) x q*
or ABCD
1
q0
2
3
4
5
6
7
q1
8
q*
9
10
11
q2
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Output
A Competitive Firm
Incurring Losses
MC
Price
($ per
unit)
C
D
At q*: MR = MC
and P < ATC
Losses = P- AC) x q*
or ABCD
F
ATC
B
A
P = MR
AVC
E
Would this producer
continue to produce
with a loss?
q*
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Output
Choosing Output in the Short Run
 Summary
of Production Decisions
– Profit is maximized when MC = MR
– If P > ATC the firm is making
profits.
– If AVC < P < ATC the firm should
produce at a loss.
– If P < AVC < ATC the firm should
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
shut-down.
The Short-Run Output of
an Aluminum Smelting Plant
Cost
(dollars per item)
1400
Observations
•Price between $1140 & $1300: q = 600
•Price > $1300: q = 900
•Price < $1140: q = 0
P2
1300
P1
1200
Question
Should the firm stay in business
when P < $1140?
1140
1100
0
300
600
900
Output
(tons per day)
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Some Cost Considerations for Managers
 Three
guidelines for estimating
marginal cost:
1) Average variable cost should not
be
used as a substitute for
marginal
cost.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Some Cost Considerations for Managers
 Three
guidelines for estimating
marginal cost:
2) A single item on a firm’s
accounting ledger may have two
components,
only
one
of which involves marginal
cost.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Some Cost Considerations for Managers
 Three
guidelines for estimating
marginal cost:
3) All opportunity cost should be
included in determining
marginal
cost.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
A Competitive Firm’s
Short-Run Supply Curve
Price
($ per
unit)
The firm chooses the
output level where MR = MC,
as long as the firm is able to
cover its variable cost of
production.
MC
P2
ATC
P1
AVC
What happens
if P < AVC?
P = AVC
q1
q2 Output
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
A Competitive Firm’s
Short-Run Supply Curve
 Observations:
P = MR
– MR = MC
– P = MC
–
 Supply
is the amount of output for
every possible price. Therefore:
– If P = P1, then q = q1
– If P = P2, then q = q2
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
A Competitive Firm’s
Short-Run Supply Curve
Price
($ per
unit)
S = MC above AVC
MC
P2
ATC
P1
AVC
P = AVC
Shut-down
q1
q2
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Output
A Competitive Firm’s
Short-Run Supply Curve
 Observations:
Supply is upward sloping due to
diminishing returns.
– Higher price compensates the firm
for higher cost of additional output
and increases total profit because
it applies to all units.
–
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A Competitive Firm’s
Short-Run Supply Curve
 Firm’s
Response to an Input Price
Change
– When the price of a firm’s product
changes, the firm changes its
output level, so that the marginal
cost of production remains equal
to the price.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Response of a Firm to
a Change in Input Price
Price
($ per
unit)
MC2
Input cost increases
and MC shifts to MC2
and q falls to q2.
Savings to the firm
from reducing output
MC1
$5
q2
q1
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Output
The Short-Run Production
of Petroleum Products
Cost
($ per
barrel) 27
The MC of producing
a mix of petroleum products
from crude oil increases
sharply at several levels
of output as the refinery
shifts from one processing
unit to another.
SMC
26
How much would
be produced if
P = $23?
P = $24-$25?
25
24
23
8,000
9,000
10,000
11,000
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Output
(barrels/day)
The Short-Run Production
of Petroleum Products
 Stepped
SMC indicates a different
production (cost) process at various
capacity levels.
 Observation:
–
With a stepped MC function, small
changes in price may not trigger a
change in output.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Short-Run Production
of Petroleum Products
 The
short-run market supply curve
shows the amount of output that the
industry will produce in the short-run
for every possible price.
 Consider,
for simplicity, a
competitive market with three firms:
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Industry Supply in the Short Run
MC1 MC2
$ per
unit
MC3
The short-run
industry supply curve
is the horizontal
summation of the supply
curves of the firms.
P3
P2
P1
0
Question: If increasing
output raises input
costs, what impact
would it have on
market supply?
2
4 5
7 8
10
15
Quantity 21
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
S
The Short-Run Market Supply Curve
 Elasticity
of Market Supply
Es  (Q / Q) /(P / P)
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The Short-Run Market Supply Curve
 Perfectly
inelastic short-run supply
arises when the industry’s plant and
equipment are so fully utilized that
new plants must be built to achieve
greater output.
 Perfectly
elastic short-run supply
arises when marginal costs are
constant.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Short-Run Market Supply Curve
 Questions
1) Give an example of a perfectly
inelastic supply.
2) If MC rises rapidly, would the
supply be more or less elastic?
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The World Copper Industry (1999)
Country
Annual Production
(thousand metric tons)
Australia
Canada
Chile
Indonesia
Peru
Poland
Russia
United States
Zambia
Marginal Cost
(dollars/pound)
600
710
3660
750
450
420
450
1850
280
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
0.65
0.75
0.50
0.55
0.70
0.80
0.50
0.70
0.55
The Short-Run World Supply of Copper
Price
($ per pound)
0.90
MCPo
0.80
MCCa
0.70
MCA
0.60
MCP,MCUS
MCJ,MCZ
MCC,MCR
0.50
0.40
0
2000
4000
6000
8000
Production (thousand metric tons)
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
10000
The Short-Run Market Supply Curve
 Producer
Surplus in the Short Run
– Firms earn a surplus on all but the
last unit of output.
– The producer surplus is the sum
over all units produced of the
difference between the market
price of the good and the marginal
cost of production.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Producer Surplus for a Firm
Price
($ per
unit of
output)
At q* MC = MR.
Between 0 and q ,
MR > MC for all units.
Producer
Surplus
MC
AVC
B
A
D
0
P
C
q*
Alternatively, VC is the
sum of MC or ODCq* .
R is P x q* or OABq*.
Producer surplus =
R - VC or ABCD.
Output
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Short-Run Market Supply Curve
 Producer
Surplus in the Short-Run
Producer Surplus  PS  R - VC
Profit   - R - VC - FC
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The Short-Run Market Supply Curve
 Observation
– Short-run with positive fixed cost
PS  
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Producer Surplus for a Market
Price
($ per
unit of
output)
S
Market producer surplus is
the difference between P*
and S from 0 to Q*.
P*
Producer
Surplus
D
Q*
Output
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Choosing Output in the Long Run
 In
the long run, a firm can alter all its
inputs, including the size of the
plant.
 We
assume free entry and free exit.
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Output Choice in the Long Run
Price
($ per
unit of
output)
In the long run, the plant size will be
increased and output increased to q3.
Long-run profit, EFGD > short run
profit ABCD.
LMC
LAC
SMC
D
SAC
A
E
$40
C
G
P = MR
B
F
$30
In the short run, the
firm is faced with fixed
inputs. P = $40 > ATC.
Profit is equal to ABCD.
q1
q2
q3
Output
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Output Choice in the Long Run
Price
($ per
unit of
output)
Question: Is the producer making
a profit after increased output
lowers the price to $30?
LMC
LAC
SMC
D
SAC
A
E
$40
C
G
P = MR
B
F
$30
q1
q2
q3
Output
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Choosing Output in the Long Run
 Accounting
Profit & Economic Profit
( ) = R - wL
– Accounting profit
– Economic profit( ) = R = wL - rK
wl
= labor cost
rk =
opportunity cost of capital
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Choosing Output in the Long Run
Long-Run Competitive Equilibrium
 Zero-Profit
If R > wL + rk, economic profits are
positive
– If R = wL + rk, zero economic
profits, but the firms is earning a
normal rate of return; indicating
the industry is competitive
– If R
< wl + rk, consider going out of
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
–
Choosing Output in the Long Run
Long-Run Competitive Equilibrium
 Entry
and Exit
– The long-run response to short-run
profits is to increase output and
profits.
– Profits will attract other producers.
– More producers increase industry
supply which lowers the market
price.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Long-Run Competitive Equilibrium
•Profit attracts firms
•Supply increases until profit = 0
$ per
unit of
output
$ per
unit of
output
Firm
Industry
S1
LMC
$40
LAC
$30
P1
S2
P2
D
q2
Output
Q1
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Q2
Output
Choosing Output in the Long Run
 Long-Run
Competitive Equilibrium
1) MC = MR
2) P = LAC
No
incentive to leave or enter
Profit
=0
3) Equilibrium Market Price
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Choosing Output in the Long Run
 Questions
1) Explain the market adjustment
when
P < LAC and firms have
identical
costs.
2) Explain the market adjustment
when firms have different costs.
3) What is the opportunity cost of
land?
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Choosing Output in the Long Run
 Economic
Rent
– Economic rent is the difference
between what firms are willing to
pay for an input less the minimum
amount necessary to obtain it.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Choosing Output in the Long Run
 An
Example
– Two firms A & B
– Both own their land
– A is located on a river which
lowers A’s shipping cost by
$10,000 compared to B.
– The demand for A’s river location
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hanani : web site : www.nuhfil.com,
email : [email protected]
will
the price
of A’s land
Choosing Output in the Long Run
 An
Example
– Economic rent = $10,000
$10,000
- zero cost for the land
– Economic rent increases
– Economic profit of A = 0
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Firms Earn Zero Profit in
Long-Run Equilibrium
Ticket
Price
LMC
LAC
A baseball team
in a moderate-sized city
sells enough
tickets so that price
is equal to marginal
and average cost
(profit = 0).
$7
1.0
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Season Tickets
Sales (millions)
Firms Earn Zero Profit in
Long-Run Equilibrium
Ticket
Price
Economic Rent
LMC
LAC
$10
$7
A team with the same
cost in a larger city
sells tickets for $10.
1.3
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Season Tickets
Sales (millions)
Firms Earn Zero Profit in
Long-Run Equilibrium
 With
a fixed input such as a unique
location, the difference between the
cost of production (LAC = 7) and
price ($10) is the value or opportunity
cost of the input (location) and
represents the economic rent from
the input.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Firms Earn Zero Profit in
Long-Run Equilibrium
 If
the opportunity cost of the input
(rent) is not taken into consideration
it may appear that economic profits
exist in the long-run.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Industry’s Long-Run Supply Curve
 The
shape of the long-run supply
curve depends on the extent to
which changes in industry output
affect the prices the firms must pay
for inputs.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Industry’s Long-Run Supply Curve
 To
determine long-run supply, we
assume:
– All firms have access to the
available production technology.
– Output is increased by using more
inputs, not by invention.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Industry’s Long-Run Supply Curve
 To
determine long-run supply, we
assume:
– The market for inputs does not
change with expansions and
contractions of the industry.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Long-Run Supply in a
Constant-Cost Industry
$ per
unit of
output
Economic profits attract new
firms. Supply increases to S2 and
the market returns to long-run
equilibrium.
MC
$ per
unit of
output
Q1 increase to Q2.
Long-run supply = SL = LRAC.
Change in output has no impact on
input cost.
S1
AC
P2
S2
C
P2
A
P1
B
SL
P1
D1
q1 q2
Output
Q1
Q2
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
D2
Output
Long-Run Supply in a
Constant-Cost Industry
 In
a constant-cost industry, long-run
supply is a horizontal line at a price
that is equal to the minimum average
cost of production.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Long-Run Supply in an
Increasing-Cost Industry
$ per
unit of
output
SMC2
LAC2
$ per
unit of
output
Due to the increase
in input prices, long-run
equilibrium occurs at
a higher price.
S1 S2
LAC1
P2
P2
P3
P3
P1
P1
B
A
D1
q1
SL
SMC1
q2
Output
Q1
Q2 Q3
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
D1
Output
Long-Run Supply in a
Increasing-Cost Industry
 In
a increasing-cost industry, longrun supply curve is upward sloping.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Industry’s
Long-Run Supply Curve
 Questions
1) Explain how decreasing-cost is
possible.
2) Illustrate a decreasing cost
industry.
3) What is the slope of the SL in a
decreasing-cost industry?
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Long-Run Supply in an
Decreasing-Cost Industry
$ per
unit of
output
Due to the decrease
in input prices, long-run
equilibrium occurs at
a lower price.
$ per
unit of
output
S1
S2
SMC1
SMC2 LAC1
P2
P2
LAC2
P1
P1
P3
P3
A
B
SL
D1
q1
q2
Output
Q1 Q2
Q3
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
D2
Output
Long-Run Supply in a
Increasing-Cost Industry
 In
a decreasing-cost industry, longrun supply curve is downward
sloping.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Industry’s
Long-Run Supply Curve
 The
Effects of a Tax
– In an earlier chapter we studied
how firms respond to taxes on an
input.
– Now, we will consider how a firm
responds to a tax on its output.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Effect of an Output Tax on a Competitive
Firm’s Output
Price
($ per
unit of
output)
MC2 = MC1 + tax
The firm will
reduce output to
the point at which
the marginal cost
plus the tax equals
the price.
MC1
An output tax
raises the firm’s
marginal cost by the
amount of the tax.
t
P1
AVC2
AVC1
q2
q1
Output
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Effect of an Output
Tax on Industry Output
Price
($ per
unit of
output)
S2 = S1 + t
S1
t
P2
Tax shifts S1 to S2 and
output falls to Q2. Price
increases to P2.
P1
D
Q2
Q1
Output
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Industry’s
Long-Run Supply Curve
 Long-Run
Elasticity of Supply
1) Constant-cost industry
Long-run
supply is horizontal
Small
increase in price will
induce an extremely large output
increase
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Industry’s
Long-Run Supply Curve
 Long-Run
Elasticity of Supply
1) Constant-cost industry
Long-run
supply elasticity is
infinitely large
Inputs
would be readily available
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Industry’s
Long-Run Supply Curve
 Long-Run
Elasticity of Supply
2) Increasing-cost industry
Long-run
supply is upwardsloping and elasticity is positive
The
slope (elasticity) will depend
on the rate of increase in input
cost
nuhfil
Long-run
elasticity will generally
hanani : web site : www.nuhfil.com, email : [email protected]
The Industry’s
Long-Run Supply Curve
 Question:
–
Describe the long-run elasticity of
supply in a decreasing -cost
industry.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Long-Run Supply of Housing
 Scenario
1: Owner-occupied housing
– Suburban or rural areas
– National market for inputs
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Long-Run Supply of Housing
 Questions
Is this an increasing or a constantcost industry?
– What would you predict about the
elasticity of supply?
–
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Long-Run Supply of Housing
 Scenario
2: Rental property
– Zoning restrictions apply
– Urban location
– High-rise construction cost
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
The Long-Run Supply of Housing
 Questions
Is this an increasing or a constantcost industry?
– What would you predict about the
elasticity of supply?
–
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Summary
 The
managers of firms can operate in
accordance with a complex set of
objectives and under various
constraints.
A
competitive market makes its
output choice under the assumption
that the demand for its own output is
horizontal.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Summary
 In
the short run, a competitive firm
maximizes its profit by choosing an
output at which price is equal to
(short-run) marginal cost.
 The
short-run market supply curve is
the horizontal summation of the
supply curves of the firms in an
industry.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Summary
 The
producer surplus for a firm is the
difference between revenue of a firm
and the minimum cost that would be
necessary to produce the profitmaximizing output.
 Economic
rent is the payment for a
scarce resource of production less
the minimum amount necessary to
hire that factor.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]
Summary
 In
the long-run, profit-maximizing
competitive firms choose the output
at which price is equal to long-run
marginal cost.
 The
long-run supply curve for a firm
can be horizontal, upward sloping, or
downward sloping.
nuhfil hanani : web site : www.nuhfil.com, email : [email protected]