Riassunto esame Microeconomics, Prof. Roberti Paolo, libro consigliato Microeconomics, Acemoglu

PRICE ELASTICITY (E ) = PERCENTAGE CHANGE IN QUANTITY SUPPLIEDS /PERCENTAGE CHANGE IN PRICE

The price elasticity of supply will tend to be positive because as price increases, firms tend to increase their quantity supplied.

An elastic supply means that quantity supplied is quite responsive to price changes: any given percentage change in price leads to a larger percentage change in quantity supplied.

Page 157 exhibit 6.9

Shutdown

A shutdown is a short-run decision to not produce anything during a specific time period.

For example, think about the case when the market price drops to $0.59 per cheese box. Now the MR = MC rule directs The Cheeseman to produce at point S (444 units).

Is this a profit-maximizing point of production?

No! Because at this particular price the firm does not even bring in enough money to cover its average variable cost of $0.65 per unit.

Supply (in the short run) = MC, if price > AVC

But: If p < AVC, the firm should shut down

run.By continuing operations at point C, The Cheeseman is at least covering some of the fixed costs.

The graphic above shows The Cheeseman's short-run supply curve as the marginal cost curve above the average cost curve.

6.4 Producer surplus

The producer surplus is computed by taking the difference between the market price and the marginal cost curve. Graphically, producer surplus is the area above the marginal cost curve and below the equilibrium price line. In this way, it is distinct from economic profits because economic profits include a consideration of total cost, not just marginal cost.

Let's consider that The Cheeseman is facing a market price of $2.

The Cheeseman can produce many units at a marginal cost below the market price.

The pink-shaded area represents the Cheeseman's surplus.

There is a similarity between producer's surplus and consumer's surplus: a consumer's surplus arises from having a willingness to

pay above the market price; a producer's surplus arises from selling units at a price that is above marginal cost. We can add up seller's producer surplus to obtain the total producer surplus in the market. We do this by measuring the area above the marginal cost curve that is below the equilibrium price line to compute producer surplus for the entire market.

(a) If linear supply curves -> producer surplus = 1/2 * base of triangle * height of triangle.

(b) If there is a shift in the market demand curve that causes a higher equilibrium market price, producer surplus increases.

6.5 From the short run to the long run

Long run = period of time in which all factors of production are variable; there are no fixed factors of production. only In the short run, if The Cheeseman wants to change production, it can do so by hiring or laying off workers. In the long run, The Cheeseman searches for the optimal combination of and workers building size (physical capital). That is, in the long run,

The Cheeseman is able to combine works and physical capital to achieve the minimal ATC for each output level. —> the short-run cost curves above the long-run cost curve.

Relationship between the short- and long-run:

The graphic (a) shows short-run ATCs for three different plant sizes: one small, one medium, and one large. Because in the long-run The Cheeseman is able to choose the plant size that minimizes costs, its long-run ATC lies below the three short-run ATCs. One way to think about it is that the average cost rises more in the short run with increased production because The Cheeseman can only hire more labor; in the long run it can hire more labor and purchase more physical capital. The long run ATC curve as a U-shape. On panel (a) of the U, ATC decreases as output increases. Over this range, economies of scale exist. Such an effect might occur because as the scale of the plant gets bigger, workers have more opportunities to specialize. When ATC does not change with the

level of output, the plant experiences constant returns to scale. Diseconomies of scale occur when ATC increases as output rises. This might happen, because management teams begin to get spread too thin or duplication of task occurs.

Long-run supply curve

P 162 25 ff ff

CHAPTER 7 - Perfect competition and the invisible hand

Adam Smith conjectured that self-interest is a necessary ingredient for an economy to function efficiently. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.

This insight is knows as the "invisible hand": when all of the assumptions of a perfectly competitive market are in place, the pursuit of individual self-interest promotes the well-being of society as a whole, almost as if the individual is led by an invisible hand to do so.

7.1 Perfect competition and efficiency

Let's assume that in our market there are only 7 buyers and 7 sellers who are price-takers. Each wants

To buy/sell an iPod that is in perfect conditions, so we assume that they are identical. Reservation values is:

• For a consumer: the maximum that she is willing to pay
• For a seller: the minimum that he is willing to accept

Together, the data of Madeline, Katie, and Ty form the market demand curve.

Together, the data of Tom, Mary, Je, and Fiona form the market supply curve.

The equilibrium price is determined by the intersection of the market demand and the market supply curves. In this case, the intersection yields a price of $40 (Dave & Phil).

The equilibrium quantity is determined by the intersection of the market demand and the market supply curves. In this case, the equilibrium quantity is 4 iPods, because four people are willing to pay at least $40 for an iPod, while four sellers have reservation values </= to $40.

Social surplus:

Social surplus is the sum of consumer surplus and producer surplus.

Consumer surplus = buyers' reservation values - what the buyers

maximize social surplus? Let's consider what would happen if we restricted the quantity sold in the market to be below the equilibrium quantity.

Number of trades: 2 —> the two highest-value consumers buy from the two lowest-cost sellers —> Madeline & Katie buy and Tom & Mary sell. Regardless at what price the sale occurs, the result will be as in panel (a). In this situation, we find a lower total surplus compared to the competitive market equilibrium outcome: the market now achieves $100 in total [(Madeline - Katie) = $130; (Tom - Mary) = $30]. This figure is lower than the $120 of reservation value reservation value surplus achieved in the competitive equilibrium of panel (b).

7.2 Extending the Reach of the Invisible Hand: From the Individual to the Firm

7.3 Extending the Reach of the Invisible Hand: Allocation of Resources across Industries

7.4 Prices Guide the Invisible Hand

7.5 Equity and Efficiency

CHAPTER 8 - Trade

8.1 The production possibilities

curve we can all be better o by trading withThe underlying motivation for trade relies on the principle:one another because trade allows total production to be maximized.

Example: you create 240 Web sites and produce 240 speci c computer programs to runapplications on each Web site. You recognize that your job resembles a two-good economy (Websites and programs). How much can you accomplish (your production possibilities) in an 8-hourday?

The table below shows output levels for various amounts of time for each of the two tasks.

A production possibilities curve (PPC) shows the relationship between the maximum productionof one good for a given level of production of another good.

The PPC is quite similar to the budget constraint: it tells us how much you can produce fromexisting resources and technology.

The most extreme trade-o s that can be made are 8 Web sites and 16 computer programs, andthey form the endpoints of the PPC for your economy.

When considering a PPC, remember that:- Points on

The PPC (Production Possibility Curve) represents the different combinations of production that can be achieved in an 8-hour day.

Points inside the PPC are attainable but inefficient because more could be produced with the available resources and time.

Points beyond or outside the PPC are unattainable.

Any point on or below the PPC represents a possible production level.

Production combinations on the PPC make full use of your resources.

Two important things about the PPC:

1. The sign of the slope is negative, indicating a trade-off between producing different goods.
2. The size of the slope (-2) represents the opportunity cost, which is what you give up to produce one additional product.

Calculating the opportunity cost involves determining the loss in computer programs divided by the gain in production.

One program "costs" you the opportunity to produce a certain amount of other goods.

Similarly, one website "costs" you the opportunity to produce a certain amount of other goods.