Riassunto esame Microeconomics, prof. Vannoni, libro consigliato Microeconomics, Pindyck
If income increase it shifts to the right, is price of a single good increase or decrease it just
rotates. Its slope is –(Pf on Pc)
3. Consumer choice
In the end, the consumer buys what , among its possible preferred baskets, is affordable within
its budget. So, the optimal choice is the point where the indifference curve with the highest
UTILITY, level of satisfaction, intersects the budget line. In other words it is where
MRS= Pf/PC= MUf/MUc
OPTIMAL CHOICE FOR A CONSUMER
MARGINAL UTILITY, MU, is the additional satisfaction obtained from consuming one
additional unit of a good.
Individual and market demand
Demand function> prices vary> optimal choices vary> we have different optimal choices>the curve
that joins the various optimal choices is the PRICE CONSUMTION CURVE.
Demand function> income varies> optimal choices vary> we have different optimal choices> the
curve that joins them is the INCOME CONSUMPTION CURVE, also known as the ENGEL
CURVE. This curve is an upward line for normal goods, but a curve that is first upward and then
downward in case of inferior goods, those good like hamburger that when income increase lose
market. In fact as soon as income increase I consume more of hamburger and steak, but then I
prefer consuming more of steak that is more expensive and good and I reduce the consumption of
For example, if price of food decreases, then I consume more food and less clothes, this is the
• if the good is normal, the income effect is positive, but lower than substitution
• if the good is inferior, the income effect is negative, but lower than substitution
• if the good is a Giffen good, the income effect is negative and greater than the substitution
In producing, a firm must consider how many inputs to use. A production function says it. This
inputs are labor and capital. In the short run at least one input must be fixed, in the long run a firm
can change both inputs.
• Production in the short run> one variable input> labor
Here, the firm has a fixed capital so the only option It has to increase its output its increasing
How many units of labor will a firm decide to use as an input?
It depends if benefits of hiring more people are higher than costs.
We can decide it analyzing the situation on an incremental basis, how output increases when an
additional unit of labor is added, or on an average one, how much output each worker produces.
Amount of labor Amount of Total output Average product Marginal product
L capital q Q/L DeltaQ/DeltaL
Increases Fixed Increases and Increases and Increases and
then decreases then decreases then decreases
The product curve that represents the relation between output and labor , at first goes up but
after a certain amount of labor added it goes down.
The average product of labor curve, is the slope of the line that goes from the origin of the
product curve to one of its points.
The marginal product of labor curve, is the slope of a a line that is tangent to a point on the
They both increase and then decrease. So we have diminishing marginal returns.
When the marginal product is over the average product, the average product is increasing.
When the marginal product is under the average product, the average product is decreasing.
The marginal product increases faster than the average one.
• Production in the long run> two variable inputs> labor and capital
Here we can change both inputs. Let’s see how many combinations we have, keeping output
fixed. The various possible combinations of both inputs are all points of an ISOQUANT. Each
isoquant corresponds to a different level of production. All the possible combinations on the
same isoquant give rise to the same quantity of output. The isoquant is quite similar to the
indifference curve, it is downward sloping because of the diminising marginal returns.
The slope of the isoquant is the MARGINAL RATE OF TECHNICAL SUBSTITUTION,
MRTS. Since the firm remains on the same isoquant, when it decides to increase labor, it must
decrease capital by the same amount to keep on having the same output. It is a positive quantity
This rate is diminishing because the productivity of both inputs is limited:
OPTIMAL CHOICE FOR PRODUCERS
INDIFFERENCE CURVE ISOQUANT
Slope: MRS=- deltaC/deltaF Slope: MRTS= - deltaK/deltaL
Diminishing marginal returns Diminishing marginal returns
MRS=MUF/MUC MRTS= MPL/MPK
By now we have just considered the possibility of substituting inputs to get the same output
Now we consider also the possibility of increasing output by increasing inputs.
What happens to the production level?
1. input doubles> output doubles, constant returns to scale, sum of the coefficients of the
function is = 1, isoquants are equidistant
2. input doubles> output more than doubles, increasing returns to scale, sum >1, isoqants are
3. input doubles> output less than doubles, decreasing returns to scale, sum< 1, isoquants are
far apart 3
The cost of production
• cost in the short run
As we have diminishing marginal returns in the production, output decreases when adding labor
after a certain level, so this means I need more labor to produce an amount of output, so I have
more costs, so the marginal cost( cost of producing one unit more) is increasing.
Marginal product is decreasing(diminishing marginal returns) > marginal cost is increasing
Fixed costs decrease with output.
When marginal cost is under the average cost, the average cost decreases.
When marginal cost is over the average cost, the average cost increases.
Average cost curve is U shaped because of diminishing marginal returns.
• Cost in the long run
Here we can change both inputs, so we can choose those inputs with the lowest costs to have the
1. The firm wants the output to be fixed.
We use ISOCOST LINES, whose function is the total cost one and whose slope is
deltaK/deltaL. They are similar to the budget line.
Where the isoquant intersects the lowest isocost that is the Optimal choice in terms of costs.
OPTIMAL CHOICE OF PRODUCTION IN TERMS OF COSTS, MINIMIZING THEM
Average cost curve in the long run is U shaped because of the returns to scale:
• Constant returns to scale> same prices> same costs
• Increasing returns to scale> lower prices> lower costs
• Decreasing returns to scale> higher prices> higher costs
Where marginal cost is under average cost, average cost is decreasing
Where marginal cost is over the average cost, the average cost is increasing.
2. Output level changes > isoquants change> we have different optimal choices>expansion path
joins all the points of choices.
In the short run, because og the inflexibility of capital, the expansion path is a horizontal line
In the long run, the expansion path is a line from the origin.
Conclusions on both chapter 6 and 7:
If output doubles and costs less than double> economies of scale
If output doubles and costs more than double> diseconomies of scale
Economies and diseconomies of scale depend on the elasticity of cost on quantity>
Ec= (deltaC/deltaQ)/ (C/Q)= MC/AC
• If Ec=1> , MC=AC, nothing
• IF Ec>1, MC>AC, diseconomies of scale
• If Ec< 1, MC< AC, economies of scale
Increasing returns to scale: output more than doubles when the inputs double.
Economies of scale: output double but costs less than double 4
Profit maximization and competitive supply
Given what the demand is and what the costs are, the firm should decide how much to produce, that
is the supply function.
In perfect competition:
1. homogenous goods, products are perfectly substitutable
2. price taking, each firm takes the price as given
3. free entry and exit.
Marginal revenue is the slope of the revenue curve and marginal cost is the slope of the cost curve.
At the beginning when we have zero output costs are positive because we have fixed costs which do
not depend on the ouput, revenues are zero of course so the profit is negative.
Then when output increases, revenues increase and costs increase but less than revenues so profit is
finally positive until it reaches a point where it is maximum. The output level chosen is where
MC=MR. Any output lower than this would lead to MR> MC, any higher output would lead to
This point is exactly where MC=MR=P
Marginal costs and revenues are equal to price because the firm in the market is price taker so the
demand curve for a single firm is horizontal, whilst the demand curve for the industry is downward
• Choosing an output that maximizes profit in the short run
Here we have fixed capital.
The profit is thus maximized at MC=MR and it is equal to the area of the rectangle between
ATC, MC and MR.
If fixed costs are high, it might happen that ATC is above MR=P, so there would be a
subsequent loss and the firm should better go out of the market. But, if these fixed costs are
sunk costs, then the firm should stay in the market and use as a profit the one formed by MR,
AVC and MC.
In the short run, the supply curve is then a part of the MC where MC is above AC=P.
Perfectly inelastic supply > a greater output can be achieved only if new plants are built.
Perfectly elastic supply> marginal cost is constant
The producer surplus= revenues – variable costs
Profit= revenues – variable costs- fixed costs
• Choosing output in the long run
Here, the firm can change its inputs and also decide to rearrange its plant size.
The profit is maximized where MC= P
PROFIT MAXIMIZATION IN THE LONG RUN
If MC= ATC then profit = 0, ZERO ECONOMIC PROFIT.
In the long run the equilibrium occurs where:
1. all firms in the industry are maximizing their profit 5
+1 anno fa
I contenuti di questa pagina costituiscono rielaborazioni personali del Publisher Marie Therese di informazioni apprese con la frequenza delle lezioni di Microeconomics e studio autonomo di eventuali libri di riferimento in preparazione dell'esame finale o della tesi. Non devono intendersi come materiale ufficiale dell'università Torino - Unito o del prof Vannoni Davide.
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