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Elasticity of Market Supply:Producer Surplus for a Market

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Microeconomics ­ECO402
VU
Lesson 24
Elasticity of Market Supply
= ( Δ Q / Q ) /( Δ P / P )
E
s
·
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.
The World Copper Industry (1999)
Annual Production
Marginal Cost
Country
(thousand metric tons)
(dollars/pound)
Australia
600
0.65
Canada
710
0.75
Chile
3660
0.50
Indonesia
750
0.55
Peru
450
0.70
Poland
420
0.80
Russia
450
0.50
United States
1850
0.55
The Short-Run World Supply of Copper
Price
($ per pound)
0.90
MCP
0.80
MCC
MCP,MCU
0.70
MC
0.60
MCJ,MC
MCC,MC
0.50
0.40
0
2000
4000
6000
8000
10000
Production (thousand metric tons)
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.
121
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Microeconomics ­ECO402
VU
*
At q MC = MR.
Between 0 and q ,
MR > MC for all units.
Price
($ per
Producer
MC
AVC
unit of
Surplus
output)
B
A
P
Alternatively, VC is the
*
sum of MC or ODCq .
*
*
R is P x q or OABq .
D
Producer surplus =
C
R - VC or ABCD.
q*
0
Output
Producer Surplus in the Short-Run
Producer Surplus = PS = R - VC
P ro fit = š - R - V C - F C
Observation
­ Short-run with positive fixed cost
PS > š
Producer Surplus for a Market
Price
S
($ per
unit of
output)
Market producer surplus is
P
the difference between P*
*
*
and S from 0 to Q .
Produce
r
D
Output
Q
*
Choosing Output in 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.
122
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Microeconomics ­ECO402
VU
Price
In the long run, the plant size will be
increased and output increased to q3.
($ per
LMC
Long-run profit, EFGD > short run
unit of
profit ABCD.
output)
LAC
SMC
SAC
D
A
E
$40
P = MR
C
B
G
F
$30
In the short run, the
firm is faced with fixed
inputs. P = $40 > ATC.
Profit is equal to ABCD.
q2
q3
q1
Output
Price
Question: Is the producer making
($ per
a profit after increased output
LMC
unit of
lowers the price to $30?
output)
LAC
SMC
SAC
D
A
E
$40
P = MR
C
B
G
F
$30
q2
q1
q3
Output
Accounting Profit & Economic Profit
­ Accounting profit (š) = R - wL
­ Economic profit (š) = R - wL - rK
· wL = labor cost
· rk = opportunity cost of capital
Long-Run Competitive Equilibrium
­ Zero-Profit
·  If R > wL + rk, economic profits are positive
·  If R = wL + rk, zero economic profits, but the firms is earning a normal rate of return;
indicating the industry is competitive
·  If R < wl + rk, consider going out of business
­ Entry and Exit
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Table of Contents:
  1. ECONOMICS:Themes of Microeconomics, Theories and Models
  2. Economics: Another Perspective, Factors of Production
  3. REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
  4. Changes in Market Equilibrium:Market for College Education
  5. Elasticities of supply and demand:The Demand for Gasoline
  6. Consumer Behavior:Consumer Preferences, Indifference curves
  7. CONSUMER PREFERENCES:Budget Constraints, Consumer Choice
  8. Note it is repeated:Consumer Preferences, Revealed Preferences
  9. MARGINAL UTILITY AND CONSUMER CHOICE:COST-OF-LIVING INDEXES
  10. Review of Consumer Equilibrium:INDIVIDUAL DEMAND, An Inferior Good
  11. Income & Substitution Effects:Determining the Market Demand Curve
  12. The Aggregate Demand For Wheat:NETWORK EXTERNALITIES
  13. Describing Risk:Unequal Probability Outcomes
  14. PREFERENCES TOWARD RISK:Risk Premium, Indifference Curve
  15. PREFERENCES TOWARD RISK:Reducing Risk, The Demand for Risky Assets
  16. The Technology of Production:Production Function for Food
  17. Production with Two Variable Inputs:Returns to Scale
  18. Measuring Cost: Which Costs Matter?:Cost in the Short Run
  19. A Firm’s Short-Run Costs ($):The Effect of Effluent Fees on Firms’ Input Choices
  20. Cost in the Long Run:Long-Run Cost with Economies & Diseconomies of Scale
  21. Production with Two Outputs--Economies of Scope:Cubic Cost Function
  22. Perfectly Competitive Markets:Choosing Output in Short Run
  23. A Competitive Firm Incurring Losses:Industry Supply in Short Run
  24. Elasticity of Market Supply:Producer Surplus for a Market
  25. Elasticity of Market Supply:Long-Run Competitive Equilibrium
  26. Elasticity of Market Supply:The Industry’s Long-Run Supply Curve
  27. Elasticity of Market Supply:Welfare loss if price is held below market-clearing level
  28. Price Supports:Supply Restrictions, Import Quotas and Tariffs
  29. The Sugar Quota:The Impact of a Tax or Subsidy, Subsidy
  30. Perfect Competition:Total, Marginal, and Average Revenue
  31. Perfect Competition:Effect of Excise Tax on Monopolist
  32. Monopoly:Elasticity of Demand and Price Markup, Sources of Monopoly Power
  33. The Social Costs of Monopoly Power:Price Regulation, Monopsony
  34. Monopsony Power:Pricing With Market Power, Capturing Consumer Surplus
  35. Monopsony Power:THE ECONOMICS OF COUPONS AND REBATES
  36. Airline Fares:Elasticities of Demand for Air Travel, The Two-Part Tariff
  37. Bundling:Consumption Decisions When Products are Bundled
  38. Bundling:Mixed Versus Pure Bundling, Effects of Advertising
  39. MONOPOLISTIC COMPETITION:Monopolistic Competition in the Market for Colas and Coffee
  40. OLIGOPOLY:Duopoly Example, Price Competition
  41. Competition Versus Collusion:The Prisoners’ Dilemma, Implications of the Prisoners
  42. COMPETITIVE FACTOR MARKETS:Marginal Revenue Product
  43. Competitive Factor Markets:The Demand for Jet Fuel
  44. Equilibrium in a Competitive Factor Market:Labor Market Equilibrium
  45. Factor Markets with Monopoly Power:Monopoly Power of Sellers of Labor