24
Slides
to More
Powerful
Command of
Microeconomics
Remember
MR = MC
Microeconomics
In
Pictures
First Picture
The Production Possibilities Frontier
Tradeoffs in Pictures
Quantity of
Computers
Produced
D
3,000
C
2,200
2,000
A
B
1,000
0
Feasible
but Inefficient
300
600 700
Infeasible Pts
Production
Possibilities
Frontier
 Efficient
Points
1,000
Quantity of
Cars Produced
Second Picture
Supply and Demand
Price of
Ice-Cream
Cone
Supply
$3.00
Equilibrium
2.50
2.00
1.50
1.00
Demand
0.50
0
1 2 3 4 5 6 7 8 9 10 11 12
Quantity of
Ice-Cream
Cones
Supply
and
Demand
on
Parade
An Increase in Demand
Price of
Ice-Cream
Cone
1. Hot weather increases
the demand for ice cream...
Supply
$2.50
New equilibrium
2.00
2. ...resulting
in a higher
price...
Initial
equilibrium
D2
D1
0
3. ...and a higher
quantity sold.
7
10
Quantity of
Ice-Cream Cones
A Decrease in Supply
Price of
Ice-Cream
Cone
S2
1. An earthquake reduces
the supply of ice cream...
S1
New
equilibrium
$2.50
2.00
Initial equilibrium
2. ...resulting
in a higher
price...
Demand
0
1 2 3 4
7 8 9 10 11 12 13
3. ...and a lower
quantity sold.
Quantity of
Ice-Cream Cones
Elastic Demand: Quantity demanded
responds dramatically to price
Price
 Elasticity is greater than 1
1. A 22% $5
increase
in price... 4
Demand
Quantity
50
100
2. ...leads to a 67% decrease in quantity.
Elasticity
(Q/Q) (P/P)
Elastic Demand: P Q TR
Inelastic Demand: P Q  TR
• Demand is more elastic when there
are lots of ways to substitute.
• Demand is more elastic in the long
run than in the short run.
Inelastic Supply: Quantity doesn’t
respond much to price
Price
Elasticity is less than 1
Supply
1. A 22% $5
increase
in price... 4
Quantity
100 110
2. ...leads to a 10% increase in quantity.
The Minimum Wage
A Price Floor
Wage
Labor surplus
(unemployment)
Labor
supply
Minimum
wage
Labor
demand
0
Quantity
demanded
Quantity
supplied
Quantity of
Labor
Consumer Surplus and Producer Surplus
Price
A
D
Equilibrium
price
Supply
Consumer
surplus
E
Producer
surplus
B
Demand
C
0
Equilibrium
quantity
Quantity
Efficiency of Competitive Market
Equilibrium … and the Tax Wedge
Price
Supply
Value
to
buyers
Cost
to
sellers
Cost
to
sellers
0
Value
to
buyers
Demand
Equilibrium
quantity
Value to buyers is greater
than cost to sellers.
Value to buyers is less
than cost to sellers.
Quantity
The Effects of a Tariff
Deadweight Loss
Price
of Steel
Domestic
supply
A
Deadweight loss
B
Price with
tariff
C
Price without
tariff G
0
D
Q 1S
E
Imports
with tariff
Q 2S
Tariff
F
Domestic
demand
Q 2D Q 1D
Imports without tariff
World
price
Quantity
of Steel
Externalities and the Social
Optimum
Price of
Aluminum
Social cost
Cost of
pollution
Supply
(private cost)
Optimum
Market Equilibrium
Demand
(private value)
0
Qoptimum QMARKE
T
Quantity of
Aluminum
Remember
Marginal Benefit
= Marginal Cost
Benefit  What buyers are willing
to pay (demand curve)
Social Cost = Private cost
+ Spillover cost
The Labor Market:
Hire to Point Where MR = MC
VMPL = P x MPL = W
(a) The Market for Apples
Price of
Apples
(b) The Market for Apple Pickers
Supply
Wage of
Apple
Pickers
Supply
W
P
Demand
Demand
0
Q
Quantity
of Apples
0
L
Quantity of
Apple Pickers
The Profit Maximizing Firm
Remember
MR = MC
The Production Function:
Diminishing Marginal Product
 Increasing Marginal Costs
350
300
5
Quantity of Apples
4
250
3
200
2
150
100
1
50
0
0
0
1
2
3
4
Quantity of Apple Pickers
5
6
Harcourt, Inc. items and derived item
Profit Maximization for the Competitive
Firm...
Costs
and
Revenue
REMEMBER:
MC = MR (= P)
MC
MC2
ATC
P=MR1
AVC
MC1
0
Q1
QMAX
Q2
P = AR = MR
for competitive
firm
Quantity
The Firm’s Short-Run Decision to Shut
Down...
Costs
Firm’s short-run
supply curve
If P > ATC,
keep producing
at a profit.
If P > AVC,
keep producing
in the short run.
MC
ATC
AVC
If P < AVC,
shut down.
0
Quantity
Economies and Diseconomies of Scale:
The Firm in the Long Run
Average
Total
Cost
ATC in long run
Economies
of scale
0
Constant Returns
to scale
Diseconomies
of scale
Quantity of
Cars per Day
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Monopoly Profit
The monopolist can earn profit in the short-run
and in the long-run thanks to barriers to entry
Costs and
Revenue
Marginal cost
Monopoly E
price
B
Average total cost
Average
total cost D
C
Demand
Marginal revenue
0
QMAX
Quantity