INTRODUCTION TO
MICROECONOMICS
Graphs and Tables
Part #3
Figure VI-1.1: An Increase in Demand in an
Increasing Cost Industry
SSR
P
SLR
$20
D
Q
100K
The Market
For an increase in demand:
1. Start at PSR = PLR, Π = 0
Figure VI-1.2: An Increase in Demand in an
Increasing Cost Industry
SSR
P
SLR
$35
$20
D’
D
Q
100K 105K
The Market
For an increase in demand:
1. Start at PSR = PLR, Π = 0
2. Increase demand
3. PSR > PLR, Π > 0 causes
entry.
Figure VI-1.3: An Increase in Demand in an
Increasing Cost Industry
P
$35
$30
$20
SSR
For an increase in demand:
S’SR 1. Start at P = P , Π = 0
SR
LR
SLR 2. Increase demand
3. PSR > PLR, Π > 0 causes
entry.
D’ 4. Entry causes S to
increase.
D
5. Costs also increase and
P
decreases
until
P
=
SR
100K 105K110K Q
PLR and Π = 0 (back in
The Market
LR equilibrium).
Figure VI-1.5: A Technological Change in an
Increasing Cost Industry
P
SSR
SLR
$20
$15
S’LR
D
Q
100K 110K
The Market
1. Start at PSR = PLR, Π = 0
2. SLR Shift to the Right
3. PSR > PLR, Π > 0 causes
entry.
Figure VI-1.6: A Technological Change in an
Increasing Cost Industry
P
SSR
1. Start at PSR = PLR, Π = 0
SLR 2. SLR Shift to the Right
3. PSR > PLR, Π > 0 causes
S’LR entry.
4. SSR Increases Until
PSR = PLR, Π = 0
D
$20
$15
Q
100K 110K
The Market
Figure VI-1.3: An Increase in Demand in an
Increasing Cost Industry
P
$35
$30
$20
SSR
For an increase in demand:
S’SR 1. Start at P = P , Π = 0
SR
LR
SLR 2. Increase demand
3. PSR > PLR, Π > 0 causes
entry.
D’ 4. Entry causes S to
increase.
D
5. Costs also increase and
P
decreases
until
P
=
SR
100K 105K110K Q
PLR and Π = 0 (back in
The Market
LR equilibrium).
Figure VI-2.1: An Increase in Demand in an
Increasing Cost Industry with Legal Entry
Barriers
P
SSR
SLR
$20
D
Q
100K
The Market
For an increase in demand:
1. Start at PSR = PLR, Π = 0;
Legal Entry Barriers
Imposed Here
Figure VI-2.2: An Increase in Demand in an
Increasing Cost Industry with Legal Entry
Barriers
P
SSR
SLR
$35
$20
D’
D
Q
100K 105K 110K
The Market
For an increase in demand:
1. Start at PSR = PLR, Π = 0
2. Increase demand
3. PSR > PLR, Π > 0 but
entry is blocked so
existing firms are able to
earn Π > 0 .
Table VI-4: The Market for Wheat with Price
Support
P
$0.00
QDPVT
130
QDPVT + USDA
190
QS
**
$2.00
$4.00
$6.00
120
110
100
180
170
160
00
20
40
$8.00
$10.00
$12.00
PSUP $14.00
90
80
70
60
150
140
130
120
60
80
100
120
$16.00
$18.00
$20.00
50
40
30
110
100
90
140
160
180
Figure VI-4: The Market for Wheat with Price
Supports
P
$26
S
ES
PSUP = $14
DPVT + USDA
$10
DPVT
$2
Q
60
80
Consumers pay = $14(60) = $840
USDA pays = $14(120 – 60) = $840
120
Table VI-5: The Market for Wheat with Price
Supports and Production Controls (PC)
P
$0.00
QDPVT
130
QDPVT + USDA
140
QS
**
QSPC = 70
**
$2.00
$4.00
$6.00
120
110
100
130
120
110
00
20
40
00
20
40
$8.00
$10.00
$12.00
*$14.00
90
80
70
60
100
90
80
70
60
80
100
120
60
70
70
70
$16.00
$18.00
$20.00
50
40
30
60
50
40
140
160
180
70
70
70
Figure VI-5: The Market for Wheat with Price
Supports and Production Controls
SPC = 70
P
S
$26
ES
PSUP = $14
$10
DPVT + USDA
$2
DPVT
Q
60 70
80
Consumers pay $14(60) = $840
USDA pays $14(10) = $140
Table VI-6: Target Prices
P
$0.00
QDPVT
130
QS
**
PCON $2.00
$4.00
$6.00
$8.00
*120
110
100
90
00
20
40
60
$10.00
$12.00
PTAR $14.00
80
70
60
80
100
*120
$16.00
$18.00
$20.00
50
40
30
140
160
180
Steps for Finding Consumer Price, PCON
•
•
•
•
1. Find Target Price = $14
2. Find Quantity Supplied at P = $14. QS = 120.
3. Find Quantity Demanded of 120.
4. Price for QD = 120 is P = $2.
Figure VI-6: The Market for Wheat with a
Target Price
P
$26
S
PTAR = $14
$10
PCON = $2
DPVT
Q
80
120
Consumers Pay Farmers $2(120) = $240
USDA Pays Farmers ($14-$2)(120) = $1,440
Figure VI-7: The Welfare Loss in a Market for
Wheat with a Target Price
P
$26
S
PTAR = $14
$10
WL
DPVT
PCON = $2
Q
80
WL = ½(b)(h) = ½ $12(40) = $240
120
Figure VI-8a: Effect of Price Supports in the
Short-Run
P
DSR
ESSR
SSR
SLR
PSUP
P0
Short-Run Cost
To USDA
DLR
Q
Figure VI-8b: Effect of Price Supports in the LongRun
P
DSR
ESLR
PSUP
P0
SSR
S’SR
SLR
Long-Run Cost
To USDA
DLR
Q
Explanation of Figures VI-8a and 8b
• 1. Start at Social Welfare Maximum, P0 = PLR
• 2. Raise price to PSUP so that PSUP > PLR, and existing
firms will now have positive profits.
• 3. That will attract new entry (In this case, it will
mean existing farms buying up smaller farms and
adding more capacity). New entry will cause the costs
to rise (increasing cost industry) but prices do not fall
because of the price floor.
• 4. New entry continues until costs have risen enough
to reduce profits to zero. (This occurs at PSUP.)
• 5. Cost of price supports is larger in the LR than the
SR.
Figure VI-9: Effect of a Producer Subsidy
• Subsidy to producers results in misallocation of
resources: Too much output in subsidized Market
and too little output in the Rest of Economy
Farm Subsidy
Rest of Economy
Resources
(Lower Valued
Use)
Output Decreases
Farm
Markets
Output Increases
Farm Subsidy in Farm Markets is equivalent to a tax
on the Rest of Economy
Figure VI-10: The Market for Corn-Supply and Demand Curves
P
S
$26.00
PF = $14.00
c
$10.00
b
$2.00
D
a
Q
100K