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Learning Objectives
1.
2.
3.
4.
5.
Chapter 4: Elasticity
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Total
revenue
Explicit
costs
Explicit
costs
Accounting
profit
Normal profit =
opportunity cost of
resources supplied
by owners of firm
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Economic
profit
Slide 5
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Calculating Profits
Slide 6
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Slide 7
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Total
revenue
($/year)
Explicit
costs
($/year)
Implicit
costs
($/year)
Accounting
profit
($/year)
Economic
profit
($/year)
Normal
profit
($/year)
22,000
10,000
11,000
12,000
1,000
11,000
20,000
10,000
11,000
-1,000
11,000
10,000
Slide 8
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Slide 9
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Total
revenue
($/year)
Explicit
costs
($/year)
Implicit
costs
($/year)
Accounting
profit
($/year)
Economic
profit
($/year)
Normal
profit
($/year)
20,000
4,000
17,000
16,000
-1,000
17,000
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Slide 11
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Slide 12
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ATC
2.00
65
Quantity (millions of
bushels/year)
Price ($/bushel)
Price ($/bushel)
Economic profit
= $104,000/yr
Price
2.00
1.20
130
Quantity (1000s of
bushels/year)
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MC
ATC
2.00
1.50
65 95
Quantity (millions of
bushels/year)
Price ($/bushel)
Price ($/bushel)
Economic profit
= $50,400/yr
2.00
1.50
Price
1.08
120 130
Quantity (1000s of
bushels/year)
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1.00
Price ($/bushel)
Price ($/bushel)
ATC
Price
1.00
D
115
Quantity (millions of
bushels/year)
90
Quantity (1000s of
bushels/year)
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A Short-Run Economic
Loss in the Corn Market
MC
0.75
D
60
Quantity (millions of
bushels/year)
Price ($/bushel)
Price ($/bushel)
Economic loss
= $21,000/year
1.05
0.75
Price
70 90
Quantity (1000s of
bushels/year)
Slide 16
ATC
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S
S
1.00
0.75
D
40 60
Quantity (millions of
bushels/year)
Price ($/bushel)
Price ($/bushel)
MC
1.00
0.75
ATC
Price
90
Quantity (1000s of
bushels/year)
The departure of firms from the industry increases the market price
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Slide 17
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The
The
Slide 19
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New firms will enter the market. Short run industry supply
curve will shift to the right until prices come down to min
ATC.
Slide 21
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Slide 22
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Initial Equilibrium
in the Market for Haircuts
ATCH
S
15
Price ($/haircut)
Price ($/haircut)
MCH
D
50
Haircuts/day
QH
Haircuts/day
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ATCA
S
10
Price ($/class)
Price ($/class)
MCA
D
20
Classes/day
QA
Classes/day
Slide 24
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15
12
Price ($/class)
Price ($/haircut)
S
15
D
10
350 500
Haircuts/day
D
200
Classes/day
300
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ATCA
Economic
loss
Economic
profit
Price ($/class)
Price ($/haircut)
MCH
15.50
12
MCA
15
11
QH QH
Haircuts/day
QA QA
Classes/day
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Reduce
Increase
Slide 27
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Slide 28
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Economic Rent
That
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Assume
A community
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Economic Rent
Versus Economic Profit
Assume
TR
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Economic Rent
Versus Economic Profit
Why not pay the chef less and increase the
economic profit for the restaurant?
Other
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Economic Naturalist
Why
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Assume
40
Slide 34
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Short Run
No impact on price; ATC and MC will shift down;
Economic profits for the company will increase by
$20,000/trip
Long Run
Other companies will introduce the propeller
ATC and MC for all firms will shift down; market
supply will shift to the right and price will fall
Zero economic profits after all firms have adopted
the new propeller; prices lower for the consumer
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Is
Therefore,
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After 2 years
$100(1.10)(1.10) = $100(1.10)2 = $121
Therefore, the PDV of $121, two years from
now is $100.
Slide 37
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Generally
PDV
M
PV
(1 r )T
What
+ 0.2)2 = $10,000
Slide 38
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Slide 45
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Assume
Accounting
profit = $1 million
1,000 shares of stock
Annual interest rate = 5%
Price/share
Each
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Slide 47
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Slide 48
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Slide 49
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Slide 51
End of
Chapter
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MC