Supply and Demand, Profit Calculations, and Economic Graphs

Supply and Demand Graph

  • Understand how to draw and label the supply and demand graph.
    • Key components:
    • Consumer Surplus: Area above the price level and below the demand curve.
    • Producer Surplus: Area below the price level and above the supply curve.
    • Equilibrium: The point where the supply and demand curves intersect, indicating market equilibrium price and quantity.
    • Impact of Tax:
    • Added tax shifts the supply curve upwards.
    • New prices are labeled as:
      • Price Buyer's Pay: The price consumers pay after tax.
      • Price Sellers Receive: The price sellers keep after tax.

Accounting and Economic Profit

  • Be able to calculate and understand the differences between accounting profit and economic profit.
    • Definitions:
    • Total Cost (TC): Sum of all costs of production.
    • Total Revenue (TR): Total income received from selling goods and services.
    • Formulas:
    • Accounting Profit: ext{Accounting Profit} = TR - TC
    • Economic Profit: ext{Economic Profit} = TR - (EC + IC)
      • EC: Explicit Costs (direct, out-of-pocket payments).
      • IC: Implicit Costs (opportunity costs of using resources).

Break-even Analysis

  • Determine important points in production such as break-even point, shutdown zone, and profit zone in the context of perfectly competitive markets.
    • Break-even Point: Occurs where marginal cost (MC) equals average total cost (ATC).
    • Shutdown Zone: Occurs when price falls below the minimum average total cost. Here, firms would choose to stop production temporarily.
    • Condition: ext{If } MC < ATC
    • Profit Zone: Where firms make profits if price is above the average total cost.
    • Condition: ext{If } MC > ATC
    • Graphical representation:
    • Cost or Price (S): Indicate points on graph for Break-even, Shutdown, and Profit Zone.
    • Zones illustrated on the graph with respect to MC and ATC curves.

Long Run Aggregate Supply (LRAS) Diagram

  • Know how to draw and interpret the LRAS diagram in different economic conditions: recession and expansion.
    • Key Components of Diagram:
    • LRAS Curve: Represents long-run aggregate supply.
    • SRAS Curve: Short-run Aggregate Supply curve, indicates production at short-term fluctuations.
    • AD Curve: Aggregate Demand curve, showing total demand at various price levels.
    • Economic Conditions:
    • Recession: Depicts a leftward shift; real GDP decreases.
    • Expansion: Illustrates a rightward shift; real GDP increases.
    • Inflation Rate: Indicates the rate at which average price levels are rising during expansion.

Summary of Components in LRAS Diagram

  • A: Represents equilibrium in the economy.
  • B: Represents recession, showcasing the decrease in output.
  • Both conditions affect aggregate quantities and overall economic health.