Econ test 2

All right, let's get started. Welcome to our second exam review session for Econ, 212 principles of microeconomics.

We are, of course, going through a fair amount of stuff today not quite so much as the last one, but of course, still a good amount of things to get through in the time we have. Our 3rd exam review is going to be kind of weird insofar, as we will not have had a normal session for it, but there's also not very many topics to go over, so that one will probably be a little more relaxed, and as you'll see, it's

coming up pretty soon here, because we are, of course, finishing up Week 4 here and there are only 5 weeks to the class. Welcome in. If you are just joining us. We are just getting started here.

Yeah. So we'll be going through each of these today as always, we have our expectations for the session. Very glad you're here. If you are here in the session, or if you are on the recording excellent utilization of resources. If after this you want to see additional examples. Please do visit the drop in Tutoring center. We are, of course, recording. I'll try to have that up as soon as I possibly can. Not within that usual 20

to 48 h time limit more like an hour or 2 after we conclude ideally. I will have it up as soon as I get it, but

that is not necessarily up to me. Lastly, we just ask that everybody be respectful during the session. We want to make sure everyone is comfortable, asking questions and learning in this space

as always, feel free to interact in whatever way you are most comfortable, whether that is through voice, through text chat or through annotations. We're going to be dealing with some of that producer consumer surplus. You know the areas. So annotations are helpful for those with that, we're going to jump right in. So speaking of producer and consumer surplus, we remember our general rules correct. Our surplus represents, of course.

sort of the extra benefit or excess good that a certain party receives. So either the consumer or producer, or if we're talking about total surplus.

the sum of both. For instance, this consumer is willing to buy a unit contributing to our current equilibrium quantity they would be willing to pay. I don't know $10 here, but maybe our market price is 5, and that distance there is their amount of surplus in this case $5,

and we add that to every other unit purchased, and it's surplus for that consumer. And that gives you your total consumer surplus that makes up this area then, and the same is true for a producer. But of course, for selling things you're willing to sell at a certain price, and if you can sell higher, then that distance is surplus.

We can apply this, of course, to

specific areas. So for consumer anything above market price and below our demand curve for producers, anything below market price and above the supply curve.

Any questions on this? Are we familiar?

Feel good about it, more or less?

All right. We'll keep moving. Then

I am going to ask you right off the bat to look at this graph and find consumer, producer, surplus, and total surplus. I'm going to give you a minute or 2 to do this.

I will pause the recording. If you are on the recording, please pause on your end as well, and take a moment to do this on your own before resuming, I'll pause here.

All right. What do we think for this? How do we break this down, or what is our 1st step?

We've got to divide it into our areas. First, st right? Calculating the areas is one thing, but defining them is another. So we know we have no price controls in this market. Currently, I know price controls our previous exam topic. But we're going to do a quick refresher on them today as well.

but not relevant to this problem. So we can just identify our equilibrium. We have an equilibrium quantity of 8 and an equilibrium price of 9 for our purposes, currently that $9. Equilibrium price is the most important. We know that anything above that and below our demand curve is going to be our consumer surplus area and anything below our price of 9 and above our supply curve is going to be our producer surplus area.

Once we have our areas, we can just apply a bit of geometry to get our actual numbers. So our formula is one half

base times height.

we can apply that to our consumer surplus. Here we have a height from 9 to 12, so that is one half

times height of 3.

So 3 in parentheses there not a an odd looking 13, and then, of course, our base here is going to be the same as our quantity, because that is the length of the base in this case. So 8 that comes out to 12

dollars, I would assume

of consumer surplus, exact same process for our producer surplus. We can go one half times. Base is going to be the same. In this case they have the same base, because the quantity applies to both, and our height is from one to 9, so that is a height of 8,

giving us a producer surplus of 32.

Our total surplus is, of course, just a matter of summing the 2 for a total of 44

questions, comments, concerns on this on identifying consumer and producer surplus, calculating them based on a graph.

If not.

we will keep moving. What happens in this case to consumer producer and total surplus. If the price of bags changes to $6 or is set at $6, remember, we had $12 of consumer surplus

32 of producer and total surplus was 44. So what are the changes in this case?

I will give you another minute or so. To do this I will pause the recording here. You can set your price and see how that changes the areas.

If you are on the recording. You know the drill, pause on your end and resume when you are ready.

All right. Where do we want to start with this

same general processes before right? So we have to identify our areas. But

wrench has sort of been thrown in the works here with this $6 price. We're no longer at equilibrium. Instead, the price has been set here. So we're going to have some different areas.

Hopefully, we remember what we have to do with a price control is, look at the lower intersection. We actually don't even have this other intersection here on the graph. But we do have this one, and it is the one we want, anyways, because it is the lower of the 2. You can only gain surplus from an actual transaction that is occurring, and though this lower price would cause a shortage in this market.

we can only consider the lower or insufficient number of units that is being sold relative to demand, because, of course, a seller cannot gain surplus from goods they are not selling, nor can a buyer gain surplus from goods they are not buying. So we have this surplus here which corresponds to or excuse me. This supply here.

This intersection, which corresponds to a quantity of 5 bags, which is the quantity we will have to use for both in this case. So we have a new producer surplus down here, still below our market price and above the supply curve.

The same is true for consumer surplus above market price, below the demand curve, but also to the left of the quantity. So our consumer surplus is this sort of odd shape here.

and we also have this triangle here which we know belongs to neither. So this is going to be our dead weight, loss or that value that has exited the market. So we can calculate that as well if we'd like.

Why don't we start with consumer surplus? Grab the bull by the horns here. It's a little tricky. I like to break it down into smaller shapes just for simplicity. So we've got a rectangle and a right triangle here, so we can use that right triangle area formula. One half base in this case is going to be from 0 here to 5.

So that's our base. Times. Height from 10 to 12 is a height of 2. So

we are going to come out with 5 of this specific triangle. We also have to consider the rectangle, of course, which has a height from 6 to 10 of 4 and a width

of 5, so that is an area of 20.

So our total consumer surplus is now 25 up from 12. So the consumers liked this price change. It was good for them. They have now got $13 more of surplus than they did prior to this price. Change.

Producers may not be so happy. We have a right triangle there, so we can go one half base times height, like we did before our base. This time is now 5, and our height is from one to 6, so that is 5 as well, giving us a producer. Excuse me, surplus of 12 and a half.

or 1250, if you prefer.

They gone, that is down, of course, from 32, so nearly $20 lost for the producers.

Some of this is also going to be our dead weight loss. We can calculate that manually, if we'd like, or we can simply compare the sum, our new total surplus to the old total surplus, which is probably a little easier. But I want to do the area one, just in case you need a little more practice with that. So we can break this down into 2 right triangles. This one on top here

has a height of one, a base of 3. So that is an area of 1.5,

and we need to add that to the area of this right triangle, which is a height of 3 and a width of 3 or a base of 3, so that is a 4 and a half unit area which brings you to a 6 unit. Debt er is that right?

One by 3 is 1.5, and then

3 by 3 should be 4.5. Correct. Am I doing a measurement wrong somewhere?

Might also just be odd compared to this. Hmm!

Give me just a moment here. So this would be 6 correct. Our total surplus, based on our new producer and consumer surplus is 37.5,

which is 6 and a half off from total surplus before we had a 6 and a half unit. Dead weight loss as opposed to the 6 here, from calculating the area

may just be a quirk of this graph, because these points are not exact. Oh, you know what I think happened here is, technically, this is a little larger than that. I think this may just be an instance of the graph being a little odd apologies, but 6 to 6 and a half dollars of deadweight loss. Your exam questions, of course, will be a lot more precise. This graph from Mindtap may not have been well suited to this particular problem. So I apologize for that.

Any questions on this

is kind of related to price controls which we've talked about already, but it is also tied very heavily to producer and consumer surplus, which is what we're on right now.

All right. Very briefly, on price controls. We remember we have 2 types, price ceilings and price floors the ceiling. Of course you cannot go above, so it limits how high a price can go any price. Floor is the reverse. You cannot go below the price floor. So it limits how low a price can go. Generally consumers prefer price ceilings, because, of course, they like lower prices and

sellers or producers prefer price floors because it prevents how low that price can go. They want to keep the price higher. All right. Looking at this very briefly, supposing the government imposes a price ceiling of $2 on this market, what is the size of the shortage in this market?

Well, if we identify our equilibrium here, where our quantity demanded and quantity supplied are equivalent. We know that our equilibrium price, our standard market equilibrium, is $3, but

because there is a price ceiling of $2, and we can't go above that. That market equilibrium is not accessible, and the price ceiling is shown to be binding, which means we will set at the highest price. We can in this case $2 based on the price ceiling, and we have a quantity demanded of 12 and a quantity supplied of 6, a disparity of 6 units. That is the amount of our shortage.

Alright

we are going to skip this one for now. This is relevant to our producer and consumer surplus discussion. We just have to remember

you go with the lower quantity of the 2. If the price is changed on you in order to determine your new quantity, and thus your new bound for either your producer or consumer surplus, depending on what sort of change in price it is. And then we know that the area excluded from producer or consumer surplus is our dead weight loss.

Okay, this is perhaps a little more relevant to what is going to be on this exam. We are going to need to define what exactly might be our consumer and producer surplus areas. And what happens after a price control. So this is a more specific

set of practice. For this. I'm going to give you some time to do this. I want you to figure out what letters correspond to what areas, of course, as it asks for here, but also the actual monetary values of those areas. I will pause here. I'll give you probably 2 or 3 min to do this one, just because there's more steps, and you're doing it all at once.

If you're on the recording, please pause on your end. Resume when you are ready to continue, I will pause here.

Alright, so same process as before. Right?

What are our areas here? What is consumer surplus, what is producer surplus? And what is our total surplus in terms of these letters corresponding to the areas.

We know our equilibrium that gives us our market price. We know our consumer surplus and producer surplus are bounded by the demand and supply curves respectively are.

I might have reversed those, but we know our consumer surplus is going to be a B and E here.

consumer or excuse me, our producer surplus is going to be CD, and F,

and then our total surplus is going to be A through F right? It's both put together in terms of actual numbers. There

we can use our area formula. So one half base in this case is going to be the quantity for consumer surplus here and producer surplus, because we're in equilibrium.

So base of 30 height from 60 to 120 is 60, and it looks like from 0 to 60 is also going to be a height of 60. So these are going to be using these same numbers here.

One, half, 30 times 60 is going to be $900 of consumer surplus, and because they are currently identical triangles, the producer surplus is the same. Total surplus will, of course, be their sum in this case. $1,800

cool we've got that now is the issue of a price change. The government specifically imposing a price floor of $90. We know it's a price floor, because it is a movement up of the price. And in order for that to be the case from

our equilibrium, we would need it to be a price floor. You can only go above the price floor. So new price is 90 that is going to shift our areas a bit. We have a new market price. So our consumer surplus is going to just be a right

above market price. Below the demand curve is just a now.

our new quantity, specifically, is going to be associated with this intersection. Right? It's going to be 15 units, because people only want 15 units. Now that it's more expensive, they will only buy 15 units. And so the suppliers here the producers can only gain surplus from the number of units they actually sell, which in this case is 15, even if they're willing to produce. If we look at this intersection, 45 units

can only gain benefit from what you actually sell. So they have BC and D as part of their producer surplus.

We can find the areas for those we, of course, know that our dead weight loss is going to be ef as a result here, because it is part of neither producer or consumer surplus, let's start with our consumer surplus our new consumer surplus here. So one half base times height, because it's just a right triangle base in this case is our new quantity of 15

and height is from 90 to 120, so a height of 30,

15 times 30 times 0 point 5 is going to be 225.

So we have gone from $900 of consumer surplus to only 225. A very unfortunate change.

Now, producer surplus is, of course, a little bit more tricky. We can split it into parts here that D is going to have the same dimensions as a a height of 30 width or a base of 15. So that's 225 there. But we also have to consider B and C. That is, a rectangle, together with a height of 60, 30 to 90, and a width of 15, so

15 times 60 is 900, plus that 225

is going to come out to $1,125 of producer surplus.

So they are happy with this change. They've gotten 225 additional dollars of producer surplus. Now, if we add those together, we have total surplus of 1,350 with letters A through D

deadweight loss, we know, is going to be this area. But we can also just look at our original total surplus, which is 1,800.

If we subtract our new total surplus of 1,350, you get a deadweight loss of $450. We can, of course, double check. This E is a triangle that we can calculate with, as is FE has a height of 30, a base of 15.

So one half base times height, it's the same formula, so E is 225 looks like F might be the same height of 30 base of 15. So yes, 225 there as well, and that will, of course, add to $450 of dead weight loss

any questions, comments, concerns on this.

All right, we'll keep moving

externalities. So we've got our 2 types, positive and negative, which is going to be associated with specifically an external cost, and in this situation society experiences a cost that is greater or smaller than the cost incurred by the participants in the activity.

What do we think

it's going to be negative right? We're dealing with cost. Cost is not good for us. We are dealing with a negative externality, and it's always going to be greater right. And externality doesn't reduce the amount of cost or benefit in a system here, it's going to increase it. On the other hand, a positive externality is, of course, associated with that external benefit.

a greater benefit than is experienced by the

private participants, so based on that oh! In terms of correcting either the imbalance from a positive or negative externality. What do we do

in this case? We're looking to subsidize something, so pay money to make it functionally less expensive or more appealing in some way or another.

What would we use that? For? What type of externality, and what is the result or the effect of that externality.

It's going to be B, right. We're dealing with a positive externality. You don't want to encourage a negative externality to happen more. You want to encourage a positive externality, because those firms tend to underproduce. We want that additional benefit. It's more valuable to society if we do that in higher quantity, so we encourage it with a subsidy equal to the external benefit.

All right. A tax on a good with a negative externality can internalize the externality by doing what? What is the mechanism by which a tax affects a negative externality?

Well, let's go down the line here. It adds the external cost to the private cost. So the market accounts for the social cost seems like a decent explanation. We can hold on to that one, for now subtracting the external cost from the social cost. So the market accounts for the private cost

that doesn't really make sense. You can't subtract

that, because then you're just back to private cost. That doesn't really fix anything adding the social cost to the private cost. So the market accounts for the external cost. Well, the social cost includes the private cost. You'd be doubling up on that private cost. That doesn't make a ton of sense. You

might overshoot in that case, and then subtracting the social cost from the private cost. So the market accounts for the external costs. In that case your cost would be negative, because once again, the private cost is included in the social cost. So you would actually be gaining from doing this activity which does not really

make sense with how things work. So we are left, of course, with a internalizing an externality is all about bringing that private equilibrium to the social equilibrium via that tax or subsidy based on whether you've got a negative or positive externality respectively, any questions so far on any of this.

If not, we'll keep moving alright. Looking at this graph.

What type of externality is in this market, or does it have an externality at all?

If we look at our graph here, we see private cost and social costs that should ring some alarm bells in your head that this is a negative externality. We're dealing with 2 different types of costs. Social cost is higher.

That means there is a negative externality. There's that external cost to society, even if the private suppliers in this case aren't experiencing it, or the private actors. I should say

so. This market has a negative externality, and that means that it would benefit from a tax right? We want to bring down the quantity here, and we do that by functionally raising the price via a tax. We bring this private cost up to be equal

to this social equilibrium or the private equilibrium equal to the social equilibrium. Through that tax we make it $4 more expensive, and we reduce the quantity by 100. In that case? Quantity demanded. I suppose.

Okay, we'll keep moving any questions on externalities before we move on.

If not, we will keep moving. Okay. So.

taking a look at our public goods and common resources. We remember we have our 4 types of goods, public goods, and common resources being 2 of them. We also have private goods and club goods. Each of these are one combination of

each of these characteristics here, so they can either be rival in consumption or non rival, and they can either be excludable or non excludable. Right? Private goods, we know, are both excludable and rival in consumption. These are your everyday, privately owned items. You own your clothes. Nobody else can wear them while you are wearing them.

Nobody else can eat the food you have purchased and are eating, but of course you have to have purchased these things in the 1st place, in order to gain access to them, so they are excludable. In addition to that, rivalry.

Club goods are non-rival, but they are excludable. So you have to pay for them or gain access to them in some way or another, but once you have access, you can use that as much as you'd like. It does not diminish it for you or anybody else. So once you pay for your satellite TV doesn't matter if a million other people also did the same. You are being provided that service, once you've gotten past that excludability barrier

common resources

not excludable, so you can't be stopped from using them, but they are arrival in consumption. So of course.

you have to consider that while you can use them as much as you'd like. You cannot overuse, or you could overuse them, and other people might be able to do the same. So, watching how much you fish in order to prevent overfishing, because you might run out of fish to catch, avoid damaging the environment too much, or utilizing natural resources too much in order to

continue guaranteeing that you might have them for the future. And then, of course, the roads example. If you're on a congested road, you are kind of fighting for space or fighting to get to your destination, but you, being there, makes traffic worse for everybody else, and them being there makes traffic worse for you. So while you don't have to pay to be there, it is a difficult situation. Lastly, we have

non-excludable non-rival public goods, so anybody can use this. You can't be stopped from using it, and it doesn't matter how many people use it, because it's not going to be diminished

until, of course, you hit potentially a critical point, as with these road examples, as long as the road is uncongested it is non-rival in consumption, and if it's non-toll, you don't have to pay to be there. If somehow enough people got onto this non-toll road that it was

backed up in traffic. We would, of course, expect this to kind of become a common resource right that would become a congested non-toll road, because it would become rival in consumption. Then, as opposed to being non-rival, like a public good, would be

any questions on any of these, or how they are identified or categorized. We'll have some practice here in a moment.

All right. So I just got a few examples here. I want you to try and identify what type of good each of these is.

I'll let you know, there's 1 of each. So if you aren't sure on one, you can kind of narrow it down by doing the others. I'm actually going to give you a minute to think about this. I will pause the recording here, if you're on the recording. Pause on your end as well. Think about it for a moment and resume, when you are ready.

All right. What's our 1st good here? A streaming service subscription?

What are our keywords or indicators of excludability and non-rival or rivalry.

I think subscription is generally a good tip off. That implies that you're paying for something most likely, so we could probably state that this is, excuse me, excludable

a streaming service is, unless they somehow get overwhelmed in terms of server load. Not going to be inaccessible, based on anything on their end. Maybe if you have a bad connection or something, but it's non-rival right?

you using. Netflix doesn't stop your neighbor from also paying for and using Netflix. So we consider that excludable non-rival which is, of course, going to be a club. Good.

What about free samples of food at a grocery store.

I think free is a pretty good indicator, right? It's not excludable. You can't be stopped from entering this grocery store and taking a free sample.

but it's likely that those samples are going to be limited. So if you take 8 samples.

maybe somebody else doesn't get one. So they are technically rival. Which means that this is a common resource.

What about a free database open to anyone

free again is helping you out here that is going to be non excludable. It's open to anyone as well, really giving you a lot of indications there and then. A database is not going to be rival, correct. It's going to be available publicly here and you using it doesn't stop anybody else from reading those same database entries or particular documents. So

this is a public good non-rival, non-excludable. That leaves, of course, the private goods, but we can identify here a ticket to a play with limited seats. You probably have to pay for the ticket, probably excludable, and with limited seats means that it is also rival. So that is a private good

questions, comments, concerns on any of this.

If

not, we'll keep moving all right. Couple more things. Just some vocab tied to these particular topics. We've got stuff tied to specifically public goods and common resources. No, I kind of spoiled things here. The free rider problem is specifically associated with one of our types of goods. Which one is it?

If we remember.

it's going to be our public goods right? The Free Rider problem is when people don't contribute to paying for or maintaining goods that are freely available and non-rival.

It doesn't necessarily hurt anything until, of course, everybody decides that they're going to be a free rider, because you can't be stopped from using this good, and whatever is paying for or maintaining this good is apparently effective enough

that you can use it without the fear that it will somehow be depleted or destroyed.

For instance, a public library. If you go in, you assume that the you checking out a book is not going to make the library collapse, or you checking out a dozen books, does not mean that the library is unusable for anybody else.

But if everybody sees this and says.

Oh, the library is static. I don't have to worry about it.

I'm not going to pay my taxes this year, and then nobody pays their taxes. Then, of course, the library goes away potentially, if that is a cut that occurs. So governments may have to perform cost, benefit analysis, or analyses

to determine whether a specific public good is worth providing if it's going to be useful enough and respected by the community enough to be a viable public service.

Our other term is the tragedy of the Commons. This one's more of a story, but it applies in broad strokes to our topic. Here you may be able to guess that we are talking about common resources for the tragedy of the Commons. It is where, of course, a common resource is over, consumed.

due to being non-excludable. We know, of course, that they are non-excludable, and they are also rival. These common resources, because of this, if they're over consumed.

the resource is going to be depleted. This is just an issue where, because nobody can be stopped from using it, and it is useful. Overuse is common, and eventually it gets ruined for everyone, because of that.

Any questions, comments, or concerns on either of these terms or phrases.

If not, we'll keep going all right on to costs. General operation stuff.

we hopefully remember, profit or loss is going to be our revenue minus our costs.

and we can find our total revenue or our total costs by taking our per unit revenue, which is in this case price or our per unit cost, which is

something you'll likely be told you won't have to really hunt for that, either of those, whichever you're trying to find times, your quantity so essentially taking that

costs or revenue per unit.

and multiplying it by the number of units. So that it's just revenue, because our price is total revenue over quantity. If you multiply by quantity, you just get total revenue.

Okay, any questions on that before we dive in.

All right, we'll keep moving. We've got 2 main types of costs that we consider. What are they? What is a cost based on the amount of production. And what is a cost that is incurred regardless of production amount?

Are they each called

the ones that change based on production amount are going to be our variable costs. Right? They vary with the amount of production and costs that are incurred regardless of production, are fixed costs, right. They don't change, no matter what. As long as you are operating this business as you are currently, or at least in the short term, you're going to have those fixed costs, whether you make one unit or a billion.

All right. So we've got Mariah here. She is running a business selling chips. She sells them at a price of $5, sells 15 bags per week, and each bag of chips requires $2 of ingredients. What is her weekly profit? I'm going to pause. I'll give you just a minute to do this kept the numbers small so hopefully. Nothing too tricky. Here. I'll pause here if you're on the recording. Please pause on your end as well.

Excuse me and resume when you are prepared to continue all right. So

we know our profit formula, right

profit equal. I'm gonna put a Pr because P is usually price profit equals total revenue minus total cost, or you can find your per unit profit profit per unit by taking per unit. Revenue so total revenue over quantity is per unit. Revenue over

total cost, over quantity or minus total cost over quantity not equals. Okay, we're going to do the 1st one. We can do the second one if we feel like it.

So in order to find total revenue. All we need to do is take price times quantity, because that's our per unit revenue.

and then we're multiplying it by our number of units to make it just our total revenue. So 5 times 15 is $75 of revenue

minus. We know it's $2 per bag. We know we're making 15 bags. So $30 of cost, leaving us with $45 of profit.

Wonderful. Let's make it marginally more complicated if she acquires a machine that can help save on ingredients costs $4 a week per rent, but reduces the cost per bag of chips by $1. What is her new profit with the machine. I won't pause on this one. I'll just give you a moment to figure this out.

Our revenue hasn't changed correct. It's still $75, selling 15 bags of chips at $5 a pop. So

we've got that there.

Our costs have changed. However, we know we now have the static cost of $4, no matter how many bags of chips we're making.

and we still have to pay per bag of chip. But now it's reduced by $1 was $2 before. So now it's a dollar per bag making 15 bags. So we have $19 of total costs, 75 minus 19. My brain is refusing to do that. 56. There we go, probably should have been able to do that in my head. But here we are so profit.

it would seem, has gone up. This machine was a good investment, and I imagine it would be a good investment so long as you increase the number of bags of chips you produce, though there may be a point where it is not financially wise to use the machine. If you reduce your production by enough

questions, comments, concerns on this.

This is mainly just to illustrate that we have fixed costs like that, and variable costs, like the before and after costs of the ingredients for the chips. Those were based on how many bags you produced, whereas the machine cost the same, regardless of your production amount.

Okay? We also have this concept of marginal values, marginal product, marginal profit. Marginal cost. These are

how much additional X is produced.

Costs

made in profit. For one additional input, whatever it might be. One additional unit, perhaps. What what does one additional X do

in this case, it is asking about marginal product of the second worker here. So what is that worker's marginal product?

But we're going from one to 2 workers. That means we need to look at how many units in this case number of dogs walked you have with one worker, 25. And if you go to 2 workers, we go to 55. So the difference between those 2 is the marginal product of that second worker, which is, of course, 30 additional dogs walked

any questions on this.

Alright, we'll keep going. We're gonna pass on. Actually let me check what slides we've got here.

We will do this one. We might skip some other stuff here. But yeah, I'm going to give you a minute or 2 to fill this out on your own. We have fixed cost, variable cost, total cost, marginal cost, average total cost, average variable cost and average fixed cost. I'm going to pause here if you're on the recording, please pause on your end as well, and resume when you are ready to continue.

All right. So we can start with our fixed costs. Fixed costs are pretty easy.

They don't change. They're fixed. So that's 200 all the way down.

Total cost is just going to be the sum of the fixed and variable costs. So we have 200 when we make nothing, 250 at one unit, 290, at 2, 3, 20, and 3 40,

so our marginal cost is going to be the difference between each of these. So going from 200 to 2, 50 is 50,

40, 30,

and 20. So our marginal cost continues to go down seems good average total cost. That's going to be your total cost, divided by your number of units. So 250, divided by one is 200, 5,290, divided by 2 is 145, 320, divided by 3. I

don't know. Off the top of my head. 2 20 over 3 that's pretty ugly, 106.6 repeating

And then 340 over 4 is 85.

So our lowest average total cost is at 4 units. Our average variable cost is our variable cost, divided by a number of units, so 50 over one is 50, 90, over 2 is 45, 120, over 3 is 40, and 140 over 4 is 35.

Our average fixed costs are going to go consistently down because it is the same fixed cost being averaged out over more and more units. So 200 over one is 200. Over 2 is 100 over 3 is

not something I'm doing off the top of my head

for good reason. 66.6, repeating, not exactly pretty, and then 200 over 4 is 50. So we have all of our different costs here illustrated. You could graph this if you wanted specifically these most likely as well as your marginal cost, and that would give you a good idea of what some of your cost curves look like for this particular production market, whatever it might be.

All right, we are. Gonna skip on this one.

we are going to pass on this as well. Long run versus short run

dealing with fixed costs. Specifically, what do we say about fixed costs in the short run versus the long run in terms of existing.

Yeah, right? It's going to be. Excuse me, I keep forgetting. I don't have stuff for this fixed costs do exist in the short run, but not in the long run. In the long run all costs are variable. This kind of goes back to our elasticity thing. You have more time to change factors of production, so you can find alternatives to fixed costs or exit a market.

and then you don't have to deal with those fixed costs anymore, or you found a way to phase them out. So in the long run those costs become variable as well. You can choose to change them

in the long run, but cannot in the short run, if a company's average total cost decreases as production quantity increases. So if you scale up production, and your average total cost goes down. What are you experiencing?

It's going to be economies of scale, right? And then the other side of the coin is diseconomies of scale. If you scale up production and your average total cost goes up. That's bad for you. You're probably making less money, and you are having diseconomies of scale

cool on to competitive markets. Let me check where we're at time wise versus where we're at in these slides.

We're doing? Okay?

Okay? So yeah, competitive markets have those 2 primary characteristics. Do we have many or few buyers or sellers, buyers and sellers? Excuse me.

yeah, many. Oh, that is not a very good circle many.

that's not good, either. Circle the answer. How about okay, there we go. You need

competitors to have competition. So there are many buyers and sellers, so many, in fact, that buyers and sellers are considered to be abundant enough that you don't really consider, demand an issue here. Goods offered by sellers are largely unique or largely the same.

Yeah, going to be the same right? So similar, in fact, that we consider them to be functionally identical. So buyers and sellers do not care who they buy from or sell to you are indifferent between buyers and indifferent between sellers depending on which of the 2 you are.

We also have a 3rd characteristic that makes for a perfectly competitive market. Can firms freely enter or exit a market. What do we think?

Yeah, right? You can freely enter and exit a perfectly competitive market. There are no barriers to entry, nothing to stop you from entering that market

cool.

So we also know that we call buyers and sellers

price takers in this case, because they must accept whatever price the market lands on. They have no ability to affect it individually, because if you raise your price as a seller, buyers will just go somewhere else, there's a million other sellers with the standard market price. If you are a buyer and try to get somebody to lower the price for you, they're just going to sell to somebody else, because there are a bunch of other buyers out there willing to pay that standard market price.

All right. Firms? Oh, kind of already explained this, no individual buyer or seller has the ability to affect the market price.

The market we talk about for next time is a different story. That is pretty much the exact opposite of this where the seller has all the market power. But we'll get to that when we get to that. Don't have to worry about that for this exam. Rather, we need to worry about maximizing profit for a competitive market. So when price is greater than average total cost profits for the firm are what

positive 0 negative proportional to marginal costs.

It's going to be positive right? This is just our formula. Price is our

per unit revenue average total cost is by definition, your per unit cost. So price minus

or, excuse me, yeah. Price minus average total cost is the same as per unit, revenue minus per unit cost, which, if price is greater, that is going to produce a positive number which is positive profit per unit, which, of course, extrapolates to positive profit in totality.

So price being greater than average total cost, is an indicator that you are making a profit, a firm that is currently producing at a level of output where marginal revenue is greater than marginal cost can increase profits by producing one more unit of output. Is that true or false?

This one might be a little tricky, so don't worry. If it's not quite clicking.

Why don't we take a look at a graph. I'm going to hop ahead just a little bit

if we have marginal cost and marginal revenue here, if we're at a point a quantity where marginal revenue is greater than marginal cost.

We know that our profit maximization point is where they meet right? So we know that profit can be increased by increasing the amount of production. So if I can hop back here.

oh, went too far. There we go. If marginal revenue is greater than marginal cost, you can scale up production and make more money. So this is true. One more unit of output will

guaranteed increase profits.

You might still be making a loss, depending on what that price is relative to marginal cost or average total cost. But it would improve your situation that one additional unit, whether or not more beyond that one would improve. Your situation is a question of the situation itself. But

in general you can say that this is true.

All right. I am going to pass on this one, for now.

if marginal revenue is equal to marginal cost at the current level of output, kind of already spoiled this for you. We know that profits are going to be maximized right? We look for Mc equals, Mr. And that gives you the quantity.

that current level of output that will maximize your profit. I specify that it's not the most relevant specification here, because if you're at the intersection here, then you are

at the given price. We'll see that that is not the case for the next market we talk about after this exam. But

for now

Know that at that intersection that is, the quantity that maximizes profit. So for this profit, maximizing, perfectly competitive, firm, determine and calculate the following, that profit, maximizing level of output, and then at that profit maximizing level of output. What is our average total cost, our total cost as a result, total revenue and profit.

I'm going to give you some time to do this on your own before we go through it together. If you're on the recording, you know the drill, pause on your end and resume when you are ready. I'll pause here.

All right. So

kind of already know our profit. Maximizing level of output is going to be found here right

in this case it's 50 where our marginal cost and marginal revenue meet. We've got our

stuff there. We can also determine, based on that our cost per unit. It's cost per unit at that quantity, and it's going to be where our average total cost intersects our quantity line. There looks to be about 550

total cost in this case is going to be that profit maximizing level of output times that cost per unit 5, 50 times 50 is 27,500.

Our total revenue is going to be our price times our quantity. Our price in this case is equal to marginal revenue, because this is a perfectly competitive market. So it's 800 times 50 for a total of $40,000 of revenue, and subsequently 40,000, minus 27,500 is 12,500 in profit

questions, comments, concerns on this feeling. Okay, on it.

Good. Good.

All right. In that case, we also have to talk about shutdown or potentially exit in the short or long run. We've got a couple important intersections in addition to marginal cost equaling marginal revenue where marginal cost equals average variable cost. That is your shutdown price. If your marginal cost is.

or excuse me if your price is below that intersection. You are going to be at a point where it is better for you to shut down, to not make anything at all. You just

take your fixed costs. You lose that money. It's unfortunate, but if you were to produce anything you would lose even more money because you'd be making, you'd be taking those fixed costs, you'd have variable costs as well, and whatever money you make off of the product is not enough

to improve your situation over just eating those fixed costs. We also have our break, even price. Any price below this is going to be a loss. So even if it's not below the shutdown price if you're above the shutdown price, but below the break, even price, you're losing money, but it's better for you to produce something than nothing. You're going to recoup some of your costs by producing.

If anything is above Breakeven Price, you're going to be profitable.

It is a high enough price that, relative to your average total cost. You are going to make money

all right.

Then, taking a look at this

right off the bat, can anybody identify? Is this going to be a profit, a loss break even. And

is this firm going to stay in this market? Or rather, are they going to operate in the short run, I should say,

Is, are they going to make money? And even if not.

will they stay open? Will they operate.

as I guess how I should phrase that.

Yes, no, maybe.

Why don't you think about it? I'll give you some time to do this one as well. I'll pause here. If you're on the recording, you know what to do.

and then we will go through together when we resume.

All right. So let's find out whether or not this firm would operate

proc profit. Maximizing level of output is still going to be where marginal cost equals marginal revenue. Right here. It's the one further along. I know there's technically 2 intersections.

it it is the higher quantity

so looks to be. We'll call that 24 a little iffy there, but we won't sweat it.

So 24 is our profit maximizing level of output. Our total revenue, as a result, is going to be that times the marginal revenue, which in this case is equal to price, because this is a perfectly competitive firm that looks to be. I'm going to put that at like 280. So 24 times 280 is 6,700. 0, my screen glitched out there for a second. 6,700 oh.

$6,720 of revenue total cost in this case is going to be based on the quantity intersecting with average total cost. I'm going to put that at about 560. So 560 times 24 is 13,300. Excuse me, 440,

so the firm is pretty obviously taking a loss here. 13,440, minus 67, 20 is $6,720 of loss, so they are losing twice as much money as they are making a total loss, or a net loss of $6,720. That is very bad.

We also want to try and calculate our fixed costs here. We can compare them to our loss here if we produce, and if the fixed costs are lower, that's an indication that we would shut down. Because if the fixed costs are lower than the best we can do while operating.

why not just take the fixed costs? So in order to find our fixed costs, we can take our total cost, and we can subtract our total variable costs. And in order to do that, we need to find our total variable cost by multiplying our average variable cost by our quantity. So our average variable cost here looks to be

300, 1,320, we'll say 310 for simplicity. So 310 times 24 is $7,440 a variable cost. If we subtract that from our total cost of 13,440,

we get $6,000 of fixed cost, which is notably less than that $6,720 of loss that we would take if we operate at the optimal level.

So

if we take our fixed costs and we just don't make anything, we save ourselves $720 kind of strange to think about, but a viable business decision. Nonetheless.

Questions, comments, concerns on this.

If you didn't want to do this whole rigmarole, and the question was, just.

are you going to turn a profit? Are you taking a loss? Will you operate, or will you shut down? We can, of course, look at our break, even point.

Our marginal revenue is well below it, so we know we are taking a loss here, and we can also look at our shutdown point marginal revenues below that, too, we would shut down

questions, comments, concerns.

All right. We'll keep going

very briefly at the end. Here. Short run and long run stuff in terms of entry and exit for a competitive market. So in the short run, if a firm has negative economic profit greater than its fixed costs. The firm will do what

kind of just talked about this. So

yeah, it's gonna shut down right?

this is, you know, an example of that that shutdown

you're not making enough money to justify operation. So you save money by shutting down in the long run. However, we know those fixed costs become variable. So a firm is going to choose to exit the market rather than stay in and continue losing money, or somehow hope that the price will Skyrocket.

So a firm is, rather than just shutting down, even going to exit the market entirely, that company will cease to exist, at least for that particular market.

This contributes to something very interesting, because there are no barriers to entry. There are no profits, no economic profit, anyway, in the long run for a competitive market

because firms can enter and exit. If you can make money, if there's profit being made, firms will enter, supply increases, price decreases to balance things back out, and profit is 0 or trends towards 0. Excuse me if there's loss, the reverse happens. Firms will leave that market supply decreases. Price increases relative to it, and profit trends towards 0 once again. So you will eventually stabilize at 0 economic profit

any questions on that idea.

All right.

so that is all I have for you. I will go through my ending spiel. And then, if there are any questions we can have those no sessions upcoming this week I will announce exam 3 review. I believe it will probably be a week from today, just because there's a very quick turnaround.

We're coming to the end of this session a summer semester. So we kind of accelerate here at the end, but also exam. 3 doesn't have a ton of content. So we'll get to that when we get to that. But no regular sessions on Monday or Wednesday, this coming week.

as always, I like to recommend mindtap adaptive test prep. To you. It is a fantastic study tool. It's in your textbook. So no paying or signing up signing up for anything extra, you just open up your textbook, find the icon that looks like this in the toolbar. You can select specific chapters, specific

parts of specific chapters, and assemble. I

up to? I believe, 100 question Quiz that you can go through. It'll tell you whether you got answers right or wrong. It'll tell you what's wrong about them. If you got them wrong.

I would highly highly recommend this as a practice thing. You can rattle off 10 question quizzes. You can do longer ones. It really helped me when I took this class, and I continue to recommend it. Every semester that I am an Si for this class.

If you have non-content questions, please feel free to fill out a survey always good to get feedback, and if you need any information about the Asn network that is there for you as well.

The tutoring center is available to you. So, despite our limited time, they are available a lot more frequently, so definitely check them out good for a variety of classes, including this one. So if you've got some other session, a stuff that you have exams coming up for, give them a shot. Same deal with the online study hub. They are a strong resource as well. So definitely check them out. If you're looking for more of a group work or peer to peer experience.

and then the writing support that is available to you is

not necessarily for this class. But if you're writing an essay, resume anything like that. They are happy to help

all that said. If there are additional questions I'd be happy to answer them, but if not. I would like to thank you very much for attending if you are here in the zoom. Thank you very much for watching. If you are on the recording. I will see you in the next session. Best of luck and best of skill on your exams.