Questions for Review Kap
1. How is an individual demand curve different from a market demand curve Which curve is likely to be more price elastic Hint Assume that there are no network externalities. 2. Is the demand for a particular brand of product, such as Head skis, likely to be more price elastic or price inelastic than the demand for the aggregate of all brands, such as downhill skis Explain. 3. Tickets to a rock concert sell for 10. But at that price, the demand is substantially greater than the available number...
Exercises 1
1. In this chapter, consumer preferences for various commodities did not change during the analysis. Yet in some situations, preferences do change as consumption occurs. Discuss why and how preferences might change over time with consumption of these two commodities b. dinner for the first time at a restaurant with a special cuisine. 2. Draw the indifference curves for the following individuals' preferences for two goods hamburgers and beer. a. A1 likes beer but hates hamburgers. He always...
Dynamic Changes in Costs The Learning Curve
Our discussion has suggested one reason a large firm may have a lower long-run average cost than a small firm-increasing returns to scale in production. It is tempting to conclude that firms that enjoy lower average cost over time are growing firms with increasing returns to scale. But this need not be true. In some firms, long-run average cost may decline over time because workers and managers absorb new technological information as they become more experienced at their jdbs. As management and...
The Industrys LongRun Supply Curve
In our analysis of short-run supply, we first derived the firm's supply curve and then showed how the horizontal summation of individual firms' supply curves generated a market supply curve. We cannot analyze long-run supply in the same way, however, because in the long run firms enter and exit the market as the market price changes. This makes it impossible to sum up supply curves-we don't know which firms' supplies to add. To determine long-run supply, we assume all firms have access to the...
IncreasingCost Industry
In an increasing-cost industry, the prices of some or all inputs to production increase as the industry expands and the demand for the inputs grows. This might arise, for example, if the industry uses skilled labor, which becomes in short supply as the demand for it increases. Or the firm might require mineral resources that are available only on certain types of land, so that the cost of land as an input increases with output. Figure 8.16 shows the derivation of long-run supply, which is...
The ShortRun Market Supplu Curue
The short-run market supply curve shows the amount of output that the industry will produce in the short run for every possible price. The industry's output is the sum of the quantities supplied by all the individual firms. Therefore, the market supply curve can be obtained by adding their supply curves. Figure 8.8 shows how this is done when there are only three firms, all of which have different short-run production costs. Each firm's marginal cost curve is drawn only for the portion that...
petroleum products
Suppose you are managing an oil refinery and you decide to produce a particular combination of refinery products, including gasoline, jet fuel, and residual fuel oil for home heating. A lot of crude oil is available, but the amount that you refine depends on the capacity of the refinery and the cost3of production. How much of the product mix should you produce each day Information about the refinery's marginal cost of production is essential for this decision. Figure 8.7 shows the short-run...
The Competitive Firms ShortRun Supply Curve
A supply curve for a firm tells us how much output it will produce at every possible price. We have seen that competitive firms will increase output to the point at which price is equal to marginal cost, but they will shut down if price is below average variable cost. Therefore, for positive output the firm's supply curve is the portion of the marginal cost curve that lies above the average variable cost curve. Since the marginal cost curve cuts the average variable cost curve at its minimum...
Marginal Revenue Marginal Cost and Profit Maximization
Let's begin by looking at the profit-maximizing output decision for any firm, whether the firm operates in a perfectly competitive market or is one that can influence price. Since profit is the difference between total revenue and total cost, to find the firm's profit-maximizing output level, we must analyze its revenue. Suppose that the firm's output is q, and that it obtains revenue R. This revenue is equal to the price of the product P times the number of units sold R Pq. The cost of...
Contestable Markets
Even when only one firm is in a market, that firm may find it profit-maximizing to act as if it were competitive. The reason is that if it tries to raise price above the competitive level, other firms will enter the market, compete for customers, and force the price back down. Hence, competition among firms within a market can be less important than the competition or a market. In a contestable market, new firms may enter the market under essentially the same, cost conditions as a firm that is...
Cost Functions and the Measurement of Scale Economies
Recall that the cost-output elasticity Ec is less than one when there are economies of scale and greater than one when there are diseconomies of scale An alternative index, the scale economies index SCI , is defined as follows When Ec 1, SCI 0, and there are no economies or diseconomies of scale. When c is greater than one, SCI is negative, and there are diseconomies of scale. Finally, when Ec is less than 1, SCI is positive, and there are economies of scale. In 1955, consumers bought 369...
Production with Two OutputsEconomies of Scope
Many firms produce more than one product. Sometimes a firm's products are closely linked to one another-a chicken farm produces poultry and eggs, an automobile company produces automobiles and trucks, and a university produces teaching and research. Other times,firms produce products that are physically unrelated. In both cases, however, a firm is likely to enjoy production or cost advantages when it produces two or more products. These advantages could result from the joint use of inputs or...
A Special CaseThe Giffen Good
The income effect may theoretically be large enough to cause the demand curve for a good to slope upward. We call such a good a Giffen good, and Figure 4.7 shows the income and substitution effects. Initially, the consumer is at A, consuming relatively little clothing and much food. Now the price of food declines. The decline in the price of food frees enough income sc that the consumer desires to buy more clothing and fewer units of food, as illustrated by B. By revealed preference, the...
Exercises Emp
1. Assume a computer firm's marginal costs of production are constant at 1000 per computer. However, the fixed costs of production are equal to 10,000. a. Calculate the firm's average variable cost and average total cost curves. b. If the firm wanted to minimize the average total cost of production, would it choose to be very large or very small Explain. 2. If a firm hires a currently unemployed worker, the opportunity cost of utilizing the worker's service is zero. Is this true Discuss. 3. a....
Estimating and Predicting Cost
A business that is expanding or contracting its operation needs to predict how costs will change as output changes. Estimates of future costs can be obtained from a cost function, which relates the cost of production to the level of output and other variables that the firm can control. Suppose we wanted to characterize the short-run cost of production in the automobile industry. We could obtain data on the number of automobiles Q produced by each car company and relate this information to the...
The Basics of Supply and Demand
One of the best ways to appreciate the relevance of economics is to begin with the basics of supply and demand. Supply-demand analysis is a fundamental and powerful tool that can be applied to a wide variety of interesting and important problems. To name a few understanding and predicting how changing world economic conditions affect market price and production evaluating the impact of government price controls, minimum wages, price supports, and production incentives and determining how taxes,...
Marginal Utility
Now we can rearrange this equation so that Since the MRS is also equal to the ratio of the marginal utilities of consuming F and C from equation 3.4 , it follows that According to equation 3.6 , utility maximization is achieved when the budget is allocated so that the marginal utility per dollar of expenditure is the same for each good. To see why this must hold,note that if a person gets more utility from spending an additional dollar on food than on clothing, her utility will be increased by...
The Tradeoff Between Risk and Return
decide how much of her savings to invest in each of these two assets-she might invest only in Treasury bills, only in stocks, or in some combination of the two. As we will see, this is analogous to the consumer's problem of allocating a budget between purchases of food and clothing. Denote the risk-free return on the Treasury bill by R . Because the return is risk free, the expected and actual returns are the same. Also, let the expected return from investing in the stock market be Rm, and the...
The Snob Effect
Network externalities are sometimes negative. Consider the snob effect, which refers to the desire to own exclusive or unique goods. The quantity demanded of a snob good is higher the fewer the people who own it. Rare works of art, specially designed sports cars, and made-to-order clothing are snob goods. Here, the value I get from a painting or sports car is in part the prestige, status, and exclusivity resulting from the fact that few other people own one like it. Figure 4.15 illustrates the...
Individual and Market Demand
Chapter 3 laid the foundation for the theory of consumer demand. We discussed the nature of consumers' preferences and saw how, given a budget constraint, consumers choose a consumption basket that maximizes their satisfaction. From here it's a short step to analyzing demand itself and how the demand for a good depends on its price, the prices of other goods, and income. We begin by examining the demands of individual consumers. Since we know how changes in pricc and income affect a person's...
Questions for Review 1
1. Suppose that unusually hot weather causes the demand curve for ice cream to shift to the right. Why will the price of ice cream rise to a new market-clearing level 2. Use supply and demand curves to illustrate how each of the following events would affect the price of butter and the quantity of butter bought and sold a an increase in the price of margarine b an increase in the price of milk c a decrease in average income levels. 3. Suppose a 3 percent increase in the price of corn flakes...
Marginal Utility of Income
Whatever the form of the utility function, the Lagrange multiplier represents the extra utility generated when the budget constraint is relaxed-in this case by adding one dollar to the budget. To see this, we differentiate the utility function U X,Y totally with respect to I dU dl UUx X,Y dX dI MUy X,Y dY dI A4.ll Because any increment in income must be divided between the two goods, it follows that Substituting from A4.5 into A4.ll , we get dU dl Px dX dl KPY dY dI PX dX PY dY dl A4.13 and...
Revealed Preference
In Section 3.1 we saw how an individual's preferences could be represented by a series of indifference curves. Then in Section 3.3, we saw how preferences determine choices, given a budget constraint. Can this process be reversed If we know the choices a consumer has made, can we determine her preferences We can, if we have information about a sufficient number of choices that are made when prices and income levels vary. The basic idea is simple. If a consumer chooses one market basket over...
Contents
PART I Introduction Markets and Prices 1.1 The Use and Limitations of Microeconomic Theory 4 1.2 Positive Versus Normative Analysis 5 1.3 Why Study Microeconomics 8 Corporate Decision Making Ford Introduces the Taurus 8 Public Policy Design Automobile- Emission Standards 9 Competitive Versus Noncompetitive Markets 11 1.5 Real Versus Nominal Prices 13 2 THE BASICS OF SUPPLY AND DEMAND 17 2.2 Shifts in Supply and Demand 20 2.3 Elasticities of Supply and Demand 28 2.4 Short-Run Versus Long-Run...
Supplementary Materials
Instructional aids of an exceptionally high quality are available to instructors and students using this book. The Instructor's Manual was written by Gilbert White of Michigan State University, Geoffrey Rothwell of Stanford University, and Valerie Suslow of the University of Michigan. It provides answers to all of the Questions for Review and the Exercises that appear at the end of the chapters, as well as a summary of the key points in each chapter and a series of teaching suggestions. It is...