ECON
lecture16-demand-as-delivered

lecture16-demand-as-delivered - Consumer Demand Theory Prof...

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© 2007 John M. Abowd and Jennifer P. Wissink Micro Consumer Demand Theory Prof. John M. Abowd October 22, 2007
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© 2007 John M. Abowd and Jennifer P. Wissink Micro Important Reminders Analyzing taxes and welfare experiment due Wednesday 9:00am (will be discussed in class). Chapter 10 and 11 required problem sets due Friday. Prelim 2 is Thursday, November 1 at 7:30pm. If you have a conflict or special requirements, follow the instructions on the course web page (under Grading). You must tell me by Thursday, October 25.
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© 2007 John M. Abowd and Jennifer P. Wissink Micro Themes of Today’s Lecture Finishing market structure Introduction to demand theory The two components of consumer demand Budget constraints Utility and preferences Introduction to indifference curves Simple derivation of a demand curve
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© 2007 John M. Abowd and Jennifer P. Wissink Micro External Economies and Diseconomies of Scale If the industry long run supply curve is perfectly elastic (horizontal), then the industry exhibits no external economies or diseconomies of scale. The industry grows by replicating firms at the efficient scale. If the industry long run supply curve is upward sloping, then the industry exhibits external diseconomies of scale. The minimum average total cost of all firms in the industry rises as the size of the market grows. If the industry long run supply curve is downward sloping, then the industry exhibits external economies of scale. The minimum average total cost falls as the size of the industry grows.
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© 2007 John M. Abowd and Jennifer P. Wissink Micro No External Economies or Diseconomies of Scale When we draw the long run supply curve as a horizontal line, we are asserting that there are no external economies or diseconomies of scale. Lack of economies or diseconomies of scale means that growth of the industry doesn’t foster technological improvements and doesn’t change the prices of inputs. This is called a “constant cost” industry.
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© 2007 John M. Abowd and Jennifer P. Wissink Micro Constant Cost Industry Long Run Supply If the technology used by all firms exhibits constant costs as the industry expands, then the long run supply curve is horizontal at the price associated with the minimum efficient scale. Quantity Price Long run supply in a constant cost industry
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© 2007 John M. Abowd and Jennifer P. Wissink Micro External Diseconomies of Scale When an industry long run supply curve slopes upward, the industry exhibits external diseconomies of scale.
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