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Lucture 5

# Lucture 5 - c =Price times quantity minus the sum of MC 5...

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I. Supply a. Very similar to Demand, yet the opposite of Demand b. OIL: i. There is a physical limit to the amount of oil in the world ii. Marginal Cost- The additional cost to produce one additional unit of a good (barrel of oil) c. Barrels of Oil i. Marginal Cost: Barrels of oil Marginal Cost Total Cost Total Revenue Producer Surplus= TR-TL 1 \$ 20 20 60 40 2 \$ 40 60 120 60 3 \$ 60 120 180 60 4 \$ 80 200 240 40 5 \$ 100 300 300 0 6 \$ 120 420 360 -60 ii. Many ways to produce oil, which range in prices 1. Often, every time you do something, it costs more (if you are studying, the first hour isn’t that bad, but every progressive hour gets worse and worse, or more expensive more expensive) iii. Total Cost: 1. The total cost of producing a certain number of units of a good 2. Equal to the sum of Marginal Cost \$/Barrel 120 Area = \$ 20 100 80 Area = \$ 40 60 40 20 1 2 3 4 5 6 Barrels 3. Producer’s Objective: To maximize producer Surplus (profit) 4. Producer Surplus a. = total revenue minus total cost b. = sum of marginal revenue minus total cost

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Unformatted text preview: c. =Price times quantity minus the sum of MC 5. How many barrels to produce if P=\$60/barrels? d. Produce until MC= MR=(P) II. General Diagram: M.C.: Height of the MC Curve P1 Q1 TR= P.Q., area under the price line TC= Area under the MC Curve PS= TR-TC PS= area below price line, and above MC Curve • IF we combine the MC Curve with the PS maximizing decision rule, we get a supply curve o Supply Curve shows the quantity produced at every price Supply Curve P2 P1 Q1 Q2 • First Law of Supply: If price increases, quantity supplied increases, ceteris paribus. • There are three supply “ceteris paribus” conditions of interest 1. Input Prices: If input prices increase, supply decreases 2. Technology: If technology increases, supply increases 3. Anything else that affects supply: weather, regulation...
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Lucture 5 - c =Price times quantity minus the sum of MC 5...

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