econ101w0709

# econ101w0709 - Introductory Economics Economics 101-300...

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(c) Sherrie A. Kossoudji Introductory Economics Economics 101--300 Lecture # 9 Sherrie A. Kossoudji If you print the preliminary version of these slides before class, please be aware that they are likely to change right up to class time.

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(c) Sherrie A. Kossoudji Please remember that reading these slides does not substitute for attending class. These slides are merely outline guides for what is discussed during the lecture.
(c) Sherrie A. Kossoudji Schedule: Week 5 WEEK 5: WEEK OF JANUARY 29TH Lecture #: 8-9 Discussion #: 4 Anderson: Chapter 3 (from last week), Anderson: Chapter 6 Subjects/Concepts: Perfect competition and the supply curve Markets with controls Readings: This week: Next week: KW Chapter 9, KW Chapter 4 KW Chapter 5, KW Chapter 6 Homework: Graded: Ungraded: Chapter 3, problem set II Chapter 9, problem set I; Chapter 4, problem set I Section Quizzes: None Exams: None Other Important Information: None

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(c) Sherrie A. Kossoudji Today’s Class Business When the market is not free Price ceilings, price floors, taxes Principle concepts: price ceilings, price floors, taxes Principle tools: the demand curve, the supply curve WWWTP & practice problem
(c) Sherrie A. Kossoudji Sherrie’s office hours cancelled this week. There will be extra office hours next week: Tuesday, from after class until 1

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(c) Sherrie A. Kossoudji Determining Profits and Costs from the graph At P 1 , the firm makes a profit. TR = P*Q TC = ATC * Q Profits = TR - TC Profits Total cost Cost (\$) Output quantity ATC MC P 1 Q 1 ATC Q1 Total revenue
(c) Sherrie A. Kossoudji Entry How do firms make the decision to enter the market? Firms must incur fixed costs before they produce one item of the product. If price exceeds minimum average total costs, it pays a firm to enter the market. Why? Because the firm will make a profit.

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(c) Sherrie A. Kossoudji Long Run Equilibrium When economic profits are zero (when equilibrium price = minimum ATC), there is no incentive for firms to enter or leave the industry. Capital is allocated efficiently across different industries.
Evolving Competitive Markets—suppose profits are positive High prices and profits signal demand for more output. Economic profit attracts new suppliers. The market supply curve shifts to the right. Prices slide down the market demand curve. A new equilibrium is reached where increased quantities of the desired product are produced and its price is lower. Average costs of production are at or near a minimum, much more product is supplied and consumed, and economic profit approaches zero. Throughout the process, producers experience great pressure to keep ahead of the profit squeeze by reducing costs, a pressure that frequently results in product and technological innovation. From Schiller, Bradley, 6

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## This note was uploaded on 04/04/2008 for the course ECON 101 taught by Professor Gerson during the Winter '08 term at University of Michigan.

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econ101w0709 - Introductory Economics Economics 101-300...

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