- 1. Economics 160 Principles of Microeconomics Quiz 5 and 6Fall
2013
2. Start off in Long Run Equilibrium Constant or Increasing Cost
Industry?Change in the world: Newspaper article or other source. 1.
Change in Demand (normal/inferior, complements/substitutes). Change
in income, change in the price of a related good, change in
preferences. 2. Change in the price of inputs. Increased wages,
higher interest rates, higher fuel costs, higher insurance, etc. 3.
Change in technology. 4. Other Unit cost curves: Will a firms unit
cost curves shift up or down? At the current price, will existing
firms produce more or lessShort Run Supply: Shift to the right or
left Where is the new short run equilibrium? At the new price will
existing firms be losing money, making money breaking even.Long Run
Changes: What effect will entry and exit of firms cause to the
short run supply curve, output, and price. Is this an Increasing or
Constant Cost IndustryDemand: Shift to the right or left. 1. Where
is the new short run Equilibrium? 2. What is the new price?Short
Run Changes: at the new price how will existing firms adjust
output? Apply 3-Part Output Rule, i.e. shutdown decision and short
run output decisionLong Run Changes: What effect will entry and
exit of firms cause to the short run supply curve, output, and
price. Is this an Increasing or Constant Cost Industry? 3.
Analyzing the effect of a decrease in the price of labor 1. 2. 3.
4.Will the likely new contract increase of decrease the cost of
production? Will unit costs at any output level increase or
decrease? At any given price will existing firms produce more or
less? What effect will this have on the short run supply curve?
After the decrease in the price of labor, the unit costs of
production are lower at each level of output. At every price each
firm will produce more (at P1 the firm will increase output from q1
to q2).The increase in output at each price by existing firms
causes the short run supply curve to shift right, lowering price to
P2L$/unitPriceMC S100 firms P1ATCAALong-run supplyP1 AVCP2S100
firmsD1 0q1q2Quantity (firm)0Q1Quantity (market) 4. Who benefits
and loses from a reduction in the cost of labor. Consumers are
better off because the price of the good has fallen. In the short
run, firms are better off because their costs fall and they earn a
profit. In the long run, if the existing firms are earning a profit
because of lower costs, new firms will enter shifting the short run
supply curve to the right, increasing output, and further lowering
price. If this were a constant cost industry, the reduction in the
cost of labor would cause the long run supply curve to shift down.
In the Long Run, consumers are the sole beneficiary of the drop in
the price of labor. The reduced unit costs of production mean that
at any given price the existing firms will produce more, shifting
the short run supply curve outward. Even at the new lower price,
the existing firms will earn a profit in the short run. In the long
run, new firms will continue entering shifting the SR supply curve
farther to the right, increasing supply, and reducing price until
the existing firms are just breaking even with their lower
costs.$/unitPrice MC S100 firmsP1ATCAAS150 firms Long-run supplyP1
AVCP2 P3 0S100 firmsD1 q1q2Quantity (firm)0Q1Quantity (market) 5.
Who benefits from an improvement in technology? An improvement in
technology is any change which allows a firm to produce more output
with the same inputs. A degredation in technology is any change
which means a firm to produces less output with the same inputs.
The reduced unit costs of production mean that at any given price
the existing firms will produce more, shifting the short runs
supply curve The improvement in technology allows the firm to
produce more outward. Even at the new lower price, the existing
firms will earn a profit output with the same inputs. in the short
run. Because the firm is producing more output with fewer inputs,
and the price of inputs hasnt changed, the unit costs of producing
will In the long run, new firms will continue entering shifting the
SR supply fall. curve farther to the right, increasing supply, and
reducing price until the existing firms are just breaking even with
their lower costs. In the SR, firms and consumers benefit from the
improvement in technology. In the LR just consumers
benefit.$/unitPriceMC S1 ATC AVCAA P1S2 S3Long-run supplyP1D1
Quantity q1 (firm) If this were a constant cost industry, the
technological change would shift the long run supply curve down.
00Q1Quantity (market) 6. United States Oil ProducerMC1$/unitMCtech
change ATC1 AVC1P1ATCtech changeP2ProfitAVCtech changeP31. The tech
change in the U.S. drops unit costs. 2. U.S. producers increase
output increasing the world supply of oil from S1 to S2. 3. At P2,
U.S. oil producers are earning a profit. 4. In the long run, new
oil fields will be brought into production in the U.S. This
increases the supply of oil from S2 to S3 and the price of oil will
drop from P2 to P3. New fields will continue to be brought into
production until the price has dropped to the min ATC after the
tech change. 5. Meanwhile in the Rest of the World, oil producers
will cut back production when prices drop from P1 to P2 and will
lose money in the short run. 6. In the Rest of the World in the
long run if the price drops to P3, oil fields will be taken out of
production.OutputWorld Oil MarketRest of World Oil Producer.
PMC1S1$/unitS2 ATC1P1 P2LossS3AVC1P1 P2P3 P3 D1OutputQ
