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OSU ECON 4001.01 - Producer Surplus

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Econ 4001.01 1st Edition Lecture 14Outline of Last Lecture I. Firms Face Horizontal Demand CurvesII. Choosing Outputa. In the Short-Runb. When the firm is making lossesIII. Short-Run Shutdown for Firms Making LossesIV. Short- Run Supply Curve for Competitive FirmsV. Short-Run Responses to Price ChangesVI. Producer SurplusOutline of Current Lecture II. Producer Surplus vs. ProfitIII. Profit Maximization in the Short-RunIV. Long-Run Competitive EquilibriumV. Supply Curves in the Long-RunVI. Introduction to Welfare EconomicsCurrent Lecture- Producer Surplus vs. Profito PS= revenue-variable costo Profit: revenue- total costo The difference is that profit accounts for fixed cost- Profit Maximization in the Short Runo Short run profits cause firms to expand capacity- Long Run Competitive Equilibriumo Short run profits induce expansion and entryo Entry will drive down prices and reduce profitso Long run equilibrium requires no incentive for entryo So, LR equilibrium occurs when firms make zero profit Qs and Qd are equal This is the best possible outcome for consumers- Final Word on Profit versus Producer Surpluso Economic profits are zero in the long-run, BUTo There may still be a surplus of revenue over costs, IFThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o Some inputs to the process have implicit costs- Supply Curves in the Long Runo If industry is subject to constant returns to scale (constant costs), long run supply curve may be horizontal Example: restaurant meals, clothing, coffeeo If industry is subject to decreasing returns to scale (increasing costs), LR supply curve slope upward Petroleum, miningo If industry is subject to increasing returns to scale (decreasing costs), the LR supply curve slopes downward Automobile production- Introduction to Welfare Economicso We analyze the health of an economy by looking at the impacts on participants- producers and consumerso Since producer and consumer surplus are measures of extra value created by market exchangeso We can examine the impact of government actions and other events by their effect on CS and PS- Welfare effects of Price Controls (Price Ceiling)o A price ceiling reduces quantity exchanged, transfers surplus from producers to consumers, and creates loss of surplus (dead weight


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