ECON-200 Lecture Notes - Lecture 19: Economic Rent, Indifference Curve, Marginal Cost
18 Sep 2020
School
Department
Course
Professor
Leo Ellis
Introduction to Economics
Econ-200
Long-Run Output
long-run profit maximization -
● marginal costs change now that firm can adjust more inputs in long run
● economic profit made as long as marginal cost (equal to price) above the average total
cost
● zero economic profit - firm earning a normal (competitive) return on investment
o normal return - equal to investing elsewhere (whether in capital or other industry)
● high profit >> other firms enter market (assuming free entry) >> increases output >>
drives down prices >> reduces profit
long-run competitive equilibrium - when no exit/entry
● firms earning zero economic profit >> no incentive to enter or exit
● all firms must be maximizing profit
● quantity supplied by industry equal to quantity demanded by consumers
● patents act as opportunity cost for firms that have it
o can be sold or kept to produce a positive profit
economic rent - willingness of firms to pay for an input less than the minimum amount
● some firms have natural advantages over others
o land might be beneficial to shipping
o materials might be more readily accessible
● gives firm an edge >> other firms willing to pay for that edge >> economic rent
long-run supply curve - cannot just sum curves like w/ short-run
● in long-run, markets and enter/exit, so no way to tell how many total firms are in the
market
● constant-cost industry - horizontal long-run supply curve, very elastic
● unlike short-run, where 1 input held constant, both inputs can vary in the long-run
o use MRTS to relate wages/rent to marginal labor/capital functions (in terms of Q)
o C(Q) = wL(Q) + rK(Q)
● curve generally wider than short-run curve
o MC-MR intersection located farther to the right
Marginal Utility, Consumer Choice
revealed preference - finding preferences based on choices
● instead of making choices based on preferences
● if consumer chooses more expensive basket over another, then chosen market basket is
more preferred
● creates a more defined indifference curve >> more rankings
● changing budget lines >> more defined preference area
marginal utility (MU) - measures additional satisfaction from an additional unit of good
● generally diminishes as more good is consumed
o ex. the 4th or 5th hamburgers aren't quite as satisfying as the 1st
● same utility on all points of indifference curve
● MU increase w/ 1 good >> MU decrease w/ other good
● MUA/MUB = MRS = PA/PB
Document Summary
Marginal costs change now that firm can adjust more inputs in long run. Economic profit made as long as marginal cost (equal to price) above the average total cost. Zero economic profit - firm earning a normal (competitive) return on investment: normal return - equal to investing elsewhere (whether in capital or other industry) Quantity supplied by industry equal to quantity demanded by consumers. Patents act as opportunity cost for firms that have it: can be sold or kept to produce a positive profit economic rent - willingness of firms to pay for an input less than the minimum amount. Some firms have natural advantages over others land might be beneficial to shipping: materials might be more readily accessible. Constant-cost industry - horizontal long-run supply curve, very elastic. Unlike short-run, where 1 input held constant, both inputs can vary in the long-run: use mrts to relate wages/rent to marginal labor/capital functions (in terms of q, c(q) = wl(q) + rk(q)
