Chapter 8 questions 1,2,3

1) In the short run firms have to cope with different costs, variable and fixed. The variable cost are usually wages, it can vary in the short run, for example, longer work days or hiring more workers. Fixed cost are rents and interest, they cannot change in the short run. The short run is also when are unable firms enter or leave the market.

Perfect competition, an economical theory, is where all the many firms are equal in size and produce identical products as well as same amount of output. Moreover, they also face equal costs and since there are no barriers of entry or exit, firms are allowed to enter or leave as they see put. Firms in perfect competition are “price takers” which means that the firm is not influential enough to affect the price of a good or service. In this case the market price is determined by the demand and supply of the market. Furthermore, the demand for goods in a perfectly competitive market is perfectly elastic. This means that the firm can only sell at that price because if they raise the price no consumer would buy a good at that particular firm. Likewise, if the firm decreased its price, then infinite amount of consumers would buy their good; however this is unrealistic.

When the marginal revenue intersects the marginal cost, it is known as the profit maximization rule, in order to maximize a firm’s profits, the firm must produce at that quantity. On the graph MR=MC.

When the firm is producing at the profit maximization point it is most efficient at producing. When the average total cost is below the price of the good then the firm is producing abnormal profits. For example, if a kebab’s cost is 8 CHF to produce and the kebab producer can sell it for 10 CHF then the producer has made profits of 2 CHF.

However, it is only possible for firms to earn abnormal profits in the short run. Since firms can only enter or exit a market the supply of the industry’s product will not vary. When a firm in a perfectly competitive market is earning abnormal profits, many new firms will enter the market because firms are profit seekers. The supply for goods in the market will increase with the increased number of firms. The price of the good will thus decrease. On the graph, the supply shifts to the right, from Qe1 to Qe2, the price moves from Pe to Pe1. Since firms in the perfect completion are price takers, they receive the price of the market. It has now decreased to Pe1. Firms must now charge at price Pe1 for consumers to buy at their firm, if they don’t, no one would buy there because the firms demand is perfectly elastic.

1) 2) In the short run firms face no fixed costs, wages, rent and interest on a firms costs are all variable, this why the long run is considered the variable plant size. Unlike the short run, firms are able to enter or exit the market in perfect competition in the long run.

It is possible for firms in perfect competition to earn abnormal profits. When the selling price of goods is higher than the cost of production then the firm is earning abnormal profits. When a firm is earning abnormal profits it attracts other firms because firms are profit seekers. With more firms entering the market the overall supply of the market increases. The supply shifts to the right and thus the price drops. There will be a new equilibrium point; the firms will now be earning normal profits. Since normal profits are points where the cost s equals the revenue, no more firms would enter the market because there is no more chance of earning abnormal profits.

When firms make losses in the short-run, some firms will pull out of the market. This will decrease the supply and thus the price will increase. Firms will now be able to sell their goods at the increased price. Since this will help raise the revenues, the loss will not be as big, if the costs remain the same.

The market is constantly changing, thus there will be new equilibrium points. The firms in perfectly competitive markets will never earn abnormal profits, only normal profits.

1) 3) Abnormal profits are when the revenue earned exceeded the costs. When a firm is producing at the profit maximization point, MC=MR, at Q then the firm is being most efficient at producing. When the average total cost is lower than the price of sell the good the firm earns abnormal profits.

Productive efficiency is the point where P= minimum ATC. The firm is using its resources to it maximum efficiency by producing at the lowest average total cost. Since all firms are equal in size and output there is a huge competition going on. There is a large incentive for reducing the costs as much as possible because the output and price is the same; the only thing variable is the costs, so if a firm has a lower cost than another the other firm and could possible shut down due to higher costs.

Allocative efficiency is where P=MC. At that point the right amount of output is produced. If the price were higher that the marginal cost, this is a signal that more output is desired, if the price were lower than the marginal cost, the signal from buyers to sellers is that less output is desired.

If a firm produces at the minimum ATC then it is productively efficient. However in this case it is not, because the price doesn’t intersect the minimum point on the ATC. The firm is still producing at the profit maximization point because MC=MR. The ATC is however, intersected by the MC. So the firm is earning abnormal profits but not productively efficient. Since the P=MC at the profit maximization point the firm is allocative efficient.

Chapter 7 questions 1,2,3

Chapter 7 question

1. The short run is considered the fixed plant size, meaning the land and capital resources are limited. The labor resource, however, is not limited; it can be changed, for example, the amount of workers or the length of working time. All the production is done in the short run. The long run is the planning phase, the firm plans how it could be more efficient lowering cost, or how to produce more. The long run is made up of many short run. The long run is considered the variable plant size, where all the factors or production are variable, land, labor, and capital. The only thing halting a firm's efficiency and total product is the state of technology, for example a ox plow versus a tractor.
   
2. As more units of the variable factor, labor, are added to the fixed factors of production, capital and land, the output of the extra input will eventually diminish. This is because there is not land or not enough capital for the increase amount of labor. For example, the soup in the kitchen will not amazing if 100 cooks work on it at once, they will just get in each other's way.
   

3. The accountant's definition of profit is the total revenue minus the total cost. The economist's definition of profit is the total revenue minus the opportunity cost. For example, if you start a business for $100,000 and your profits are $120,000. An accountant would say your profits are $20,000. An economist would say it would be an economic loss, if you were employed and had received $45,000. There is an economic loss of $25,000, $45,000 - $20,000 = $25,000, because of the opportunity cost of not being employed opposed to employing someone else.

We are in a recession, let’s go to the movies!

http://www.cbc.ca/money/story/2009/11/10/cineplex-quarterly-earnings.html?ref=rss

We are in a recession, let's go to the movies! Introducing Cineplex's increase in revenue because of an increased demand for movies. The article states that the total revenue for Cineplex has increases by 7.7 percent from $239.1 million to %257.5 million and the attendance went up by 4%; a change in demand. The price of movies has stayed the same but the attendances have increased, thus shifting the demand curve to the right, seen on this graph. There has been an excess supply of seats, creating disequilibrium, because the revenue has increased but the price has stayed constant. Due to increased demand the demand curve, D, moves to D1 creating equilibrium and a decreased excess supply of seats.

Continuing, the movie theatre must have had empty seats, because the number of movie theatres built has not increased because the situation is in the short run. The movie supply, S, is thus inelastic because it takes a lot of time before a new movie theatre opens. The movie theatre is limited to its capacity, which was not overflowing because the attendance has increased but not the price. In this case the attendance, demand, has increased by four percent. This shifts the demand curve, D, out to the right again to D1, because the price has stayed constant. The supply is still inelastic because the firms have not received enough time to react to the increase in demand thus; no new theatres have been built yet. On the other hand, if the firm had been given enough time to react, long run, then the firm would have built new theatres to support the increasing demand for movie tickets. The supply has shifted from S to S1 in the long run, making it more elastic. The quantity demanded has reached QD3 lower the price to Pe2.

According to the box office "the recession has been fantastic". In a recession consumers usually have lower incomes, thus they can spend less money on goods and services. Demand for restaurant meals, normal goods, decreases during a recession. Movie tickets, on the other hand, represent a relatively cheap form of entertainment, meaning their demand will increase during a recession, an inferior good. In this article movies are represented as inferior goods because they are cheaper substitutes for restaurant meals, furthermore, a consumer can still have a night out, but only eating cheaper dinner at home then going to a movie instead of going to a restaurant and a movie, spending over $100 a night.

Interestingly, the price of concessions has gone up by 4.5 % while the attendance of movies has gone up by 4% as well. These two goods are considered compliments for each other, because they go together. The concessions sale especially booms when a family movie is shown, the entire family is present thus there is an increase in demand for concessions. The firm has stated: "One thing we've been very conscious of during the past year is we have not raised any of the prices on concessions". Again the price of concessions has stayed the same but there has been an increase of 4.5 % demand for concessions. The price has stayed constant at Pe but the demand, D, has shift the curve to the right, D1. This moved the quantity demanded from Qe to Qe1.

At the moment, Cineplex has a decreased amount of excess supply because the demand has gone up but the price has stayed constant, indicating an excess supply of seats. In the short run, Cineplex is able to sustain the increasing demand for movies, an inferior good, during the recession. In the long run, if demand continues to increase Cineplex has might decide to build new theatres to sustain the increasing demand, making the supply more elastic. Since the Cineplex's resources are invariable in the short run, Cineplex might decide to raise its price to lower demand if it cannot sustain the increasing demand for movies.

Cineplex tickets boost revenue

http://www.cbc.ca/money/story/2009/11/10/cineplex-quarterly-earnings.html?ref=rss

The article Box office bonanza helps Cineplex buck recession discusses the increase in revenue for

Cineplex based on an increase in demand for movies in the third quarter.

The article states that the total revenue for Cineplex has increases by 7.7 percent from $239.1 million to

%257.5 million. The attendance went up by four percent since last year from 18 million to 18.8 million

viewers, this is an example of a change in demand. The price of movies has stayed the same but the

attendances has increased, thus shifting the demand curve to the right, seen on this graph. The demand

curve, D, shifts to the right to D1, the price, Pe1, has stayed the same but the quantity demanded, Qe,

has increased to Qe1.

According to the box office "the recession has been fantastic". In a recession consumers usually have

lower incomes, thus they can spend less money on goods and services. Restaurant meals are examples

of expensive goods, so the demand for restaurant meals, decreases during a recession, because it is a

normal good. Movie tickets, on the other hand, are cheap good, meaning their quantity demanded will

increase during a recession. This is an example of an inferior good. In this article movies are

represented as inferior goods. Movies are a cheaper substitutes for restaurant meals, furthermore, a

consumer can still have a night out, but only eating cheaper dinner at home than going to a movie

instead of going to a restaurant and a movie, spending over $100 a night.

Another interesting aspect is that the attendance of movies has gone up but the price has stayed

constant. To begin with, the movie theatre must have had empty seats, because the number of movie

theatres built has not increased because the situation is in the short run. The movie supply, S, is thus

inelastic because it takes a lot of time before a new movie theatre opens. The movie theatre is limited

to its capacity, which was not overflowing because the attendance has increased but not the price. In

this case the attendance, demand, has increased by four percent. This shifts the demand curve, D, out to

the right again to D1, because the price has stayed constant. The new quantity demanded has moved

from Qe to Qe1 increasing the price from Pe to Pe1 greatly. The supply is still inelastic because the firms

have not received enough time to react to the increase in demand thus; no new theatres have been

built yet. On the other hand, if the firm had been given enough time to react, long run, then the firm

would have built new theatres to support the increasing demand for movie tickets. The supply has

shifted from S to S1 in the long run, making it more elastic. The quantity demanded has reached Qe2

lower the price to Pe2.

Lastly, the price of concessions has gone up by 4.5 % while the attendance of movies has gone up by 4%

as well. These two goods are considered compliments for each other, because they go together. The

concessions sale especially booms when a family movie is shown, the entire family is present thus there

is an increase in demand for concessions. The firm has stated: "One thing we've been very conscious of

during the past year is we have not raised any of the prices on concessions". Again the price of

concessions has stayed the same but there has been an increase of 4.5 % demand for concessions. The

price has stayed constant at Pe but the quantity demanded, D, has shift the curve to the right, D1. This

moved the quantity demanded from Qe to Qe1.