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Demonstrate how the allocation of resources across industries affects economic profit and economic loss. (please explain in details with graphs) Attached are the slides of the lecture.

Demonstrate how the allocation of resources across industries affects economic profit and economic loss. (please explain in details with graphs) Attached are the slides of the lecture.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Demonstrate how the allocation of resources across industries affects economic profit and economic loss. (please explain in details with graphs)

Attached are the slides of the lecture. 

Responses to Profits and Losses Responses to Profits and Losses Responses to Economic Profits Markets with excess profits attract resources If a firm is covering its variable cost, it can stay in the market in the SR If a firm would like to stay in the market in the LR, it must cover all costs: explicit and implicit Markets in which firms are earning an economic profit tend to attract additional resources > More firms want to enter the market > Market supply is expected to increase Com Indasty Typical Com Farm Price, Sbu Price Sbu MC ATC Economic Profit: S104,000 costs A firm that earns no more than a normal profit (zero profits) has managed only to cover the opportunity cost of the resources > A firm that makes a positive economic profit earns more than the opportunity cost of the invested Markets in which firms are experiencing economic losses tend to lose resources 1.20 D > Firms want to leave the market > Market supply is expected to decrease 130 Quantity (000s of bushels'year) 65 resources Quantity (M of bushels year) Shrinking Economic Profits Market Equilibrium Responses to Profits Supply increases IZero economic profits I The initial equilibrium price was above the minimum value of ATC, giving rise to positive economic profits > Incentive for other firms to enter the market > Supply increases > Equilibrium price decreases until the incentive to enter the market disappears Com Industry Typical Com Farm Com Industry Ispical Com Farm Price Price Sbu Price Price Sbu Sbu MC ATC Sbu MC ATC Economic Profit $50,400 1.50 1.50 1.08 D •P= minimum ATC 65 115 Quantity (M of bushels year) 90 130 Quantity (000s of bushels year) > What if the price went below the minimum ATC? 120 130 65 95 Quantity (M of bushels'year) Quantity (000s of bushels 'year)
Transcribed Image Text:Responses to Profits and Losses Responses to Profits and Losses Responses to Economic Profits Markets with excess profits attract resources If a firm is covering its variable cost, it can stay in the market in the SR If a firm would like to stay in the market in the LR, it must cover all costs: explicit and implicit Markets in which firms are earning an economic profit tend to attract additional resources > More firms want to enter the market > Market supply is expected to increase Com Indasty Typical Com Farm Price, Sbu Price Sbu MC ATC Economic Profit: S104,000 costs A firm that earns no more than a normal profit (zero profits) has managed only to cover the opportunity cost of the resources > A firm that makes a positive economic profit earns more than the opportunity cost of the invested Markets in which firms are experiencing economic losses tend to lose resources 1.20 D > Firms want to leave the market > Market supply is expected to decrease 130 Quantity (000s of bushels'year) 65 resources Quantity (M of bushels year) Shrinking Economic Profits Market Equilibrium Responses to Profits Supply increases IZero economic profits I The initial equilibrium price was above the minimum value of ATC, giving rise to positive economic profits > Incentive for other firms to enter the market > Supply increases > Equilibrium price decreases until the incentive to enter the market disappears Com Industry Typical Com Farm Com Industry Ispical Com Farm Price Price Sbu Price Price Sbu Sbu MC ATC Sbu MC ATC Economic Profit $50,400 1.50 1.50 1.08 D •P= minimum ATC 65 115 Quantity (M of bushels year) 90 130 Quantity (000s of bushels year) > What if the price went below the minimum ATC? 120 130 65 95 Quantity (M of bushels'year) Quantity (000s of bushels 'year)
Economic Losses Market Equilibrium Resources leave INo economic losses Com Industry Typical Com Farm Price Price Price Рrice Sbu Sbu Sbu S'bu MC MC ATC ATC Economic Loss: $21,000 1.05 0.75 0.75 0.75 70 90 Quantity (000s of bushels'year) 40 60 60 70 90 Quantity (M of bushels'year) Quantity (M of bushels'year) Quantity (000s of bushels'year) Responses to Losses Responses to Profits and Losses IAssumptions > Firms are free to enter and leave the market > Inputs can be purchased in any quantities at fixed prices > All firms employ similar standardized production methods ICondition: P<minimum ATC > TR = 0.75 x 70 = $52,500 > TC = 1.05 x 70 = $73,500 • Total losses = $21,000 • Incentive for some firms to leave the market • Supply decreases • Price increase until incentive to leave the market disappears Final outcome: zero economic profit > Do firms want zero economic profit? • The zero economic profit is a consequence of price movements following entry and exit of firms
Transcribed Image Text:Economic Losses Market Equilibrium Resources leave INo economic losses Com Industry Typical Com Farm Price Price Price Рrice Sbu Sbu Sbu S'bu MC MC ATC ATC Economic Loss: $21,000 1.05 0.75 0.75 0.75 70 90 Quantity (000s of bushels'year) 40 60 60 70 90 Quantity (M of bushels'year) Quantity (M of bushels'year) Quantity (000s of bushels'year) Responses to Losses Responses to Profits and Losses IAssumptions > Firms are free to enter and leave the market > Inputs can be purchased in any quantities at fixed prices > All firms employ similar standardized production methods ICondition: P<minimum ATC > TR = 0.75 x 70 = $52,500 > TC = 1.05 x 70 = $73,500 • Total losses = $21,000 • Incentive for some firms to leave the market • Supply decreases • Price increase until incentive to leave the market disappears Final outcome: zero economic profit > Do firms want zero economic profit? • The zero economic profit is a consequence of price movements following entry and exit of firms
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