Regulation by the government is essential to limit possible abuses of the Increased costs of production e.g. utility charges; costs of rent; insurances etc. .. (ii) Explain the relationship between the Marginal Cost (MC) and Average Cost ( AC) curves . The following table shows the level of National Income, its Consumption. The National Interest Argument · Key Concepts and Summary · References The total cost curve intersects with the vertical axis at a value that shows the level . The answer depends on the relationship between price and average total cost. .. in contrast, bad weather or added government regulations can add to costs. ➢The relationship between quantity of inputs and ➢What the various forms of a firm's costs are and The total product curve shows how the quantity of output.
Social costs include both the private costs and any other external costs to society arising from the production or consumption of a good or service.
Determining the Highest Profit by Comparing Total Revenue and Total Cost
Social costs will differ from private costs, for example, if a producer can avoid the cost of air pollution control equipment allowing the firm's production to imposes costs health or environmental degradation on other parties that are adversely affected by the air pollution.
Remember too, it is not just producers that may impose external costs on society. Let's also view how consumers' actions also may have external costs using Field's previous example on driving: The key point is that even if a firm or individual avoids paying for the external costs arising from their actions, the costs to society as a whole congestion, pollution, environmental clean up, visual degradation, wildlife impacts, etc. Those external costs must be included in the social costs to ensure that society operates at a socially efficient rate of output.
Aside from the obvious environmental issues, one might ask why external costs are of interest to economists? Resource Implications A socially efficient output rate in a competitive market is reached when social costs both private and external costs are considered in production and consumption decisions.
When significant external costs are associated with a good or servicethen the price of the good is too low because external costs are not being paid and its output level is too high, relative to the socially efficient rate of output for the good.
The bottom line, unless costs and prices include external costs, the market will not produce a socially efficient result. Consider also the competitive issues: At the individual firm level, as well as across states or nations, failure to pay for external costs would provide those firms or nations with a competitive advantage over producers who are paying the external costs associated with the production of their products. If you're interested, a graphic examination of the issue follows!
Here's the Graphic Illustration for those who like charts!
- Aggregate demand and aggregate supply curves
In the graphic illustration, the intersection of the demand curve and marginal cost curve represents the socially efficient rate of output in a competitive market. However, in the case where external costs exist, we need to plot two curves: The marginal private cost curve and the marginal social cost curve equals the marginal private cost curve plus the marginal external cost curve.
Diagrams of Cost Curves | Economics Help
Comparing prices and outputs illustrates how external costs affect resource allocation. If a firm or nation pays only the private costs and avoids paying the external costs associated with their product, then output and prices would be determined at point P where the marginal private cost curve heavy solid black line meets the demand curve thin purple line.
At P thin dashed green lines price equals Pp and output equals Op.
When private and external costs are paid by the firm, the marginal social cost curve dotted red line is created by adding the marginal external costs to the marginal private costs. In this case, the intersection of the marginal social cost curve and the demand curve occurs at point S thin blue lineswith price Ps and output Os.
Point S denotes the socially efficient rate of production.
Lower output typically would also reduce the amount of pollution generated by the activity. Summary Society is better off when production and consumption decisions are based on social costs that include external costs, because external costs really do matter in the real world.
At these relatively low levels of output, levels of unemployment are high, and many factories are running only part-time or have closed their doors. In this situation, a relatively small increase in the prices of the outputs that businesses sell—with no rise in input prices—can encourage a considerable surge in the quantity of aggregate supply—real GDP—because so many workers and factories are ready to swing into production.
As the quantity produced increases, however, certain firms and industries will start running into limits—for example, nearly all of the expert workers in a certain industry could have jobs or factories in certain geographic areas or industries might be running at full speed. In the intermediate area of the AS curve, a higher price level for outputs continues to encourage a greater quantity of output, but as the increasingly steep upward slope of the aggregate supply curve shows, the increase in quantity in response to a given rise in the price level will not be quite as large.
At the far right, the aggregate supply curve becomes nearly vertical. At this quantity, higher prices for outputs cannot encourage additional output because even if firms want to expand output, the inputs of labor and machinery in the economy are fully employed.
EconAir: Economics Tutorial 2 - Production Functions, Cost Curves, Supply and Equilibrium
In our example AS curve, the vertical line in the exhibit shows that potential GDP occurs at a total output of 9, When an economy is operating at its potential GDP, machines and factories are running at capacity, and the unemployment rate is relatively low at the natural rate of unemployment.
The aggregate supply curve is typically drawn to cross the potential GDP line. This shape may seem puzzling—How can an economy produce at an output level which is higher than its potential or full-employment GDP?
The economic intuition here is that if prices for outputs were high enough, producers would make fanatical efforts to produce: Such hyper-intense production would go beyond using potential labor and physical capital resources fully to using them in a way that is not sustainable in the long term. Thus, it is indeed possible for production to sprint above potential GDP, but only in the short run.
So, in the short run, it is possible for producers to supply less or more GDP than potential if demand is too low or too high. In the long run, however, producers are limited to producing at potential GDP.
The Aggregate Demand Curve Aggregate demand, or AD, refers to the amount of total spending on domestic goods and services in an economy. Strictly speaking, AD is what economists call total planned expenditure. We'll talk about that more in other articles, but for now, just think of aggregate demand as total spending. Aggregate demand includes all four components of demand: Consumption Government spending Net exports—exports minus imports This demand is determined by a number of factors; one of them is the price level.
An aggregate demand curve shows the total spending on domestic goods and services at each price level. You can see an example aggregate demand curve below.
Diagrams of Cost Curves
Just like in an aggregate supply curve, the horizontal axis shows real GDP and the vertical axis shows price level.
But there's a big difference in the shape of the AD curve—it slopes down. This downward slope indicates that increases in the price level of outputs lead to a lower quantity of total spending.
The aggregate demand curve The graph shows a downward sloping aggregate demand curve, showing that, as the price level rises, the amount of total spending on domestic goods and services declines.