Profit vs Producer Surplus
Вставка
- Опубліковано 5 жов 2024
- For how we derived the supply curve, see: • Deriving the short run...
_______________
Thank you to ETS Multimedia Services at UC San Diego and the developers of open-source programs OpenShot Video Editor (openshot.org) and Audacity (audacityteam.org)
Thank you madam for explaining beautifully. I have exam in the coming week and it was very helpful.
Thank you for this video!
This was really awesome!
You're so welcome!
Thank you so much!
Thank you so much
Amazing explanation! Thanks 💐
Glad it was helpful!
great video
Ma’am is it the area between price and MC or Area between price and min AVC .. small lower portion of MC is left out but in book all the area between price and MC is considered but you took from min AvC
If I understand your question correctly, yes: taking the full area above MC and below price is equivalent to the area above the supply curve and below price.
When MC is uniformly increasing, these two regions are exactly the same in the graph.
When MC has a decreasing portion, the regions don't overlap perfectly (the supply curve "jumps" horizontally at min(AVC)), but the areas are nonetheless the same. That's because AVC measures the average over marginal cost up to that point.
(So if we consider the area above the supply curve, we include the corner area below MC and above AVC on the initial decreasing portion of MC, but exclude the area below AVC and above MC over the next quantity interval. These two exactly cancel each other out.)
Thanks you so much !! It is very precise.
Thank you for this. Specific question: let's consider a perfect discrimination monopoly situation. In that case, in some books, profit is shown on a graph as everything between the MC-curve and the demand curve. So that's wrong then? Or is that area 'always' the same as the area between demand curve and ATC-curve? I would say no, since the supply curve (which is the MC-curve) does not incorporate fixed costs? Or is there something special about the perfect discrimination monopoly situation where producer surplus and profit is actually the same?
If the *entire* area under demand and above marginal cost is indicated, then you are correct that this ignores fixed costs (any costs that are not accrued on a per-unit basis and thus counted in MC).
The rest of this answer is about why those books probably made that choice, so it may be way more than you bargained for, lol.
In a competitive (non-monopolistic) market in the LONG RUN, both profit and producer surplus would be indicated by the area above *supply* (not above MC - see the next paragraphs for why) and below the market price. However, the concept of supply curve actually doesn't apply to a monopolist, which makes it trickier to show their profit in the graph, unless we also add the ATC curve. For a non-discriminating monopolist, min(ATC) is still relevant as a price threshold, so we could say that profit is the area above MC, truncated at min(ATC). But even that becomes unhelpful for a price-discriminating monopolist, since they will be willing to sell *some* units below min(ATC), as long as enough others are sold at higher prices.
The supply curve is actually just *part* of the MC curve: there's a price cutoff below which the supply curve goes along the vertical axis, at Q=0. This video talks about a SHORT RUN situation, when some component of the firm's cost is sunk (this is the "fixed cost"), meaning that you can't avoid paying it - let's say you signed a long-term rental contract for your production facility, and have to keep making those payments for another year, regardless of whether or not you keep producing.
Now suppose I waved a magic wand and it became possible for you to get out of that contract at any time. You would still be paying rent as long as you are producing (so ATC would be the same), but as soon as you decided to stop producing, you would no longer incur any costs. Then your entire cost (not just VC) would be avoidable, and the only relevant cost curve would be ATC: if price dipped below min(ATC), you would stop producing because you could avoid negative profits entirely. In other words, a segment of the supply curve would break off: for prices between min(AVC) and min(ATC), quantity supplied would drop to zero. Producer surplus would now equal profit, and they could both be measured as the area above this truncated supply curve (not above all of MC) and under the price received for each unit.
So the difference between PS and profit is actually not the entire fixed cost - just the component that is sunk (cannot be avoided within the current timeframe). In the long run, by definition, all costs (both fixed and per-unit) are avoidable, and the supply curve only tracks MC above min(ATC). Then it is correct to say that market-level profit is the area below price and above the supply curve - assuming that there is a supply curve to speak of, which is technically only accurate in a competitive market.
I hope this helps.
@@UCSDIntroductoryEcon This helps for sure, thanks! And it confirms what I was thinking already (I guess...). So the graph I was talking about that you see sometimes in some books, is OK when you're talking about the 'long run' (where, by definition, there are no fixed costs), but not when you're talking about the short run? So to be accurate, it should be mentioned at all times when showing such a graph?
@@ellenmaes2480 Sort of. The complicating factor is that there are actually fixed costs in the long run, too, it's just that they are not sunk. "Fixed" in that context simply means that it doesn't vary with the output produced.
If a cost doesn't vary with the output, that means it will not be captured in the marginal cost curve - since, by definition, MC shows how much costs increase with each extra unit. It _would_ be captured in the supply curve, because the minimum price at which the firm supplies any product would be directly driven by it, but a monopolist doesn't _have_ a supply curve, strictly speaking, because they will charge a different price depending on the demand curve. (That's a separate topic for discussion)
Let's use "A" for the area above MC and below the price at which is unit is sold.
Then, it is always correct to say:
Profit = A - (all fixed costs)
and
Producer Surplus = A - (fixed costs that can be avoided by not producing at all)
In the long run all costs can be avoided, so Profit = PS
But in the graph they still wouldn't be the full area A, unless we explicitly assume that all costs are the per-unit type and thus reflected in MC.
You can include links to those sources, if you want me to check what assumptions they make.
Thank u