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 LossesResponses to Profits and LossesResponses to Economic ProfitsMarkets with excess profits attract resourcesIf a firm is covering its variable cost, it can stayin the market in the SRIf a firm would like to stay in the market in theLR, it must cover all costs: explicit and implicitMarkets in which firms are earning an economicprofit tend to attract additional resources> More firms want to enter the market> Market supply is expected to increaseCom IndastyTypical Com FarmPrice,SbuPriceSbuMCATCEconomicProfit:S104,000costsA firm that earns no more than a normal profit(zero profits) has managed only to cover theopportunity cost of the resources> A firm that makes a positive economic profit earnsmore than the opportunity cost of the investedMarkets in which firms are experiencingeconomic losses tend to lose resources1.20D> Firms want to leave the market> Market supply is expected to decrease130Quantity (000s of bushels'year)65resourcesQuantity (M of bushels year)Shrinking Economic ProfitsMarket EquilibriumResponses to ProfitsSupply increasesIZero economic profitsI The initial equilibrium price was above theminimum value of ATC, giving rise to positiveeconomic profits> Incentive for other firms to enter the market> Supply increases> Equilibrium price decreases until the incentive toenter the market disappearsCom IndustryTypical Com FarmCom IndustryIspical Com FarmPricePriceSbuPricePriceSbuSbuMCATCSbuMCATCEconomicProfit$50,4001.501.501.08D•P= minimum ATC65115Quantity (M of bushels year)90 130Quantity (000s of bushels year)> What if the price went below the minimum ATC?120 13065 95Quantity (M of bushels'year)Quantity (000s of bushels 'year) Economic LossesMarket EquilibriumResources leaveINo economic lossesCom IndustryTypical Com FarmPricePricePriceРriceSbuSbuSbuS'buMCMCATCATCEconomicLoss:$21,0001.050.750.750.7570 90Quantity (000s of bushels'year)40 606070 90Quantity (M of bushels'year)Quantity (M of bushels'year)Quantity (000s of bushels'year)Responses to LossesResponses to Profits and LossesIAssumptions> Firms are free to enter and leave the market> Inputs can be purchased in any quantities at fixedprices> All firms employ similar standardized productionmethodsICondition: P 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 marketdisappearsFinal outcome: zero economic profit> Do firms want zero economic profit?• The zero economic profit is a consequence of pricemovements following entry and exit of firms

Economic profit If the firm is able to sell at a price that is above ATC, it implies a firm is able…

Answered: Demonstrate how the allocation of…

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

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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