Review Class
ECO101: Microeconomics
Section 03 & 04
Lecture 06: Three Stages of Production
▪ Stage I: Increasing Returns
a. TP is increasing at an increasing rate.
b. MP is increasing and reaches its maximum.
c. AP is also increasing.
▪ Stage II: Decreasing Returns
a. TP continues to increase but a decreasing rate.
b. MP starts to decrease but remains positive.
c. AP also starts to decrease after reaching its
maximum at stage I.
▪ Stage III: Negative Returns
a. TP starts to decrease.
b. MP becomes negative.
c. AP continues to decrease.
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Importance of Each Stage
Stage I: Increasing Returns
Production is becoming more efficient. However, it is not • Overall Importance:
optimal to stop here, because resources are still
underutilized. • They help businesses decide
Stage II: Decreasing Returns how many workers to hire.
• They show where production
• This is the rational stage of production. Firms operate in
this stage because: is most efficient.
• Total product is still increasing • They warn when too much
• Inputs are used efficiently labor can hurt output.
• They guide in managing
• Marginal returns are positive
costs and planning better.
Stage III: Negative Returns
• No rational producer will operate in this stage because:
• Marginal returns are negative
• Resources are overcrowded or overused
Example: Calculation of MP and AP
Labor (L) Total Product (TP)
0 0 a) Calculate the Marginal Product (MP) and Average
Product (AP) for each unit of labor.
1 15
b) Identify the stage at which diminishing marginal
2 35 returns set in.
3 60 c) At what labor input is MP = 0?
4 80
5 95
6 100
Answer (a)
Labor (L) TP MP=ΔTP / ΔL AP=TP/L
0 0 – –
1 15 15 15.0
2 35 20 17.5
3 60 25 20.0
4 80 20 20.0
5 95 15 19.0
6 100 5 16.7
Answer (b) and Answer (c)
(b) MP increases from L=1 to L=3 (15 → 20 → 25)
MP starts to decrease after L = 3 (25 → 20 → 15 → 5)
Diminishing marginal returns begin at L = 4
(c) At what labor input is MP = 0?
• MP is still positive at L = 6 (MP = 5)
• If we add a 7th worker and TP stands at 100, MP = 0
• MP = 0 would occur at L = 7
Lecture 07: Cost and Revenue
• Example: A small bakery uses labor as the only variable input in the short run.
The bakery pays Tk. 120 per day for each worker and incurs a fixed cost of Tk.
1,000 per day for rent and equipment. The production schedule for bread loaves
is given below:
Output (Bread loaves
Number of Workers
per day)
0 0
a) Construct a short-run cost schedule including Total Cost (TC),
1 15 Marginal Cost (MC), and Average Total Cost (ATC).
2 35 b) On graph paper, draw the Total Cost (TC), Total Fixed Cost
(TFC), and Total Variable Cost (TVC) curves. Label all points
3 55
clearly.
4 70
5 80
Answer (a)
L Q TFC (Tk.) TVC (Tk.) = L × 120 TC = TFC + TVC MC = ΔTC / ΔQ ATC = TC / Q
0 0 1000 0 1000 – –
(1120-1000)/(15-
1 15 1000 120 1120 1120 / 15 ≈ 74.67
0)=120 / 15 = 8.00
(1240 - 1120) / (35 -
2 35 1000 240 1240 1240 / 35 ≈ 35.43
15) = 120 / 20 = 6.00
(1360 - 1240) / (55 -
3 55 1000 360 1360 1360 / 55 ≈ 24.73
35) = 120 / 20 = 6.00
(1480 - 1360) / (70 -
4 70 1000 480 1480 1480 / 70 ≈ 21.14
55) = 120 / 15 = 8.00
(1600 - 1480) / (80 -
5 80 1000 600 1600 1600 / 80 = 20.00
70) = 120 / 10 = 12.00
Answer (b)
• You know how to draw a graph. You can follow your assignment
where you have drawn several graphs.
Lecture 08: Perfect Competition
• Perfect Competition is a market structure in which
(i) There are many sellers and many buyers
(ii) Each firm produces and sells a homogeneous product.
(iii) Buyers and sellers have all relevant information about prices,
product quality, sources of supply, and so forth.
(iv) Firms have easy entry and exit into the market.
Examples: (i) Agricultural markets like wheat or rice markets.
(ii) Stock markets where many buyers and sellers trade identical shares.
Relationship between Price, Average Revenue
and Marginal Revenue
• Price (P): The market price at which goods are sold. In perfect competition, firms are price takers (price is
fixed).
𝑻𝑹 𝑷∗𝑸
• Average revenue (AR) is the total revenue divided by the quantity sold. 𝑨𝑹 = = =𝑷
𝑸 𝑸
• Marginal Revenue (MR): The additional revenue from selling one more unit. Since price is fixed, P=MR.
• In perfect competition: P=AR=MR
Quantity (Q) Price (P) TR=P*Q 𝑨𝑹=𝑻𝑹/𝑸 ∆𝑻𝑹
M𝑹 =
(Sweaters per day) ∆𝑸
7 25 175 25 -
8 25 200 25 25
9 25 225 25 25
10 25 250 25 25
11 25 275 25 25
12 25 300 25 25
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Why Does a Perfectly Competitive Firm Sell at
the Equilibrium Price?
• If a perfectly competitive firm tries to charge a price higher than the market-
established equilibrium price, it won’t sell any of its product. The reasons are that
the firm sells a homogeneous product, its supply is small relative to the total
market supply.
• If the firm wants to maximize profits, it does not offer to sell its good at a lower
price than the equilibrium price. Why should it? It can sell all it wants at the
market-established equilibrium price. The equilibrium price is the only relevant
price for the perfectly competitive firm.
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Lecture 09: Monopoly
• A monopoly is a market with a single firm that produces a good or
service with no close substitutes.
• Examples: WASA in Dhaka City, DESCO etc.
• Characteristics of monopoly:
• There is one seller.
• The single seller sells a product that has no close substitutes.
• The barriers to entry are extremely high.
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Monopoly’s demand and marginal revenue
curve
• In a monopoly, there is only one firm. Thus, the demand curve for the
monopoly firm is the market demand curve, which is downward sloping.
• Since a downward-sloping demand curve shows an inverse relationship
between price and quantity demanded, more is sold at lower prices than
at higher prices, ceteris paribus.
• Unlike the perfectly competitive firm, the monopolist can raise or
reduce its price and sell its product.
• Since it faces a downward-sloping demand curve, to sell an additional
unit of its product, the monopolist must necessarily lower its price for
the product on all units.
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Monopoly’s demand and marginal revenue
curve • The demand curve (D) plots price and quantity; the marginal
revenue curve (MR ) plots marginal revenue and quantity.
• Because P>MR for a monopolist (See Table), its demand curve
necessarily lies above its marginal revenue curve.
Marginal
Total Revenue
Quantity (Q) Price (P) Revenue (MR =
(TR = P×Q)
ΔTR / ΔQ)
1 Tk. 10 10 × 1 = Tk. 10 —
2 Tk. 9 9 × 2 = Tk. 18 = Tk. 8
3 Tk. 8 8 × 3 = Tk. 24 = Tk. 6
4 Tk. 7 7 × 4 = Tk. 28 = Tk. 4
5 Tk. 6 6 × 5 = Tk. 30 = Tk. 2
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Monopolist’s output and price decisions
• To maximize profit, the monopolist produces the
quantity of output at which MR=MC and charges the
highest price per unit at which this quantity of output
can be sold.
• The monopolist produces the quantity of output (Q1)
at which MR = MC and charges the highest price per
unit P1 at which this quantity of output can be sold.
• Notice that, at the profit-maximizing quantity of
output, price is greater than marginal cost (P>MC).
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