Subject: Economics for a

sustainable world (LB5229)

Topic(s): Microeconomics
continued
(Ch. 6)

Workshop 3 Tutorial 3 : Rich Task

Learning outcomes of subject
• Real world understanding of issues and
application of economic tools for sustainable
resource management – without growth to
begin with
• Different ATC curves for different market
structures
• International trade and fiscal & monetary
policy HOW D
OWE MAN
BUSINE AGE OU
SSES SU R
STAINA
BLY?
2
 Big Ideas this week

1. The firm (cost curves, revenue and

marginal thinking)
2. No-Arbitrage & optimal use of resources

3
 Recap of “firm” concepts
We think on the margin…
The next (marginal) thing I produce costs me
$10 (ie marginal cost is $10)
A. If I can sell that thing for $12 (ie marginal
revenue is $12) should I produce it?
B. If I can sell that thing for $8 (ie marginal
revenue is $8) should I produce it?

4
 Task 1a – procedural in pairs
Complete the below table by using the following:
TC = FC + VC, MC(Q=2) = TC(Q=2) – TC(Q=1), AFC=FC/Q, AVC=VC/Q, ATC=TC/Q,
TR=PxQ, MR=TR(Q=2)-MR(Q=1).

Q FC VC TC MC AFC AVC ATC P TR MR

10+0= 10/1= 0/1= 10/1= 19x1=
1 10 0 10 - 10 0 10 19 19 -
10+1= 11-10= 10/2= 1/2= 11/2= 18x2= 36-19=
2 10 1 11 1 5 0.5 5.5 18 36 17

3 10 4 17

4 10 13 16

5 10 31 15

5
 Task 1b – relational in pairs
A graph of the previous table is presented below.
What “optimal” quantity maximises the profit of the firm?
P vs Q firm
20

18

16

14

12
$ 10

0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
Q
MC AFC AVC ATC P MR

6
 What is the “PRICE”
at the optimal quantity?
$10
Average Total cost Marginal Cost MC
ATC = TC/Q

Total cost = TC

Variable cost = VC

P
fixed cost FC
Price P
Marginal revenue MR AFC = FC/Q
Q 100 units
Does this monopoly firm make an economic profit or loss?

7
 What is the “TOTAL REVENUE”
at the optimal quantity?
HINT: TOTAL REVENUE = PRICE X QUANTITY
$10
Average Total cost Marginal Cost MC
ATC = TC/Q

Total cost = TC

Variable cost = VC

P
fixed cost FC
Price P
Marginal revenue MR AFC = FC/Q
Q 100 units
Does this monopoly firm make an economic profit or loss?

8
What is the “AVERAGE TOTAL COST”
at the optimal quantity?
$10
Average Total cost Marginal Cost MC
ATC = TC/Q

Total cost = TC

Variable cost = VC

P
fixed cost FC
Price P
Marginal revenue MR AFC = FC/Q
Q 100 units
Does this monopoly firm make an economic profit or loss?

9
 What is the “TOTAL COST”
at the optimal quantity?
HINT: TOTAL COST = AVERAGE TOTAL COST X QUANTITY
$10
Average Total cost Marginal Cost MC
ATC = TC/Q

Total cost = TC

Variable cost = VC

P
fixed cost FC
Price P
Marginal revenue MR AFC = FC/Q
Q 100 units
Does this monopoly firm make an economic profit or loss?

10
 What is the “ECONOMIC PROFIT”
at the optimal quantity?
HINT: ECONOMIC PROFIT = TOTAL REVENUE – TOTAL COST
$10
Average Total cost Marginal Cost MC
ATC = TC/Q

Total cost = TC

Variable cost = VC

P
fixed cost FC
Price P
Marginal revenue MR AFC = FC/Q
Q 100 units
Does this monopoly firm make an economic profit or loss?

11
Recap of “OPTIMAL EXTRACTION” concepts

The (opportunity) cost of extracting

resources later should equal the cost of
extracting resources now (when
measured using “same time” dollars)

12
 Optimal extraction (together)
• Given the following information
– 100 units of resource can be extracted (some now and some (later) in 1 year from now)
– The return on investment is 20% per annum
– Price per unit
• Now $30
• Later $35
– Cost per unit
• Now $5
• Later $15
• Opportunity cost per unit
– Later = $35 - $15 = $20 in later dollars
– Now = $30 - $5 = $25 in now dollars… What is this in later dollars?
• If you extract 40 units now and 60 units later – what is the opportunity cost of
these activities in later dollars?
• If you extract 60 units now and 40 units later – what is the opportunity cost of
these activities in later dollars?
• How much of the resource should you extract now and how much should you extract 1 year (later)?

13
 Optimal extraction (group)
• Given the following information
– 500 units of resource can be extracted (some now and some (later) in 1 year from now)
– The return on investment is 50% per annum
– Price per unit
• Now $60
• Later $70
– Cost per unit
• Now $10
• Later $15
• Opportunity cost per unit
– Later = $__ - $__ = $__ in later dollars
– Now = $__ - $__ = $__ in now dollars… What is this in later dollars?
• If you extract 400 units now and 100 units later – what is the opportunity cost of
these activities in later dollars?
• If you extract 100 units now and 400 units later – what is the opportunity cost of
these activities in later dollars?
• How much of the resource should you extract now and how much should you extract 1 year (later)?

14
 Policy

• How would you use a tax (per unit of

resource) to incentivize extraction later?
• How would you use a subsidy (per unit of
resource) to incentivize extraction later?

15
 Summary
1. Firms: Optimal quantity produced 
economic profit
2. Resource extraction  opportunity costs
of now and later extraction activities are
the same (when measured in the same
“time” dollars)… changing opportunity
costs with taxes/subsidies incentivize
different extraction behaviours.

16