
SELFCORRECTION, INFLATIONARY GAP: The automatic process through which the aggregate market achieves longrun equilibrium by eliminating an inflationary gap created by shortrun equilibrium. With an inflationary gap shortrun equilibrium real production is greater than fullemployment real production, meaning resource markets have shortages, and in particular labor is overemployed. Selfcorrection is the process in which these temporary imbalances are eliminated through flexible prices as the aggregate market achieves longrun equilibrium. The key to this process is shifts of the shortrun aggregate supply curve caused by changes in wages and other resource prices. The longrun result is lower wages and a decrease in shortrun aggregate supply.
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MONOPOLY, REVENUE DIVISION: The marginal approach to analyzing a monopoly's profit maximizing production decision can be used to identify the division of total revenue among variable cost, fixed cost, and economic profit. The Ushaped cost curves used in this analysis provide all of the information needed on the cost side of the firm's decision. The demand curve facing the firm (which is also the firm's average revenue) and the corresponding marginal revenue curve provide all of the information needed on the revenue side. The total revenue received by a monopoly is divided among total fixed cost, total variable cost, and economic profit. This division can be illustrated using the marginal approach to analyzing the profitmaximization production decision.The key to this division is to translate averages indicated by average curves into totals using the quantity produced. For example total revenue can be identified by multiplying average revenue by the quantity produced and total cost is obtained by multiplying average total cost by the quantity. To see how revenue is divided, consider the production decision undertaken by FeetFirst Pharmaceutical, a hypothetical monopoly that controls the production of AmblathanPlus, the only cure for the deadly (but hypothetical) foot ailment known as amblathanitis. On the revenue side, FeetFirst Pharmaceutical is a price maker with market control, meaning it faces a negativelysloped demand curve. On the cost side, FeetFirst Pharmaceutical's shortrun AmblathanPlus production is guided by increasing, then decreasing marginal returns, which means that its cost is reflected by Ushaped cost curves. Revenue Division 

 The exhibit to the right sets the stage for identifying how the total revenue received by FeetFirst Pharmaceutical from AmblathanPlus production is divided. The profitmaximizing situation illustrated in this exhibit is based on the intersection of two curvesthe green, negativelysloped marginal revenue curve (MR), which is beneath the average revenue (demand) curve, and the Ushaped red marginal cost curve (MC). The intersection of these two curves at 6 ounces of AmblathanPlus is the profitmaximizing production level. The price charged by FeetFirst Pharmaceutical for this quantity is $7.50.The task at hand is first to identify the total revenue FeetFirst Pharmaceutical receives from producing AmblathanPlus, then to identify the division of this revenue.  Total Revenue: Because FeetFirst Pharmaceutical is a monopoly, the MR curve is negativelysloped and below the average revenue curve. The price charged for 6 ounces is thus $7.50 per ounce. Total revenue is then simply the price ($7.50) times the quantity of output (6), which is $45.
Total revenue can be graphically highlighted as the rectangle bounded by the vertical and horizontal axes on the left and bottom, the $7.50 price on the top, and the vertical line at the quantity of 6 ounces connecting the MRMC intersection point with the quantity axis on the right. Click the [Total Revenue] button to highlight this area.
 Total Cost: The next task is to divide FeetFirst Pharmaceutical's revenue between the total cost of production and its profit. Much like price times quantity generates total revenue, average total cost times quantity generates total cost. The average total cost of producing 6 ounces of AmblathanPlus is $6.17 per ounce. This is found at the point where the vertical line designating the profitmaximizing 6 ounces of quantity intersects the ATC curve. Total cost is then average total cost ($6.17) times quantity (6), which is $37.
This total cost can be graphically highlighted as the rectangle bounded by the vertical and horizontal axes on the left and bottom, the horizontal line indicating $6.17 average total cost on the top, and the vertical line indicating 6 ounces of AmblathanPlus on the right. Click the [Total Cost] button to illustrate this area.
 Profit: The difference between the total revenue area and the total cost area is economic profit, equal to $8. This is the smaller rectangle near the top of the total revenue area. It is bounded on the left by the vertical price axis, on the top by the $7.50 price line, on the bottom by the horizontal line indicating $6.17 average total cost, and on the right by the vertical line indicating 6 profitmaximizing ounces of AmblathanPlus production. Click the [Profit] button to highlight this area.
 Total Variable Cost: Next up is the division of total cost between total variable cost and total fixed cost. The point at which the vertical line indicating 6 ounces of AmblathanPlus intersects this AVC curve identifies average variable cost, which is $4.5 per ounce of AmblathanPlus. Total variable cost is then average variable cost ($4.5) times quantity (6), which is $27. Total variable cost is the lower rectangular area bounded by the vertical and horizontal axes on the left and bottom, the line indicating average variable cost of $4.5 on the top, and the vertical line indicating 6 profitmaximizing ounces of AmblathanPlus production on the right. Clicking the [Total Variable Cost] button highlights this area.
 Total Fixed Cost: The last area to identify is total fixed cost. The portion of the total cost area not used for total variable cost goes for total fixed cost. The middle rectangle bounded on the left by the vertical price axis, on the top by the horizontal line indicating $6.17 average total cost, on the bottom by the horizontal line indicating $4.5 average variable cost, and on the right by the vertical line indicating 6 profitmaximizing ounces of AmblathanPlus production is total fixed cost. Click the [Total Fixed Cost] to highlight this area.
Recommended Citation:MONOPOLY, REVENUE DIVISION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 20002024. [Accessed: March 2, 2024]. Check Out These Related Terms...       Or For A Little Background...                        And For Further Study...          
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