Short Run Production Fixed Inputs Do not change with quantity
produced Variable Inputs Do change with quantity produced This will
be number of workers in our examples
Slide 3
Short Run Production Short Run At least one input is fixed Long
Run All inputs are variable
Slide 4
Short Run Production Consider the following example Q measures
production Marginal Product TP / L Average Product TP / L 15 0 2 3
4 5 Q 0 3 8 L 20 23 MP L --- 3 5 7 5 3 AP L --- 3 4 5 5 4.6 1
Slide 5
Short Run Production These are the typically shaped curves
Teamwork and Specialization Increasing MP L Steepening TP Crowding
of the Fixed Input Decreasing MP L Flattening TP
Slide 6
Short Run Production Marginals and Totals Marginal is the slope
of the total Works with any value (product, cost, etc.)
Example
Slide 7
Short Run Costs Fixed Costs (FC) Tied to Fixed Inputs Will not
vary with quantity Variable Costs (VC) Tied to Variable Inputs
(Labor) Will vary with quantity FC + VC = Total Costs (TC)
Costs of Production FC, VC, and TC $ Q FC VC TC Difference here
is FC
Slide 10
Costs of Production AFC $ Q
Slide 11
Costs of Production MC, AVC, and ATC $ Q MC ATC AVC Minimum of
ATC and AVC Difference is AFC
Slide 12
Short Run Production Now look at the AVC and ATC curves Also
look at the value of the MC curve Marginal pulls the average Only
crossing point is at minimum/maximum of the average
Slide 13
MP L and MC Look again at the table Note that as MP L
increases, MC decreases MC and MP L are opposites As you get more
production out of each worker, your additional cost per unit
decreases (and vice versa)
Slide 14
Putting the curves together If we use these two facts Marginal
cost (or product) is the slope of total cost (or product) Marginal
cost and marginal product are opposites We can use this to
determine the shape of MC, TC, MP, and TP if we only know one For
example
Slide 15
Profit When economists say zero profit, the definition is
slightly different Economic Profit = TR EC IC TR = Total Revenue EC
= Explicit Costs IC = Implicit Costs Accounting Profit = TR EC
Slide 16
Profit Explicit Costs Any cost that causes money to change
hands Taxes/Wages/Utilities/Supplies Depreciation Interest on a
loan (not the principle) Implicit Costs Value of lost opportunities
Lost income from a job Lost interest Money you Could Have
Earned
Slide 17
Profit Example Economic Profit < Accounting Profit Econ.
Profit tells Rate of Return EP > 0 Above Normal EP = 0 Normal EP
< 0 Below Normal
Perfect Competition Characteristics Very small firm Large
number of firms Identical (homogeneous) product Free entry and exit
Industry-Level advertising Example: Agriculture
Slide 20
Perfect Competition The goal of firms is to maximize profit How
to maximize profit? MR=MC Need to find marginal revenue Finding
marginal revenue in PC
Slide 21
Perfect Competition P $ Q Q S D ATC AVC MC PePe MR=d q*
TR=P*q=MR*q TC=ATC*q Total Profit is the difference, or the area
that is in one but not both This is negative, so this firm is
losing money
Slide 22
Perfect Competition Since this firm is losing money, it should
shut down right? Not so fast! What do you lose if you shut down?
Fixed costs
Slide 23
Perfect Competition P $ Q Q S D ATC AVC MC PePe MR=d q* This is
what the firm loses if it produces Firm loses FC if it shuts down
This is AFC And FC=AFC*Q Clearly, the loss from producing is
smaller than shutting down
Slide 24
Perfect Competition Positive Profit Continue to Produce Zero
Profit Continue to Produce Negative Profit If P (or MR) AVC
Continue to Produce This means covering some of FC If P (or MR)
< AVC Shut Down
Slide 25
Perfect Competition What happens in the Long-Run if firms are
making a loss? Some firms will shut down because of free exit
Market Supply decreases, shifting supply to the left Drives price
upwards to a particular point
Slide 26
Perfect Competition P $ Q Q S D ATC AVC MC PePe MR=d q* ATC=AVC
Now there are no losses driving firms out of the market
Slide 27
Perfect Competition What if there is positive profit? This will
attract new firms, and they will enter because of free entry
Increase supply, shift to the right Drives price down to a
particular point
Slide 28
Perfect Competition If positive profit attracts firms, and
negative profit drives firms away, what must profit be to be
stable? P e LR = minimum of ATC LR Profit = 0 How do we achieve
this?
Slide 29
Monopoly P.C. is one extreme, monopoly is the other Most
markets fall somewhere in between Monopolistic Competition
Oligopoly
Slide 30
Monopolistic Competition Characteristics Fairly small firms
Fairly large number of firms Mildly differentiated product Small
barriers to entry Advertising at firm level Example: Walk around
the mall
Slide 31
Oligopoly Characteristics Fairly large firms Fairly small
number of firms Somewhat unique product Higher barriers to entry
Advertising at firm level Example: Automobiles
Slide 32
Monopoly Characteristics Large-sized firm Single firm Unique
product No entry P.R. advertising Example: AmerenUE
Slide 33
Monopoly How does a monopolist find the profit-maximizing
quantity? Same way as anyone else Produce where MR=MC Finding MC
Market Supply Only producer Finding MR Example
Slide 34
Monopoly P Q S D =MC MR QMQM PMPM MC Markup = P MC Measures
Market Power Markup RM and DWL? QeQe RM
Slide 35
Monopoly Only firm that can earn positive profit (above normal
rate of return) in long-run No Entry Where does monopoly derive its
market power? Barriers to entry are insurmountable
Slide 36
Barriers to Entry Control of Resource OPEC, DeBeers Government
Creation/License High Fixed Costs Copyright Protection Patents
These are how all markets (not PC) restrict to at least some degree
entry/exit by other firms
Slide 37
Monopoly Problems with Monopoly RM, DWL, and higher prices Less
product innovation Less customer service Simply put, if youre the
only game in town, you have no incentive to improve.
Slide 38
Monopoly Advantage of Monopoly Natural Monopoly High Fixed
Costs relative to Variable Costs Example Patent Protection Recoup
costs of R&D To promote the Progress of Science and useful
Arts, by securing for limited Times to Authors and Inventors the
exclusive Right to their respective Writings and Discoveries;
-Article I, US Constitution House, MD Copyright Incentive to
Create
Slide 39
Oligopolies Characterized by a few sellers Each firms decision
affects other firms P.C. Firms too small Mono. Only one firm Would
prefer the cartel outcome This is where the two act as a
monopoly
Slide 40
Oligopolies This outcome is unstable Why dont all of you get
together and bomb the exam to build up the curve? Both sides have
incentive to cheat Oligopolistic decisions can be modeled using
Game Theory Study of how people make strategic decisions Oceans
Twelve
Slide 41
Elements of Game Theory Players or actors Strategies Payoffs or
outcomes With these, we can set up a Payoff Matrix
Slide 42
Game Theory Terms Dominant Strategy Move that is best for an
actor regardless of other actors choices This results in a
most-likely outcome Does Linas/Basher have D.S.? Nash Equilibrium
Outcome where neither side has incentive to move Does N.E. exist
for this situation?
Slide 43
Prisoners Dilemma Classic example of game theory Case where the
most-likely outcome is not the best overall outcome for both
parties Is Linas and Bashers situation a Prisoners Dilemma?
Yep.
Slide 44
Other Games Matching Pennies Game Telephone Game Advertising
Game