Measures of performance
This presentation is the property of its rightful owner.
Sponsored Links
1 / 7

Measures of Performance PowerPoint PPT Presentation


  • 72 Views
  • Uploaded on
  • Presentation posted in: General

Measures of Performance. Concepts and Graphs. Performance. Profits Efficiency Technical – best technology (minimize cost) Allocative – Marginal Benefit (P)=Marginal Cost (MC) Deadweight Loss Product Variety Technical Progress. Efficiency. Only Perfectly Competitive markets are efficient

Download Presentation

Measures of Performance

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Measures of performance

Measures of Performance

Concepts and Graphs


Performance

Performance

  • Profits

  • Efficiency

    • Technical – best technology (minimize cost)

    • Allocative – Marginal Benefit (P)=Marginal Cost (MC)

  • Deadweight Loss

  • Product Variety

  • Technical Progress


Efficiency

Efficiency

  • Only Perfectly Competitive markets are efficient

    • Many buyers and sellers

    • Homogeneous products

    • Easy entry

  • P = MC in the short run

  • P = MC = Min AC in the long run

  • Supply = Demand maximizes Economic Surplus, no Deadweight Loss


Efficiency1

Efficiency

  • Departures from P=MC cause Deadweight Losses of Economic Surplus

  • P > MC May be associated with positive economic profit in monopoly and some oligopoly models (Bertrand, for example)

  • Long Run equilibrium in monopolistic competition has P > MC, but zero economic profit and a dead weight loss


Profit as a measure of performance

Profit as a Measure of Performance

  • Economic vs. Accounting Profit

  • Data availability

    • Division or Subsidiary vs. Parent Corporation

    • Financial reports required only if stock is traded

  • High profit may indicate

    • Greater efficiency than other firms

    • Monopoly or collusive behavior

  • Even zero economic profit may be associated with positive deadweight loss in differentiated product markets


Deadweight loss

Deadweight Loss

  • Does Price exceed Marginal Cost?

  • DWL = ½ ΔP ΔQ = ½ (P-MC)(Qc-Q1)

  • Lerner Index and the Price-Cost Margin

    • (P-MC)/P = -(1/Ep)

    • At profit maximizing price and quantity

  • DWL = ½ PQ(-Ep)[(P-MC)/P]2

    • Assuming (P-MC)/P is small

    • DWL increases with the size of the market (PQ), the price elasticity of demand, and the square of the price-cost margin


Variety and progressivity

Variety and Progressivity

  • Does product variety offset DWL in differentiated product markets?

  • Technical Progress or Progressivity

    • Innovation in process or product technologies

    • Process innovation reduces cost

      • Production

      • Distribution

      • Advertising, marketing, etc.

    • Product innovation leads to new products


  • Login