market structure and the behavior of firms n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Market Structure and the Behavior of Firms PowerPoint Presentation
Download Presentation
Market Structure and the Behavior of Firms

Loading in 2 Seconds...

play fullscreen
1 / 36

Market Structure and the Behavior of Firms - PowerPoint PPT Presentation


  • 136 Views
  • Uploaded on

Market Structure and the Behavior of Firms. Market Structures. Benchmark models Perfect Competition Monopoly. Major Econ 211 (Micro I) Econ 212 (Macro I) Econ 349 (Micro II) Econ 375 (Macro II) Math 123 (Stats) Econ 420 (Regression) Econ 421 (Empirical Research)

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Market Structure and the Behavior of Firms' - ajay


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
market structures
Market Structures
  • Benchmark models
    • Perfect Competition
    • Monopoly
it s registration time how about economics
Major

Econ 211 (Micro I)

Econ 212 (Macro I)

Econ 349 (Micro II)

Econ 375 (Macro II)

Math 123 (Stats)

Econ 420 (Regression)

Econ 421 (Empirical Research)

12 additional hours in Econ

33-34 hours

Minor

Econ 211

Econ 212

Math 123

9 additional hours in Econ

18 hours

It’s registration time…how about economics?
  • Fall 2008
  • Econ 325 (Gender Econ)
  • Econ 350 (Environmental Econ)
  • Econ 360 (Law & Econ)
  • Econ 420 (Regression)
  • Spring 2009
  • Econ 301 (Money & Banking)
  • Econ 340 (Sports Econ)
  • Econ 349 (Micro II)
  • Econ 414 (Int’l Econ)
behavior of firms
Behavior of Firms
  • What is the objective of a business?
    • Assume firms maximize profit

 = TR – TC

TR = Total Revenue = Pq

TC = Total Economic Costs

Economic Cost = Explicit Cost + Implicit Cost

slide5

Suppose that a young chef opened his own restaurant. To do so, he quit his job, which was paying $36,000 per year; cashed in a $6,000 certificate of deposit that was yielding 5% (to purchase equipment); and took over a building owned by his wife which had been rented out for $3,000 per month. His expenses for the first year amounted to $60,000 for food, $40,000 for extra help, and $7,000 for utilities. The chef is trying to figure out whether he would have been better off not being in business last year. He knows how to calculate his revenues, but he needs help with the cost side of the picture. What were the chef's total economic costs?

  • $107,000
  • $113,000
  • $149,000
  • $185,300

$60,000 (food)

$36,000 (foregone job)

$40,000 (extra help)

$300 (foregone interest)

$7,000 (utilities)

$36,000 (foregone rent)

$6,000 (equipment)

$113,000

$72,300

Total Economic Cost = $185,300

technological constraints

Variable input

Fixed input

Technological Constraints
  • Production Function

q = F(L, K)

_

q = output

L = labor

K = capital

F(·) represents technology

Lab Experiment 3: Widget Production

other measures of productivity
Other measures of productivity
  • Total Product

q = F(L, K)

  • Average Product

AP = q/L

  • Marginal Product

MP = Δq/ ΔL

Note: Diminishing Marginal Returns (DMR)

When there is at least one fixed input, eventually a point is reached at which the marginal product of an additional worker begins to fall.

productivity graphs
Productivity Graphs

DMR

output

Slope = MPL = ∆q/ ∆L

q/L

∆q

TP

∆L

AP

labor

L1

L2

labor

L1

L2

MP

measuring marginal product
Measuring Marginal Product
  • Batting Averages
  • GPAs

4.0

2.0

3.0

3.0

3.5

3.125

When MP > AP then AP will rise

When MP < AP then AP will fall

which worker at decent donuts has the highest marginal product
Which worker at Decent Donuts has the highest marginal product?
  • The fourth
  • The fifth
  • The sixth
  • The seventh
short run costs
Short Run Costs

TC = FC + VC

  • Does not vary with output:
    • Rent
    • Utilities
    • Salaries
    • Property taxes
    • Insurance premiums
  • Varies with output:
    • Labor
    • Raw materials
short run cost curve family
Short Run Cost Curve Family

TC

$

VC

$

MC

ATC

AVC

FC

AFC

output

output

TC = FC + VC

ATC = AFC + AVC

which of the following would be classified as a variable cost for the local texaco gasoline station
Which of the following would be classified as a variable cost for the local Texaco gasoline station?
  • interest payments to a local bank for a loan.
  • the local property tax on the building owned by the Texaco operator.
  • the premiums paid for liability insurance, which are fixed at about $30,000 per year.
  • the federal excise tax paid on each gallon of Texaco gasoline sold.
properties of the cost curves
Properties of the Cost Curves

$

MC

  • “Ross Perot” Equation
  • Short Run Cost Curve Shifters
    • Change in price of labor
    • Change in price of capital
    • Change in amount of capital
    • Change in technology

$

MC

ATC

output

AVC

q/L

AFC

output

MP

labor

slide15

Austyn's fixed cost is $3,600. Austyn’s employs 20 workers and pays each worker $60. The average product of labor is 30, the marginal product of the 20th worker is 12. What is the marginal cost of the last unit produced by the last worker Austyn’s hired?

  • $0.20
  • $5
  • $240
  • $720
long run costs
Long Run Costs
  • What is the optimal size for a factory?

$

ATC1

ATC2

ATC4

LRAC

ATC3

q2

output

long run average cost curve
Long Run Average Cost Curve

$

LRAC

ATC3

Diseconomies of Scale

Economies of Scale

Specialization

Coordination/Communication Problems

qMES

output

EOS: double the inputs, output more than doubles

 LRAC falls

DOS: double the inputs, output less than doubles

 LRAC rises

when all inputs increase by 40 and output rises by 30 the firm is experiencing
When all inputs increase by 40% and output rises by 30%, the firm is experiencing:
  • Diminishing returns
  • Economies of scale
  • Diseconomies of scale
  • Constant returns to scale
perfect competition price taker model
Perfect Competition: Price Taker Model
  • Characteristics of the Industry
    • Large number of small buyers/sellers
    • Homogeneous product
    • Free entry/exit
    • Perfect information

 firms are price takers

MR = ΔTR / Δq

$

$

S

P1

P

= MR

D

Q1

Quantity

quantity

Industry

Firm

maximizing profit
 = TR – TC

 = P  q - [FC + VC]

What output should firm produce?

 produce until MR = MC

If MR > MC  produce more

If MR < MC  produce less

Maximizing Profit

$

MC

MR

$60 = P1

quantity

q1 = 300

I want you

to maximize profit

What is TR = ?

What is TC = ?

slide21

In a perfectly competitive industry, the market price of the product is $12. Firm A is producing the output at which average total cost equals marginal cost, both of which are $10. To maximize its profits, Firm A should:

  • expand output
  • reduce output
  • leave output unchanged
  • decrease its price
profit and loss diagrams
Profit and Loss Diagrams
  • Positive Profit:  > 0
    •  = Pq – (ATC)q
    •  = (P-ATC)q
    •  = (60-50)300
    •  = $3000
  • Negative Profit
    •  = (35-50)250
    •  = -$3750
  • Zero Profit?

$

MC

ATC

$60 = P1

MR1

$50 = ATC

$35 = P2

MR2

quantity

q2 = 250

q1 = 300

slide23

Juan’s Software Company is a perfect competitor. Juan has total fixed costs of $25,000, average variable costs for 1,000 units of the product of $45, and marginal revenue of $75. What is his total economic profit?

  • $5,000
  • $25,000
  • $45,000
  • It is impossible to determine with the information given.
sometimes it s better to stay open and lose a little bit
Sometimes it’s better to stay open and lose a little bit…
  • Temporary Shut Down: q = 0
    •  = Pq – (FC +VC)
    •  = 0 – (FC + 0)
    •  = - FC
    • Stay open if TR > VC
    • Shut down if TR < VC

$

MC

ATC

AVC

$35 = ATC1

Fixed Cost = $30,000

$25 = P1

MR1

$20 = AVC1

quantity

q1 = 2000

Stay open:  = -$20,000

Shut down:  = -$30,000

slide25

$480,000

$600,000

-$120,000

A competitive firm is maximizing profits by producing 600 units of output at the current market price of $800 per unit. The firm has AFC of $150 and total costs of $600,000 at this output level.

$ 90,000

$510,000

$1,000

$150

$850

$800

$800

Firm should shut down since TR < VC

-$90,000

shutdown recap
Shutdown recap
  • Shut down if TR < VC

Pq < (AVC)(q)

P < AVC

$

MC

Note:

The portion of the MC curve above the shutdown point is the firm’s supply curve

ATC

AVC

PSD = Min AVC

quantity

qSD

how should a business react if
How should a business react if…
  • Price rises?
  • Marginal costs rise?
  • Fixed costs rise?

I have to remember to think at the margin!

$

MC

ATC

AVC

P1

MR1

quantity

q1

long run equilibrium
Long Run Equilibrium

Firm =

  • A = TR – Explicit Costs
  • E = A - Implicit Costs

LRE: E = 0

Economy

A= 6%

7%

E= 0%

A= 9%

7%

E= 3%

0%

A= 6%

7%

E= 0%

A= 6%

7%

E= 0%

if E > 0  entry occurs

if E < 0  exit occurs

long run adjustment process
Long Run Adjustment Process

$

$

MC

ATC

S1

S2

P2

MR2

LRS

P1

MR1

D2

D1

Q1

Q3

Quantity

q1

q2

quantity

Industry

Firm

At P1: each firm produces q1 and earns E= 0

causes price to rise to P2

Long run supply curve

for a constant cost

industry is horizontal

Demand rises to D2:

At P2: each firm produces q2 and earns E> 0

Since E> 0 , new firms will enter: supply shifts to S2

Price will fall back to P1 and E= 0

slide30

The rutabaga market is perfectly competitive. Research is published claiming that eating rutabagas leads to gaining weight and so the demand for rutabagas permanently decreases. The permanent decrease in demand results in a

  • lower price, economic losses by rutabaga farmers, and entry into the market.
  • lower price, economic losses by rutabaga farmers, and exit from the market.
  • higher price, economic profits for rutabaga farmers, and entry into the market.
  • higher price, economic losses by rutabaga farmers, and exit from the market.
slide31

Suppose that newspaper companies are now required to use recycled paper, which is more expensive than new paper. Which of the following is most likely to result if the newspaper industry is highly competitive?

  • The firms’ costs will rise, resulting in positive economic profit in the short run and, hence, the industry supply curve will shift rightward in the long run
  • The firms’ costs will rise, resulting in economic losses in the short run and, hence, the industry supply curve will shift rightward in the long run.
  • The firms’ costs will rise, resulting in economic losses in the short run and, hence, the industry supply curve will shift leftward in the long run.
  • The industry supply curve will shift leftward in the short run, causing permanent long-run economic losses
slide32

Ian’s fixed cost of mowing lawns is $250 and his marginal cost is constant at $10 per lawn. If Ian mows 5 lawns in one day, what is his average total cost?

  • $25
  • $50
  • $60
  • $300
slide33

A wheat farmer operating in the short run produces 100 bushels of wheat. Her average total cost per bushel is $1.75, total revenue is $450, and (total) fixed costs are equal to $100. Then

  • average fixed cost is equal to $1.50.
  • profit per bushel is equal to $2.75.
  • average variable cost is equal to $1.25.
  • economic profit is equal to $250.
slide34

Business people often speak about price elasticity without actually using the term. Which of the following quotations describes an elastic demand for a product?

  • "A price cut won't help me. It won't increase my sales; I'll just get less money for each unit that I was selling before."
  • "I don't think a price cut will help my bottom line any. Sure, I'll sell a bit more, but what I may gain by selling more, I'll more than lose because the price will be lower."
  • "My customers are real shoppers. Since I cut my prices just a few cents below those my competitors charge, customers have been flocking to my store and sales are booming."
  • "The economic expansion has done wonders for my sales. With more people back at work, my sales are taking off, and I don't even have to reduce my prices."
slide35

A group of dairy farmers are trying to raise milk prices by 20%. If the price elasticity of demand for is 0.75, and the price elasticity of supply for milk is 0, then by how much should farmers reduce their milk production to obtain the 20% increase?

  • 2.7%
  • 7.5%
  • 15%
  • 20%
slide36
For which of the following is the cross-price elasticity of demand most likely a large positive number?
  • french fries and onion rings
  • DVDs and milk
  • hockey pucks and hockey sticks
  • All of the above are correct, because the cross-price elasticity is always a positive number.