Transcript TR, MR and Demand TR= PQ, MR= (TR)/
TR= PQ, TR, MR and Demand MR= D (TR)/ D Q |E|=1 D MR
Production and Costs an Economist’s view Q = f ( L, K,….) Short-Run (production): K – fixed Long-Run (planning): everything is flexible
Measures of productivity • Total product (TP) TP = Q (L, K) = L 1/2 K 1/2 Fixed vs variable proportion functions - Average Product (AP) APL = Q/L APK = Q/K - Marginal Product (MP) MPL = D Q/ D L
Law of Diminishing Marginal Product –
Seen in the slope of the MP curve
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More intense usage of fixed input by the variable inputs may initially increase Q; however, after a certain point inputs are less productive and produce less output for each additional input added
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Can employ additional inputs when MP is decreasing. Do not employ additional inputs when MP is negative
• Relationships between MP, AP, and TP If MP>0 then
TP
is rising If MP<0 then
TP
is falling If MP is rising then the output function is convex If MP is falling then the output function is concave MP as the slope of the production function
If MP>AP then AP is rising If MP
Costs of Production
fixed vs. variable vs. sunk
Opportunity cost (explicit + implicit) Cost of Labor: wage bill User Cost of Capital: Economic Depreciation + Interest Rate * Value of Capital
costs TC = w L + r K Variable (w L), fixed (r K) Averages: ATC = TC/Q AVC = TVC/Q AFC = TFC/Q Marginal: MC = D TC/ D Q = D TVC/ D Q
Some cost identities and profit maximization in the short-run • MC=MR • MC = w / MPL • W = VMPL=MR*MPL • AVC = w / APL
Long-run costs Everything is variable Isoquant and Isocost analysis & Input substitution
K C/r Isocost w L + r K = C -(slope) = (C/r)/(C/w) =
w/r
C/w L
K Isoquant Q = f ( L, K ) = constant -(slope) = (dK/dL) dQ = MPL dL + MPK dK dK/dL = MPL/MPK dK/dL – MRTS of labor for capital Set dL =1 L
K Equilibrium
cost minimization
MPL/MPK = w/r w/MPL = r/MPK
the last $ spent on capital brings the same change in output as the last $ spent on labor L
returns to scale
% change in inputs => % change in output (% D output) > (% D inputs) increasing returns Q = K a L b if a + b > 1 then we have increasing returns to scale.
economies of scale and the LRAC
specialization and technology
economies of scope
sharing of inputs
scope
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x
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Cost minimization
MPL/MPK = w/r w/MPL = r/MPK
the last $ spent on capital brings the same change in output as the last $ spent on labor
Profit maximization Profit = total revenues – total costs Profits are maximized when
MC = MR MC = W/MPL => W = MR * MPL
market structure oligopoly monopoly mc Perfect competition
Perfect competition and the internet -
Assumptions:
number of firms Ease of entry and exit Perfect information Identical transaction costs Homogeneous good Horizontal demand and MR. Shut down and break even price levels Long-run and cost structure of the industry
monopoly • Market power & MR • What is Monopoly and why do they exist?
natural monopoly barriers to entry (legal, brand loyalty….) is Microsoft a monopoly
?
Measures of monopoly power
elasticity approach Learner index (P-MC)/P
Monopolistic competition Large number of firms and heterogeneous goods
oligopoly Few players and strategic behavior Oligopolies arise because of the same reasons as monopolies.
Models for studying Oligopoly Kinked Demand Model (discontinuous MR) Cournot Duopoly Model Game Theory Bertrand and Stackelberg Models
Game theory Cooperative vs non-cooperative games Basic 2X2 game framework analysis Price leadership models,
airlines
Tacit collusion (explicit) Implicit collusions and the
MIT
case Tree form games and entry deterrence
Multi-plant production obtaining total MC Multi-market marketing price discrimination vs price differentiation obtaining total marginal cost curve