chapter 8: producers in the long-run
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Chapter 8: Producers In The Long-Run. All factors of production can be varied You can change your plant size. What is the long-run?. To maximize profits you must… minimize costs YAY. Profit Maximization & Cost Minimization. LRAC: Long Run Average Cost Curve - PowerPoint PPT PresentationTRANSCRIPT
Chapter 8:Producers In The Long-Run
What is the long-run?
All factors of production can be variedYou can change your plant size
Profit Maximization & Cost Minimization
To maximize profits you must…minimize costs
YAY
Long-Run Cost Curves
LRAC: Long Run Average Cost Curve◦Boundary between attainable and unattainable
costs◦3 parts:
Decreasing costs Constant costs Increasing costs
Long-Run Cost Curves
Decreasing costs◦Output increases more than inputs
Output 20% Inputs (Cost) 10%◦Why?
I don’t know But if I had to guess: larger plant sizes provide more
opportunities for specialization
This is also called: ◦Economies of Scale◦Increasing Returns to Scale
Long-Run Cost Curves
Constant costs◦Output increases the same as inputs
Output 20% Inputs (Cost) 20%◦Why?
Prolly cuz at some point you cannot specialize any further
◦Minimum Efficient Scale (WTF) Lowest quantity output at constant costs
This is also called: ◦Constant Returns to Scale
Long-Run Cost Curves
Increasing costs◦Output increases the same as inputs
Output 10% Inputs (Cost) 20%◦Why?
You so big you can’t even handle it
This is also called: ◦Diseconomies of Scale◦Decreasing Returns to Scale
Long-Run and Short-Run Together
SRATCs cannot lie below the LRAC
SRATC touches the LRAC at the optimal output for that plant size
Picture
The Very Long-Run
Technology can change! FINALLY!◦What does this mean?
Things can get better◦2 Ways:
New Techniques Improved Inputs
Firms choices in the long run:◦Cost of an input goes up:
Substitute Innovate Both
Chapter 9:Competitive Markets
Market Structure & Firm Behaviour
Market Structure:◦Number/Size of Sellers◦Extent of Knowledge ◦Degree of Freedom of Entry◦Degree of Product Differentiation
Market Power:◦How much a firm can influence the market
Perfect Competition
What does it look like?◦Homogenous Product◦Consumers Have Perfect Information◦Firms Are Small◦Freedom of Entry & Exit
What does this mean?◦Firms take it… price that is
Demand Curves: Perfect Competition
Demand for the whole market: negatively sloped
Demand for a single firm: flat◦Why?
Quantity (Millions of Tonnes)
D
D (Firm)
Quantity (Thousands of Tonnes)
•
S
Total, Average & Marginal Revenue
Total Revenue: TR = p × Q
Average Revenue: AR = TR ÷ Q
Marginal Revenue: MR = TR ÷ Q
For perfect competition:◦P = MR = AR
Short-Run Decisions
Should we produce?◦If you lose money at all levels of output, don’t
produce
How much should we produce?◦If we can make monies, produce at MR = MC◦This means we produce where MC = price
Short-Run Supply CurvesFirms only supply if the price is higher than
the cost!
MC
•
AVC
q0 q2q1 q3q2q1q0q3
•••
•
••
•S=MC
Price
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rs p
er
Unit
p3
p2
p1
p0
p3
p2
p1p0
Output Output
Short-Run Supply Curves
The supply curve for a market is the sum of all the firm’s individual supply curves
• • •
34 2Quantity Quantity Quantity
333
7
SA = MCA SB = MCB SA+B
121
22
2
Long-Run Decisions
Entry & Exit◦Positive Profits: Firms Enter◦Negative Profits: Firms Exit
Speed of Exit:◦How fast does capital become obsolete?◦Are your fixed costs sunk costs?
Long-Run Equilibrium
Supply = DemandNo Incentive For Entry & Exit
What does this look like?◦Firms Maximize Profit: Short-Run p=mc◦Zero Economic Profits◦At Minimum Point On LRAC
Chapter 10: Monopoly
Revenue Concepts
Downward Sloping Demand Curve
MR Cuts Demand Curve in Half
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-2-4-6-8
-10
Average revenue (demand curve)
•
•
•
•
••
••
••
••
•
•
••
•
•Marginal revenue
Dolla
rs
Short Run Profit Maximization
MR = MC
Go To Demand
This Is Price
Profits, Break Even, Loss
•
••
•
MRD
ATC1
ATC2
ATC3MCc3
c2 = p0
c1Pric
e
q0 Output
Inefficiency of Monopoly
Monopolies produce where MC is less than price
Equilibrium quantity is lower
Deadweight loss
Inefficient
Entry Barriers
If the monopoly makes mad cash in the long run others want in.
We need barriers:◦Natural monopolies
Electricity◦Created barriers:
Patent law Legislation Threat of price cutting
Cartels
Multiple firms acting as one
Essentially a monopoly
Reduce OutputRaise Price
••
qm qc
pmpc
D
S = MC
Output
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er U
nit
Problems Cartels Face
Incentive to CheatRestricting Entry
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rs
per U
nit
OutputOutput
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rs p
er U
nit
MR
•••
S
E
ATC MC
DQ1
p1p1
p0 p0
Q0 q2q1 q0
Market Equilibrium
Firm Incentives
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Price Discrimination
Pricing units of the same commodity differently◦Not based on cost
When is this possible?◦Market Power◦Know Consumers Valuations◦No Arbitrage
Forms of Price Discrimination
Price Discrimination Among Units of Output◦Charging the consumer’s value at each unit
Price Discrimination Among Market Segments◦Charging different prices to different groups◦Charge a higher price to the group with less elastic
demand
Hurdle Pricing◦Firms create an obstacle consumers must overcome to
get the lower price
Among Units of Output
Price
QuantityD
S
p6
q6q4q3q2q1 q5
Consumer surplus
p5
p4
p3
p2
p1
Among Markets
• •MCA MCB
DA
DBMRA MRB
Market A Market B
Price
Pric e
pApB
Output OutputQA QB
Consequences of Price Discrimination
Price discrimination (done well) is always more profitable than a single price
A monopolist that discriminates will sell more units
If price discrimination increases output, total surplus increases
No general relationship between price discrimination and consumer welfare
Chapter 11: Imperfect Competition
The Canadian Economy
2/3 of the Economy:◦Large number of small firms
1/3 of the Economy:◦Small number of large firms
Sometimes measured by concentration ratio◦Shows market share of largest producers
The Canadian Economy
Imperfect Competition
Have differentiated products
Firms “administer” (choose) their prices◦They are price setters
Price change is rare◦It is costly◦Easier to let output vary with demand
Non-Price Competition
Competing on things other than price:◦Advertising
Gain market share Shift demand curve
◦Competing on quality or guarantees
◦Erecting barriers to entry
Monopolistic Competition
Firms produce one variety of differentiated product
Negatively sloped demand curve◦Close substitutes
Firms ignore each other
Freedom of entry and exit
Monopolistic Competition
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rs p
er U
nit
ATCMC
D
MR
ESpS •
A Typical Firm in the Short Run
•
Output qS
The usual situation◦MR = MC◦Positive profits in this situation
Monopolistic Competition
Positive Profit???◦Firms enter the market
Excess capacity theorem◦Long run costs not minimized
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er u
nit
Output
••
• ECEL
pC
pL
qCqL
MR D
MC
LRAC
GOOD LUCK
A) Of course
B) Meh
C) Not my type
D) Shut up and teach me econ