tr, mr and demand tr= pq,mr= (tr)/ q d mr |e|=1
TRANSCRIPT
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TR, MR and Demand
TR= PQ, MR=(TR)/Q
D
MR
|E|=1
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Production and Costsan Economist’s view
Q = f ( L, K,….)
Short-Run (production): K – fixed
Long-Run (planning): everything is flexible
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Measures of productivity
• Total product (TP)
TP = Q (L, K) = L1/2 K1/2
Fixed vs variable proportion functions
- Average Product (AP)
APL = Q/L APK = Q/K
- Marginal Product (MP)
MPL = Q/L
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Law of Diminishing Marginal Product– Seen in the slope of the MP curve
– More intense usage of fixed input by the variable inputs may initially increase Q;however, after a certain point inputs are lessproductive and produce less output for each additional input added
– Can employ additional inputs when MP is decreasing. Do not employ additional inputs when MP is negative
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• 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<AP then AP is falling
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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
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costs
TC = w L + r K
Variable (w L), fixed (r K)
Averages:
ATC = TC/Q AVC = TVC/Q AFC = TFC/Q
Marginal: MC = TC/Q = TVC/Q
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Some cost identities and profit maximization in the short-run
• MC=MR
• MC = w / MPL
• W = VMPL=MR*MPL
• AVC = w / APL
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Long-run costs
Everything is variable
Isoquant and Isocost analysis
&
Input substitution
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Isocostw L + r K = C
L
K
C/w
C/r-(slope) = (C/r)/(C/w) = w/r
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IsoquantQ = f ( L, K ) = constant
K
L
-(slope) = (dK/dL)dQ = MPL dL + MPK dK
dK/dL = MPL/MPKdK/dL – MRTS of labor for capitalSet dL =1
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Equilibriumcost minimization
MPL/MPK = w/rw/MPL = r/MPK
the last $ spent on capital brings the samechange in output as the last $ spent on labor
K
L
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returns to scale% change in inputs => % change in output
(% output) > (%inputs) increasing returns
Q = KL if > 1 then we have increasing returns to scale.
economies of scale and the LRACspecialization and technology
economies of scopesharing of inputs
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Cost minimization
MPL/MPK = w/rw/MPL = r/MPK
the last $ spent on capital brings the samechange in output as the last $ spent on labor
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Profit maximization
Profit = total revenues – total costs
Profits are maximized when MC = MR
MC = W/MPL => W = MR * MPL
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market structure
monopoly Perfectcompetition
oligopoly mc
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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
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monopoly
• Market power & MR• What is Monopoly and why do they exist?
natural monopolybarriers to entry (legal, brand loyalty….)
is Microsoft a monopoly?Measures of monopoly power- elasticity approach- Learner index (P-MC)/P
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Monopolistic competition
Large number of firms and heterogeneous goods
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oligopoly
Few players and strategic behaviorOligopolies arise because of the same reasons as
monopolies.
Models for studying OligopolyKinked Demand Model (discontinuous MR)Cournot Duopoly ModelGame Theory Bertrand and Stackelberg Models
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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
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Multi-plant productionobtaining total MC
Multi-market marketingprice discrimination vs price differentiationobtaining total marginal cost curve