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Chapter 8: Producers In The Long-Run

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

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Chapter 8: Producers In The Long-Run

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  1. Chapter 8:Producers In The Long-Run

  2. All factors of production can be varied • You can change your plant size What is the long-run?

  3. To maximize profits you must…minimize costs • YAY Profit Maximization & Cost Minimization

  4. LRAC: Long Run Average Cost Curve • Boundary between attainable and unattainable costs • 3 parts: • Decreasing costs • Constant costs • Increasing costs Long-Run Cost Curves

  5. 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

  6. Constant costs • Output increases the same as inputs • Output 20% Inputs (Cost) 20% • Why? • Prollycuz 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

  7. 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 Cost Curves

  8. SRATCs cannot lie below the LRAC • SRATC touches the LRAC at the optimal output for that plant size Long-Run and Short-Run Together

  9. Picture

  10. 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 The Very Long-Run

  11. Chapter 9:Competitive Markets

  12. 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 Market Structure & Firm Behaviour

  13. What does it look like? • Homogenous Product • ConsumersHave Perfect Information • Firms Are Small • Freedom of Entry & Exit • What does this mean? • Firms take it… price that is Perfect Competition

  14. Demand for the whole market: negatively sloped • Demand for a single firm: flat • Why? S D (Firm) • D Quantity (Millions of Tonnes) Quantity (Thousands of Tonnes) Demand Curves: Perfect Competition

  15. Total Revenue: TR = p × Q • Average Revenue: AR = TR ÷ Q • Marginal Revenue: MR = TR ÷ Q • For perfect competition: • P = MR = AR Total, Average & Marginal Revenue

  16. 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 Decisions

  17. Firms only supply if the price is higher than the cost! S=MC MC Dollars per Unit Price • p3 p3 • AVC • p2 p2 • • p1 p1 • p0 • p0 • q0 q1 q2 q3 q0 q1 q2 q3 Output Output Short-Run Supply Curves

  18. The supply curve for a market is the sum of all the firm’s individual supply curves SA =MCA SB = MCB SA+B 3 • 3 • 3 • 2 2 2 1 1 2 4 3 2 7 Quantity Quantity Quantity Short-Run Supply Curves

  19. 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 Decisions

  20. Supply = Demand • No Incentive For Entry & Exit • What does this look like? • Firms Maximize Profit: Short-Run p=mc • Zero Economic Profits • At Minimum Point On LRAC Long-Run Equilibrium

  21. Chapter 10: Monopoly

  22. Downward Sloping Demand Curve • MR Cuts Demand Curve in Half Average revenue (demand curve) 10 8 6 4 2 0 • • • • • • • • Dollars • • • • • • -2 -4 -6 -8 -10 • • • Marginal revenue • Revenue Concepts

  23. MR = MC • Go To Demand • This Is Price • Profits, Break Even, Loss ATC3 MC • c3 ATC2 c2 = p0 • ATC1 Price c1 • • D MR q0 Output Short Run Profit Maximization

  24. Monopolies produce where MC is less than price • Equilibrium quantity is lower • Deadweight loss • Inefficient Inefficiency of Monopoly

  25. 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 Entry Barriers

  26. Multiple firms acting as one • Essentially a monopoly • Reduce Output • Raise Price S = MC Dollars per Unit pm pc • • D qm qc Output Cartels

  27. Incentive to Cheat • Restricting Entry Market Equilibrium Firm Incentives Dollars per Unit S MC ATC Dollars per Unit p1 p1 E p0 • • p0 • D MR 0 Q1 Q0 0 q1 q0 q2 Problems Cartels Face Output Output

  28. Pricing units of the same commodity differently • Not based on cost • When is this possible? • Market Power • Know Consumers Valuations • No Arbitrage Price Discrimination

  29. 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 Forms of Price Discrimination

  30. Consumer surplus S p1 p2 p3 p4 p5 p6 Price D Quantity q1 q2 q3 q4 q5 q6 Among Units of Output

  31. Price Price Market B Market A pA pB MCB • MCA • DB DA MRA MRB Output QB Output QA Among Markets

  32. Price discrimination (done well) is always more profitable than a singleprice • 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 Consequences of Price Discrimination

  33. Chapter 11: Imperfect Competition

  34. 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

  35. The Canadian Economy

  36. 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 Imperfect Competition

  37. Competing on things other than price: • Advertising • Gain market share • Shift demand curve • Competing on quality or guarantees • Erecting barriers to entry Non-Price Competition

  38. Firms produce one variety of differentiated product • Negatively sloped demand curve • Close substitutes • Firms ignore each other • Freedom of entry and exit Monopolistic Competition

  39. The usual situation • MR = MC • Positive profits in this situation A Typical Firm in the Short Run Dollars per Unit MC ATC ES • pS D • MR qS Output Monopolistic Competition

  40. Positive Profit??? • Firms enter the market • Excess capacity theorem • Long run costs not minimized Dollars per unit MC LRAC EL pL • EC • pC • D MR qL qC Output Monopolistic Competition

  41. Of course Meh Not my type Shut up and teach me econ GOOD LUCK

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