Measures of Performance

1. Measures of Performance Concepts and Graphs

2. Performance • Profits • Efficiency • Technical – best technology (minimize cost) • Allocative – Marginal Benefit (P)=Marginal Cost (MC) • Deadweight Loss • Product Variety • Technical Progress

3. Efficiency • Only Perfectly Competitive markets are efficient • Many buyers and sellers • Homogeneous products • Easy entry • P = MC in the short run • P = MC = Min AC in the long run • Supply = Demand maximizes Economic Surplus, no Deadweight Loss

4. Efficiency • Departures from P=MC cause Deadweight Losses of Economic Surplus • P > MC May be associated with positive economic profit in monopoly and some oligopoly models (Bertrand, for example) • Long Run equilibrium in monopolistic competition has P > MC, but zero economic profit and a dead weight loss

5. Profit as a Measure of Performance • Economic vs. Accounting Profit • Data availability • Division or Subsidiary vs. Parent Corporation • Financial reports required only if stock is traded • High profit may indicate • Greater efficiency than other firms • Monopoly or collusive behavior • Even zero economic profit may be associated with positive deadweight loss in differentiated product markets

6. Deadweight Loss • Does Price exceed Marginal Cost? • DWL = ½ ΔP ΔQ = ½ (P-MC)(Qc-Q1) • Lerner Index and the Price-Cost Margin • (P-MC)/P = -(1/Ep) • At profit maximizing price and quantity • DWL = ½ PQ(-Ep)[(P-MC)/P]2 • Assuming (P-MC)/P is small • DWL increases with the size of the market (PQ), the price elasticity of demand, and the square of the price-cost margin

7. Variety and Progressivity • Does product variety offset DWL in differentiated product markets? • Technical Progress or Progressivity • Innovation in process or product technologies • Process innovation reduces cost • Production • Distribution • Advertising, marketing, etc. • Product innovation leads to new products