Midterm 2 Outline PDF

Midterm Chapter 11 Do OrganizationalTheory 1 EEff.rs of production how activities are organized in firm relative...

Midterm Chapter 11 Do OrganizationalTheory 1 EEff.rs of production how activities are organized in firm relative to costs 2 Produce goodsand services internal vs contracting production Make or Buy Decision 3 sell producedgoods and services Goal of the firm is to max profits T TR TC Accounting costs focus on explicitcosts contractual Economic costs focus explicitandimplicit costs opportunity costs on EconomicProfit explicitandimplicit revenue explicitandimplicit costs 1 Short Run Long Run all inputs are variable I some inputs are fixed not a set length of time 1 less flexible to change inputs flexible to change inputs The law of diminishing margina productivity with each additional variable input added to an existing fixed unit marginal output will fall law does not apply to longan because all inputs are variable I Lecosts are costs that change as output changes  ge ge TC FC VC Image affects cost Advertising consumers ATC TC Q buying a more expensive good bc it's considered higher AFC FC Q quality AVC VC Q Cost Curves AFC curve is downward sloping as output increases the fixed costis spread over a largequantity Average curves have a U shape be as inputincreases productivityfalls then marginal and average costs rise When the productivity curves are falling the correspondingcost curves are MC intersects AC curves rising explaing why at lowestpoint Me ATC then ATC is rising MC ATC ATC is at its lowest MC ATC ATC is falling Lecture RSI means comparing costs vs benefits Ex College Expense E 408 Fs Ex Costof a Hood Nascar Econcost Incomforegone because they Econ cost advertisement AccountingCost Tuition can't affordto car is like a billboard Room and Board 0 take the bus cost vs benefit time income human forgone capital 1 Firm is a bundle of contracts combinesinputs corporation haslimited liability butarelegally Land considered people ital  verticalscope make or buy Horizontalscope whatproducts to produce toproduce an output Geographicscope where to operate separation ofownership and Control managersdon'town firm owners don'tmanage CSR Corporation SocialResponsibility Profitability andreputationeffect firmsthatoutwardly displayprofitmaximizing don'tappealto consumers Principleagentproblem avoid solution changeIncentives Shirking pay a manager basedon the an employee acts responsibility in their own self GoldPlating interest contraryto profits of a firm relativeto principles theft overcompensating the profits ofotherfirms in company medtests the indus Chapter 12 Technical Efficiency fewinputs aspossible to produce a given output Economic Efficiency lowestpossible costto produce a given output Ex Land is more abundant thanlabor more econ efficient Economies of scale when LRAC decrease as outputincreases veryimportant atlow levels of production indivisible setup cost a set upcostthatrequires a certain amountofinput ex steelfurnace influence the shape of the LongRun Total Costcurve  ong ge LongRun when average eqnoiEGYMMIMfiseconomi.es average cost is cost curve of ofscale at a minimum there 1 constant is an efficient level Engin retire of production diseconomies of scale wheJACincraes as outputincreases however only occurs when no input is fixed Is not the same as LDMP centretunescal Ex Apple has large when LRAC do not change with an increase Economies of in output scale Social Dimensions as the firm increases monitoring costs increase team spiritdecreases EnvelopeRelationship Long run costs will always be lessthan or p n equal to short run costs because all inputs are variable Echini c additional constraints always raise cost 70 Economies of scope cost of producing goods are interdependent so it's less costly for a firm to produce an additionalrelated good Ex Nike workers becomemoreproductivethe longerthey work learning by doing Technological change alter production costs Moore's Law cost of computing will fall over time these are Ex chicken genetically engineered meat related utputs shouldweproducemore orless dimentions to output qualitymarketing appearance  Perfect Competition where Chapter 13 economic forces are unimpeded Forperfectcompetition Pareto Optimality 1 both buyers and sellers are pricetakers a state of resource allocation elastic demand where it is impossible to make 2 no barriers to entry while a personbetter off 3 products are identical making someone worse off 4 symetrically informed buyers andsellers ignoresjealousy In perfectcompetition demand curve is perfectly elastic for a particular firm actionswon't effect the market be its so small Profit Maximizing Firms maximize profit where MC MR as long as MC MR it makes sense to increase production for a competitive firm MR P profitmaximizing firms only care if an increase in output will increase total profits doesn't matter how much by curve is the The Marginal Cost Curve is the supply_the sumation of the curve MC curve tells a firm how much it should produce at a certain price MC MR idicates at whatoutput is firm maximizingprofits a steps to find graphically 1 identify MC MR 2 draw a line vertically and identify its intersection with ATC curve 3 Draw a dotted horizontal line from bothintersecti to the price cost curve only represents 1 individual firm 4 The area aboveATC is profit Shutdown Point locatewhere MC AVC if price is less than this point the firm will not produce I P minimum of AVC the firm will continue to produce in the short run abovethe shutdownpoint the MC is the supply anddeterminesproduction Short Run Market market supply curve isjust thehorizontal sum of all the firms marginal cost curves Zero profit Long Run Competitive Equilibrium in the long run firms enter and exit the market neithereconomic profit or lossis possible firms enter the market becausethere is an incentive which shift supply to the right decreaseand as market supply increases marketpricewill reduce profits this will in turn make firms exit the market increasing price only at zero profitdo entryand exit stop short in the long run adjustment is done by quantity wheras in the run price does the adjusting An increase in demand Finding Output Price Profit higher output same price MC 1 1 demand shifts out 1 2 priceincreases outputincreases ATC 3 Newfirmsentermarket 1 JY ftp 4 Shift in supplycauses price I totall I Long Run Supply is perfectly 1 elastic constantcostindustry I short run profitincentives point  new firms enter Lecture The cost of producing shoes in a plannedeconomy is the same in a market economy plannedeconomomy firms aren't profit maximizers venture capital firms search for firms that aren't profit maximizers this is how the stock market diciplinesthose firms Share price presentvalue of a future stream of income rate of return will outweigh initial cost cost efficient control costs better than competitor Sum of the portion above AFC curve correlatesto supply Pareto optimality everyone is better off Involuntary wealth transfer theft  Chapter14 Monopoly where one firm makesup the entire market a monopoly considers how it can manipulateoutput to affectprice Price notinterested in consumer benefit firm faces no competitors Maker Model of Monopoly a monopolist's marginal revenue is always below its price because an increase in output lowers the price of all previous units Ex Art work is more valuable if it's one of a kind Questions to ask MR intersects 1 Whatoutput halfway in a 2 What price can it charge monopoly MR MC applys to monopolies Q Determinesprofit maximizing quantity when MR MC firm is maxingiz in profit Short Run MRI MC profitsbyincreasing output Monopoly Supply curve MR LMCprofitsbydecreasingoutput is nonexistent and Perfect Comp Comparing Monopoly MC Effton t.it imIiiyEfyii is price higher is MC MR restrictsoutput marginal revenue is below its price equilibriumoutput is differentfrom competitivemarket LR SR are the In monopoly Price is greater than same marginal cost because firm produces at MR MC Finding OutputandPrice look at ATC curves 1 draw MR curve 2 MR MC PandQ 3 identify 4 P ATCprice Ap 5 Ap Q total Ti Profit Break Even Loss P ATC P ATC PLATC Patent legalmonopoly creativemonopoly product so good that no other firm can producea sub gov'tsupports short run monopolies displaysinnovation and economic growth Wellfare Loss from Monopoly In a monopoly higher prices can lead to a deadweightloss of economic welfare Consumerchoices are distorted less incentive to increase out put Price discriminate demand a higherprice than those with charges people with elastic an inelastic demand This increases total profit can eliminate welfare loss becausethe MR is the demand curve will increase output in turn increasing well fare price discriminatingmonopolists produce at the competitive marketprice MC MR D higher outputthan normal monopolist Barriersto entry are essential to Monopoly 3 barriers to entry 3 Government 1 htiltp i a ing h t tps.lt pricethen 2 or more firms ataoner Restrictions a good more totalcostfalls with higheroutputs efficient possibility of wellfaregain mareautpurtice  p platform firms you are the product have first mover advantage benefits have network externalities Monopolistic CompetitionEx SoapIndustry differentiated products and few barrier to entry many firms selling 4 distinguishing characteristics 1 Many Sellersfirms don'tconsiderrivals reactions 2 Product differentiation Ex Ketchup 3 Multipledimensions of competition advertising compare marginalcostto marginalbenefits andchange competition dimensions until theyreequal 4 Ease of Entry of new firms in LR Economicprofitin LR 0 firm monopoly Monopolistic to IFBTE Bilmogeneous comp Exfasto unique Advertising and Monopoly goal of advertising shifting or maintaining demand curve to the right advertising increasesTotal costs Int monopolist competition the point in which a firm produces is not at the ATC lowest its where MR MC with point a vertical line Price is higher than marginal cost Monopoly Long Run equilibrium P ATC M R MC  Lecture GameTheory Split orsteal strategy negotiation Demand Curve AverageCost ATC tells usprice profits TC AC Q and total Revenue ostT p marg.int variabecost tells us aboutsupply tells us shutdownpoint MC MR optimal the firm isn't even covering quantity variable costs Monopolyindicates a market failure or imperfect competition must define what the market is before considering a monopoly Monopoliesreduce consumerwell fare cross elasticity measures 2 products substitutability Price Maker Conditions low crosselasticity demand in a highmathetshe no substitutes monopoly highentrybarriers Good Bad Monopoly YingYang Monopoly Patent reduceconsumer wellfare cartel when firms conspiretogether to restrict output free rider firm joins themarket be of a incentiveand produces at a higheroutput cheating firm with in cartel Sherman Act Makes cartels illegal Deadhand of monopoly generates less surplus and is less efficient price discriminating firms capture all the surplus consuming Pms a Monopolies charge a price above marginal cost misis bad because ff 1 reduces consumer wellfare 2 lowers output 3 deadweightloss MR Monopolies engage in Price Discrimination preventsarbitrage Ex coupons Per no consumer surplus Its maximize profits p2 p2 p3 Q p GaryBecker RSI Daniel Kahneman peopledon't think rationally ppl emotional are Alfred Marshal elasticity scicors of SandD  EI.nl i I i zero econ ii profits p market s Per Individualfirm 9 92 incentive for new firms Supply shifts Profiting  IF LR EquilibriumPC Market p n a MC ATL f mm 0 Q Cartel firm wiiiiiiti IU. vi iai Cartel q q Pr Ñ 11kg bePro if Y won'tproduce isthe fd 1 have a loss fmqyfffimmefifn.peprofitanemonetofindcans andoutput individual youdivideby how memberstheyare many 0 q q 93 cheating