FILE: 251N06.HTML
2005SEP27/TO SEP29
CLASS NOTES FOR ECONOMICS 251
DR. WILLIAM SHINGLETON
THESE NOTES ARE FOR WEEK 6
REVIEW/COMPLETE COST
THE COMPETITIVE FIRM CH 22
PROFIT AND CAPITAL
NORMAL
PROFIT
DEFINITION
ROLE
ECONOMIC
PROFIT
DEFINITION
ROLE
PROFITS
ACCOUNTING
= NORMAL + ECONOMIC
NORMAL
= OPPORTUNITY COST OF RESOURCES
VENTURE
CAPITAL
ROLE OF
THE ENTREPRENEUR
APPLE
COMPUTER
MCDONALDS
HIGH
FAILURE RATE/RISK
NECESSARY
RESOURCE
NORMAL
PROFIT AS A COST
MINIMUM
PROFIT NECESSARY
CREATES/DESTROYS
MARKETS/JOBS/TECHNOLOGY
NO
CHEERS
SURVIVORSHIP
PRINCIPLE I AND II
BUYOUT
OF FIRMS WHO DO NOT MAXIMIZE PROFITS
SHARE
PRICES REFLECT MANAGEMENT'S EXPECTED FUTURE
PROFIT
STREAM
IF
EVERYBODY DOES IT IT MUST BE CORRECT
MARKET STRUCTURE
DEFINE
PLANT
FIRM
INDUSTRY
TYPES
OF INDUSTRIES/THE SPECTRUM
PERFECT
COMPETITION
MONOPOLISTIC
COMPETITION
OLIGOPOLY
DUOPOLY
MONOPOLY
PRICE TAKING FIRMS
CAUSE
TOO
SMALL TO MAKE A DIFFERENCE
LARGE
NUMBER OF PRODUCERS
HOMOGENEOUS
PRODUCTS
OR
REGULATED PRICE
GOAL:
ECONOMIC PROFIT
INDUSTRY
DEMAND VS FIRM DEMAND (SKETCH)
TOTAL
REVENUE
MARGINAL
REVENUE
OPERATING RULES FOR PRICE TAKING
FIRMS
START
MARKET
PRICE = MARGINAL REVENUE FOR FIRM
Q =
OPERATING RATE
ALL
CASES REPRESENT PRICE TAKERS AND QUANTITY ADJUSTERS
CASE
1... P < MIN AVC
SHORT
RUN
THE
INTERSECTION RULE
BEST Q
= 0
SHUT
DOWN PRICE
LOSS =
FIXED COST
LONG
RUN
LIQUIDATION
CASE
2... P > MIN AVC BUT P < MIN ATC
STRESS
NEED TO KNOW COST STRUCTURE
SHORT
RUN
CHOOSE
Q SUCH THAT MR = P = MC
BREAK
EVEN PRICE
LOSS
< FIXED COST
HOW TO
SHOW ECONOMIC LOSS
LONG
RUN
LIQUIDATION
CASE
3... P = MIN ATC
WHAT IS
SPECIAL ABOUT Q* ?
SHORT
RUN P VS AVC
SET Q
AT P = MR = MC
LONG
RUN P VS ATC
SET Q
AT P = MR = MC
HOW TO
SHOW ECONOMIC PROFIT (= 0)
CASE
4... P > MIN ATC
SHORT
RUN P VS AVC
SET Q
AT P = MR = MC
LONG
RUN P VS ATC
SET Q
AT P = MR = MC
PROFIT
MARGIN = P - ATC
MAXIMUM
PROFIT MARGIN IS NOT MAXIMUM TOTAL PROFIT
PROFIT
= P*Q - ATC*Q
HOW TO
SHOW ECONOMIC PROFIT
SUMMARY
SUPPLY CURVE OF FIRM
SHORT RUN FROM MC CURVE ABOVE AVC
LONG RUN FROM MC CURVE ABOVE ATC
INDUSTRY SUPPLY
INDUSTRY SUPPLY CURVE... SHORT RUN
ECONOMIC PROFITS AND LOSSES AS
MARKET SIGNALS
NO ENTRY/EXIT
THE ROLE OF EQUILIBRIUM
INDUSTRY SUPPLY CURVE... LONG RUN
ECONOMIC PROFITS AND LOSSES AS
MARKET SIGNALS
FREE ENTRY/FREE EXIT
THE ROLE OF EQUILIBRIUM
COMPETITIVE INDUSTRY
FREE ENTRY AND EXIT
HOMOGENEITY
MANY SELLERS
MANY BUYERS
EXAMPLES/AS TIME ALLOWS
STORY GUIDELINES
IT WAS
A DARK AND STORMY NIGHT...
NO,
THAT'S NOT IT. LET ME TRY AGAIN.
USE TWO
DIAGRAMS
ONE FOR
THE FIRM
ONE FOR
THE INDUSTRY
START
AT EQUILIBRIUM
END AT
EQUILIBRIUM
GIVE A
REASON FOR EACH AND EVERY CHANGE
THE
MOTIVATION OF THE FIRM IS PROFIT
SHOW
ECONOMIC PROFIT OR ECONOMIC LOSS
SHORTAGES/SURPLUSES
ARE INFORMATION SIGNALS
INDUSTRY
SUPPLY CURVE... SHORT RUN
INDUSTRY
SUPPLY CURVE... LONG RUN
THE
ROLE OF EQUILIBRIUM AND PROFITS
LONG RUN SUPPLY FOR EACH
EFFECT
OF DEMAND INCREASE FOR EACH