470 WORKSHOP PLAN
JANUARY 2006
DR. SHINGLETON
DESIGNED IN NEW
TIMES ROMAN, 16 FONT, PORTRAIT, WITH 1.0 INCH SIDE MARGINS
ONLINE SAVED IN
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WORKSHOP
2. JAN24
ü
ASSIGNMENTS
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PROBLEMS
AND EXERCISES 5-2A 5-2B 5-3 5-5
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PROBLEMS
AND EXERCISES 6-3
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PROBLEMS
AND EXERCISES 7-2A
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EACH INDIVIDUAL
SHOULD BE PREPARED TO EXPLAIN THE ANSWER TO EACH ASSIGNMENT. THIS WILL BE PART
OF YOUR CLASSROOM PARTICIPATION GRADE.
ONLY ONE WRITTEN SET OF ANSWERS IS REQUIRED FROM EACH GROUP.
THE QUIZ WILL BE
AN APPLICATION OF THE TOOLS OF SUPPLY AND DEMAND.
REVIEW ANSWERS TO
EXAM
TONIGHT CH 5-6-7 COST, DECISION MAKING, AND COMPETITIVE MARKETS
PURPOSE:
ESTABLISH THE LOGIC OF THE SUPPLY FUNCTION
PRODUCTIVITY
DEFINE AS AVERAGE PHYSICAL PRODUCT OF
LABOR
OTHER FACTORS HAVE PRODUCTIVITY TOO
DIMINISHING RETURNS
OTHER FACTORS HELD CONSTANT
SPECIALIZATION AND RISING
MPPL
MCDONALDS
ADAM SMITH'S PIN
FACTORY
DIMINISHING RETURNS TO LABOR
USE
PRODUCTION
FUNCTIONS
MARGINAL (PHYSICAL) PRODUCT OF LABOR
COST CONCEPTS
SUNK COSTS
NOT RELEVANT TO PRODUCTION
DECISION
VALUABLE FOR LEARNING
FIXED COST
LONG RUN VS SHORT RUN
ALFRED MARSHALL'S CLOCK
VARIABLE COST
TOTAL COST
INTRODUCTION TO ATC (PER UNIT COST)
ATC = AVC + AFC AND SKETCH
THIS IS THE IMPORTANT PART
MARGINAL COST
MARGINAL VS dAVERAGE
HOW TO SHOW
INCREASE IN COST
FIXED COST
VARIABLE COST
5.3(PG 169)
LONG RUN AVERAGE
COST (LRATC)
ECONOMIES OF SCALE (FALLING LRATC)
DISECONOMIES OF SCALE (RISING LRATC)
CLOSING NOTES ON
LRATC
ALL COSTS ARE VARIABLE IN LONG RUN
NO LRATC, LRAVC, LRAFC
NOT JUST ALL LOW POINTS FROM ATC
CURVES
LRATC IMPLIES DEGREE OF COMPETITION
5.2A 5.2B (PG 169)
SHOWING COST IN
TABLE
5.5(PG 170)
CH 6: PROFIT
MAXIMIZATION
PROFIT AND
CAPITAL
ECONOMIC PROFIT
DEFINITION
ROLE
PROFITS
ACCOUNTING =
NORMAL + ECONOMIC
VENTURE CAPITAL
ROLE OF THE
ENTREPRENEUR
APPLE COMPUTER
MCDONALDS
HIGH FAILURE RATE/RISK
INNOVATION
PROFIT AVERAGES ONLY ABOUT 12% OF
INCOME
SURVIVORSHIP
PRINCIPLE I AND II
SHARE PRICES REFLECT EXPECTED FUTURE
PROFITS
BUYOUT OF FIRMS WHO DO NOT MAXIMIZE
PROFITS
IF EVERYBODY DOES IT IT MUST
BE CORRECT
PRICE TAKER VS
PRICE SETTER
PRICE TAKING FIRMS
LARGE NUMBER OF PRODUCERS
WITH
HOMOGENEOUS
PRODUCTS OR
REGULATED PRICE
LONG RUN: FREE ENTRY AND EXIT
COMPETITIVE
MARKETS, ASSUMPTIONS
ALL ARE PRICE TAKERS IN A COMPETITIVE
MARKET
MANY PARTICIPANTS
EASY ENTRY AND EXIT
PRICE MAKERS ARE IN OTHER KINDS OF
MARKETS
OPERATING RULES
FOR PRICE TAKING FIRMS
THIS IS THE
IMPORTANT STUFF
ALL CASES
REPRESENT PRICE TAKERS/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
MAX PROFIT MARGIN IS NOT MAXIMUM TOTAL
PROFIT
PROFIT = P*Q - ATC*Q
HOW TO SHOW ECONOMIC PROFIT
6.3(PG 194)
SUPPLY CURVE OF
FIRM
SHORT RUN FROM MC CURVE ABOVE AVC
LONG RUN FROM MC CURVE ABOVE ATC
INDUSTRY SUPPLY
FREE ENTRY/FREE EXIT
ECONOMIC PROFITS/LOSSES AS
MARKET SIGNALS
INDUSTRY SUPPLY CURVE... SHORT RUN
INDUSTRY SUPPLY CURVE... LONG RUN
THE ROLE OF EQUILIBRIUM AND
PROFITS
PRICE
SETTING FIRMS (EVERYONE ELSE)
DOWNWARD SLOPING DEMAND
CURVES
MARGINAL REVENUE
7.2A(PG
227)
EXAMPLES, AS TIME
PERMITS
NEXT TIME
MARGINAL REVENUE
USE STRAIGHT LINE DEMAND CURVES
CONSTRUCTION OF MR CURVE
WHAT DOES NEGATIVE MR MEAN?
MR = PNEW MINUS (
QOLD * PRICE REDUCTION)
ELASTICITY REVIEW
EXAMPLE: SELLING BASEBALL
CARDS
EXAMPLE
Q=1
P=$50 SALES
= 1*50 = $50 MR = $50
Q=2
P=$45 SALES
= 2*45 = $90 MR = $40
Q=3
P=$40 SALES
= 3*40 = $120 MR = $30
6.3(PG 194)
CASE STUDIES
SECOND QUIZ
GIVE COMPLETE ANSWERS
MAXIMUM 2 PAGES