Outline For Lecture 15: Long-Run Production Costs

Outline For Lecture 15long Run Production Coststhe Long Run Cost Curve

Outline for Lecture 15 Long-Run Production Costs The Long-Run Cost Curve (five plant sizes) Suppose that a firm can operate in five alternative plants in the short run, Plants 1 through 5, with respective short-run average total cost curves (ATC1 through ATC5) illustrated by Figure 9.7. In this illustration, vertical white lines show levels of output at which firm should change its plant to achieve the lowest average total cost. To see why, suppose that firm produces an output of less than 20 units, say 15 units. In this case, lowest average total cost is achieved in Plant 1 because ATC1 lies below all other ATC curves for 15 units. Provided that plant is a variable resource in the long run, firm chooses Plant 1, indicating that blue section of ATC1 is part of firm’s long-run average total cost curve for output levels below 20 units.

Now, suppose firm raises production to somewhere between 20 and 30 units, say 25 units. In this second case, lowest average total cost is achieved in Plant ____ because ____ lies below all other ATC curves for 25 units. Provided that plant is a variable resource in the long run, firm chooses Plant ____, indicating that blue section of ____ is part of firm’s long-run average total cost curve for output levels between 20 and 30 units. Similarly, blue section of ____ is part of long-run average total cost curve for output levels between 30 and 50 units, blue section of ____ is part of long-run average total cost curve for output levels between 50 and 60 units, and blue section of ____ is part of long-run average total cost curve for output levels above 60 units.

Given these five cases illustrated by Figure 9.7, how do we obtain long-run average total cost curve? Is it smooth or bumpy? Explain. The Long-Run Cost Curve (unlimited plant sizes) The blue long-run average total cost curve in Figure 9.7 is drawn under the assumption that firm can operate in five alternative plants in the short run. However, in modern manufacturing industries (i.e., automobiles, pharmaceuticals, etc.) the number of possible plant sizes is many more than five.

In line with this reasoning, each red average total cost curve in Figure 9.8 represents a possible plant size in the short run. Given all these red curves illustrated by Figure 9.8, how do we obtain long-run average total cost curve? Is it smooth or bumpy? Explain. Economies and Diseconomies of Scale Shape of long-run average total cost curve (Figures 9.8 and 9.9) is explained via economies and diseconomies of scale.

Economies of Scale In the upper panel of Figure 9.9, economies of scale corresponds to ____ part of the curve; in the output range between zero and q1, average total cost ____ as production rises in the long run. Explain economies of scale: why is average total cost decreasing with rising output? Diseconomies of Scale In the upper panel of Figure 9.9, diseconomies of scale explains ____ part of the curve; in the output range above than q2, average total cost ____ as production rises in the long run. Explain diseconomies of scale: why is average total cost increasing with rising output? Materials for Lecture 15 Start with textbook to get familiar with content and progression of the lecture. Then, go to videos (and supplemental articles, if provided) for further clarification and additional examples. Textbook Read carefully pages 209 through 213 from textbook. Video Comprehensive video on long-run average total cost curve, economies of scale, and diseconomies of scale Article Article on cloud computing with a focus on economies of scale Outline for Lecture 16 Four Market Models Pure Competition What is the number of firms in a purely competitive market: one, few, many, or a very large number? How would you characterize products sold in a purely competitive market: unique, differentiated, or standardized? Provide an example of a purely competitive market.

Pure Monopoly What is the number of firms in a purely monopolistic market: one, few, many, or a very large number? How would you characterize products sold in a purely monopolistic market: unique, differentiated, or standardized? Provide an example of a purely monopolistic market. Monopolistic Competition What is the number of firms in a monopolistically competitive market: one, few, many, or a very large number? How would you characterize products sold in a monopolistically competitive market: unique, differentiated, or standardized? Provide an example of a monopolistically competitive market. Oligopoly What is the number of firms in an oligopolistic market: one, few, many, or a very large number? How would you characterize products sold in an oligopolistic market: unique, differentiated, or standardized? Provide an example of an oligopolistic market. Pure Competition: Characteristics and Occurrence Purely competitive markets have four main characteristics.

1. Very large numbers Referring to your example of a purely competitive market from above, how many firms would you expect to see in this market? How would you characterize the extent of interdependence; do one firm’s actions affect other firms? Explain. 2.

Standardized product Referring to your example from above, how similar are products sold by different firms? Do consumers prefer one firm’s product over another’s? Explain. 3. Price takers Referring to your example from above, how much of total output is produced by an individual competitive firm: all of it, a large fraction, or a small fraction?

Accordingly, would you characterize individual firm as a price maker or a price taker? Explain. 4. Free entry and exit Referring to your example from above, how would you characterize the ease with which firms can enter or exit competitive industries? Explain.

Materials for Lecture 16 Start with textbook to get familiar with content and progression of the lecture. Then, go to videos (and supplemental articles, if provided) for further clarification and additional examples. Textbook Read carefully pages 221 and 222 from textbook. Video Four market models Perfect competition in first three minutes Airline industry as an example of competitive markets (not a great one) in first five minutes Outline for Lecture 17 Demand as Seen by a Purely Competitive Seller Perfectly Elastic Demand Figure 10.1 and accompanying table present price, quantity, and revenue data for a purely competitive firm. In the first two columns, we see that market price remains fixed at ____ as quantity demanded increases from 0 to 10 units.

Explain why. As a result, competitive firm’s demand curve will plot as a ____ at the level of market price. Average, Total, and Marginal Revenue Total Revenue How do we define total revenue? According to Table 10.1, what is total revenue from selling one unit of output? How about two units?

Report the total revenue for all remaining output levels. Based on these data, how do we graphically illustrate total revenue? Average Revenue How do we define average revenue? In Table 10.1, what is average revenue from selling one unit of output? How about two units?

Report the average revenue for all remaining output levels. Based on these data, how do we graphically illustrate average revenue? Does average revenue curve coincide with demand curve? Explain. Marginal Revenue How do we define marginal revenue?

In Table 10.1, what is marginal revenue from first unit of output? How about second unit? Report the marginal revenue for all remaining output levels. Based on these data, how do we graphically illustrate marginal revenue? Does marginal revenue curve coincide with demand and average revenue curves?

Explain. Profit Maximization in the Short Run: Marginal Revenue-Marginal Cost Approach Profit maximization by a competitive firm in the short run rests on two cases regarding marginal revenue and marginal cost. Case 1 Assuming that producing is preferable to shutting down in the short run, competitive firm should produce any unit of output whose ____ exceeds ____. Explain why. Case 2 Assuming that producing is preferable to shutting down in the short run, competitive firm should not produce an output level if ____ exceeds ____.

Explain why. Rule Combining these two cases, we obtain the following rule As long as producing is preferable to shutting down, competitive firm maximizes profits in the short run by producing the level of output at which marginal revenue ____ marginal cost. Materials for Lecture 17 Start with textbook to get familiar with content and progression of the lecture. Then, go to videos (and supplemental articles, if provided) for further clarification and additional examples. Textbook Read carefully pages 222 through 226 from textbook.

Video Competitive markets, determination of market price via industry demand and industry supply, and output determination by competitive firm in first five minutes Graphical analysis of profit maximization Comprehensive video on competitive markets answering questions from Lectures 16 and 17 Outline for Lecture 18 Depending on market price (determined by market demand and market supply), competitive firm faces three scenarios in the short run: profit maximization, loss minimization, and shutdown. Profit-Maximizing Case First five columns of the table accompanying Figure 10.3 present cost data for a competitive firm. In the 6th column, we have the market price of ____, which also equals marginal revenue.

Applying MR = MC rule, how many units of output will competitive firm produce to maximize profits in the short run? Explain. Total profit equals per-unit profit multiplied by quantity sold. What is per-unit profit in this case? What is quantity sold?

Given these two figures, what is total profit? Figure 10.3 illustrates profit-maximizing case: average variable cost (AVC) curve and average total cost (ATC) curve are U-shaped; marginal cost (MC) curve is also U-shaped and it intersects AVC and ATC at their ____; MR = Price line is drawn at the market price of ____. In applying MR = MC rule, we look for the intersection of ____ with ____, which yields an output of ____ units. At this output level, market price (P) of ____ exceeds average total cost (A) of ____, thereby producing a per-unit profit of ____. Per-unit profit is multiplied by output produced to give a total profit of ____, which is illustrated by the area of ____.

Loss-Minimizing Case If market price falls to $81, competitive firm will face loss minimization. First five columns of the table accompanying Figure 10.4 present cost data. In the 6th column, we have the new, lower market price of ____, which also equals marginal revenue. Applying MR = MC rule, how many units of output will competitive firm produce to minimize losses in the short run? Explain.

Total loss equals per-unit loss multiplied by quantity sold. What is per-unit loss in this case? What is quantity sold? Given these two figures, what is total loss? Figure 10.4 illustrates loss-minimizing case.

It is identical to Figure 10.3, except MR = Price line is drawn at the new, lower market price of ____. In applying MR = MC rule, we look for the intersection of ____ with ____, which yields an output of ____ units. At this output level, average total cost (A) of ____ exceeds market price (P) of ____, thereby producing a per-unit loss of ____. Per-unit loss is multiplied by output produced to give a total loss of ____, which is illustrated by the area of ____. Shutdown Case If market price falls further to $71, competitive firm will shut down in the short run.

First five columns of the table accompanying Figure 10.4 present cost data. In the 8th column, we have the new, lowest market price of ____, which also equals marginal revenue. In the 9th column, what is total loss at an output of zero? How about an output of one? Report the total loss for remaining output levels.

Based on these figures, what is the best short-run decision for competitive firm: keep producing or shut down? Explain. Materials for Lecture 18 Start with textbook to get familiar with content and progression of the lecture. Then, go to videos (and supplemental articles, if provided) for further clarification and additional examples. Textbook Read carefully pages 226 through 230 from textbook.

Video Profit-maximizing case after three minute mark How falling market price leads to loss-minimizing and shutdown cases BUSN-2380 Critical Thinking Grading Rubric Points: Emerging 0 2 Developing 4 6 Integrating 8 10 Analysis: To scrutinize parts of a whole (data, facts, objects, words, details) for significance and relevance · Does not identify or expresses confusion about parts (problems, arguments, points of view, etc.) · Does not apply basic concepts involved · Does not recognize biases or multiple points of view · Does not acknowledge uncertainties · Partially identifies relevance of parts (problems, arguments, points of view, etc.) · Partially applies basic concepts involved · Partially recognizes biases or multiple points of view · Partially acknowledges uncertainties · Accurately and thoroughly identifies all relevant parts (problems, arguments, points of view, etc.) · Accurately and thoroughly applies basic concepts involved · Fully recognizes biases and multiple points of view · Acknowledges uncertainties Evaluation: To make judgments according to appropriate criteria · Does not evaluate based on logic and context · Does not assess quality of evidence or distinguish between facts, opinions, and assumptions · Does not identify the weak and strong points of a problem, argument, or point of view · Does not recognize counterpoints or counterarguments · Partially evaluates based on logic and context · Partially assesses quality of evidence and distinguishes between facts, opinions, and assumptions · Partially identifies the weak and strong parts of a problem, argument, or point of view · Partially recognizes counterpoints or counterarguments · Evaluates based on logic and context · Thoroughly assesses quality of evidence and distinguishes between facts, opinions, and assumptions · Thoroughly identifies the weak and strong parts of a problem, argument, or point of view · Fully recognizes counterpoints or counterarguments Inference: To hypothesize and develop conclusions based upon facts, reasons, observations, and evidence · Recognizes only one “correct” answer instead of a variety of possible conclusions or outcomes · Does not develop a reasonable hypothesis or conclusion · Does not draw a hypothesis or conclusion based on evidence and reasoning · Recognizes some possible conclusions or outcomes · Develops a hypothesis or conclusion that cannot be fully supported · Draws a hypothesis or conclusion based on partial evidence or incomplete reasoning · Recognizes multiple conclusions or outcomes · Develops a reasonable hypothesis or conclusion that can be fully supported · Draws a hypothesis or conclusion fully based on evidence and reasoning Deduction: To use premises or generalizations to draw conclusions in a specific situation · Does not draw conclusions that can be supported by evidence and reasoning · Does not identify the appropriate general premises · Does not apply basic concepts involved · Draws conclusions that can be partially supported by evidence and reasoning · Identifies some general premises · Partially applies basic concepts involved · Accurately develops conclusions based on evidence and reasoning · Identifies applicable general premises · Accurately and thoroughly applies basic concepts involved