1. Chapter 7 Production, Firms and the Market

2. Profit & the Firm The Bottom Line Incentive and reward for risks Leads to better decision making and greater productivity Accounting profit = revenue – costs Revenue = price x quantity Costs = Fixed Costs + Variable Costs Short Run – at least one resource cant be changed Long Run – all costs, including buildings, can be variable

3. Production Marginal Revenue is the additional revenue earned producing one more unit of output Marginal Cost is the additional cost of that unit Profit maximized where MR = MC Productivity – maximize output from resources used Efficiency – producing at lowest cost

4. Productivity factors Skills, education, experience of workforce Quantity and quality of resources State-of-the-art machinery Aim to lower cost per unit Capital-intensive (using machines) vs. Labour- intensive Economies of scale relates to the efficient use of machinery Producing more output lowers the cost per unit

5. Useful Formulas Total Revenue = Price x Quantity Total Costs = Fixed Costs + Variable Costs Average Cost = Total Cost / Quantity Average Variable Cost = Variable Cost / Quantity Marginal Revenue = Total Revenue / Total Quantity Marginal Cost = Total Cost / Total Quantity Profit Max. Point where Marginal Revenue = Marginal Cost Profit in $ = Total Revenue – Total Costs

6. Perfect Competition many buyers and sellers identical product price taker … no control over price no barriers to entry little non-price competition may not actually exist

7. Perfect Competition Profit Maximization Quantity Revenue D=AR=MRP AC AVC Revenue Rectangle Cost Profit MC Profit Max Profit Max Quantity

8. Monopolistic Competition Many firms Similar product Some influence over supply and price Easy entry Non-price competition high

9. Monopolistic Competition Profit Maximization Quantity RevenueD=AR MR MC AC Profit Cost P Q

10. Oligopoly Few firms dominate Products may be similar or different Influence over price varies Barriers to entry high Non-price competition high

11. Oligopoly Profit Maximization Quantity Revenue D=AR AC MC MR P Q Cost Profit Kink

12. Monopoly One firm dominates Unique product Price maker and control over supply Barriers to entry very high No need for non-price competition

13. Monopoly Profit Maximization Quantity Revenue MC AC Profit Cost P Q D=AR MR Profit max Note: Similar to Mono. Comp. but more inelastic demand curve

14. Issues Natural Monopoly – where high fixed costs make one firm the choice (e.g. utilities like public transit) Deregulation – allow competition Privatization – sell public assets to private interests Fewer bigger firms may mean collusion Third-party costs – social costs such as pollution are borne by others Public-Private Balance – govt as a provider of goods and services (health, education, etc.) increased in last 40 years as deficits soared Regulation – firms may prefer less but govt must balance with needs of individuals