Transcript Overview Of Course

Firms: Legal Forms
1.
2.
3.
4.
Corporation and Proprietorships.
Corporations which use stock have two
advantages: limited liability and transferability
of ownership. Disadvantages: the corporate
income tax and costs of incorporation.
Proprietorships have unlimited liability and can
not be transferred. They do not have to pay
corporate income tax, however. (New hybrid
forms).
Firms in our theory produce output in order to
maximize profit. Marginal Analysis will help us
understand profit maximization.
1
Marginal Analysis
1.
2.
3.
4.
5.
Relationship between Total, Average, and
Marginal Magnitudes?
You already have experience – you have been
calculating your ‘average’ since elementary
school. Each test is a ‘marginal’ score.
Useful in Understanding Profit Maximization.
Total Revenue is defined as Price multiplied by
Quantity.
MR is the change in TR when another unit
is sold.
2
Marginal Analysis - Demand
1.
Note Relationship between elasticity
and Marginal Revenue.
Quantity
Demanded
1
2
3
4
5
6
7
8
9
10
Price
75
60
48
35
26
17
11
6
2.5
1
3
Total
Marginal Arc Elasticity (based on
Revenue Revenue
average Q and P)
75
75
120
45
3
144
24
1.8
140
-4
0.9121
130
-10
0.7531
102
-28
0.4343
77
-25
0.3590
48
-29
0.2267
22.5
-25.5
0.1429
10
-12.5
0.1228
More Marginal Analysis
Price
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Quantity
Demanded
60
66
74
83
96
110
130
165
190
225
250
270
285
290
294
4
Total
Revenue
900
924
962
996
1056
1100
1170
1320
1330
1350
1250
1080
855
580
294
Marginal
Revenue
Arc Elasticity (based on
average Q and P)
4.0000
4.7500
3.7778
4.6154
3.1429
3.5000
4.2857
0.4000
0.5714
-4.0000
-8.5000
-15.0000
-55.0000
-71.5000
1.3810
1.5429
1.4331
1.6704
1.4272
1.5833
2.0169
1.0563
1.0964
0.5789
0.3462
0.1892
0.0435
0.0205
Marginal Costs and Profit
Quantity
Used
0
1
2
3
4
5
6
7
8
9
Output
10
15
25
42
58
73.5
87
100
110
115
Fertilizer
Output Price
Price
12
150
5
Marginal
Product
Marginal
Revenue
Product
5
10
17
16
15.5
13.5
13
10
5
60
120
204
192
186
162
156
120
60
Total Revenue
120
180
300
504
696
882
1044
1200
1320
1380
Marginal
Fertilizer
Total Cost
Cost
0
150
150
300
150
450
150
600
150
750
150
900
150
1050
150
1200
150
1350
150
Profit
120
30
0
54
96
132
144
150
120
30
Profit Maximization
1.
Marginal Analysis
2.
TR= PxQ
Calculus leads to MR=MC conclusion;
Alternatives to Calculus
AR = demand curve; marginal revenue
curve must lie below demand curve
Profit maximized when TR-TC is greatest
(vertical difference)
this implies slope of TR = slope of TC which
means that MR=MC
3.
4.
5.
6.
7.
6
Some simple Calculus


 Q
=
=
TR
 TR
 Q
-
 TC
 Q
Max


so
=
P
=
( 1
e
where
7
+
P
=
-
MR

 Q
Also
=
P

TC
=
MR
TR
 TR
 Q
-
=
MC
0
MC

Q
 Q
 P
+ Q

 Q
 Q
 P
1
) =
P ( 1  Q
e
Q

P
=
elasticity
of
demand
)
The Intuition
Marginal Revenue = D in Revenue when Q + 1
units are sold instead of Q units.
Last Unit brings revenues = price of last unit +
DP  Q for Q units which go down in price.
MR is less than P because of this DP effect.
So MR = P - ( DP  Q) where DQ = 1
DP  Q
1
MR = P(1 ) or MR = P (1 - )where
DQ  P
e
e = elasticity of demand
8
Profit Maximization
TC
$
TR
max Rev
q*
9Max Profit
D
Output
MR
Another Angle
AC
MC
P*
Profits
D
q*
10
MR
The Firm's Inputs And Costs
1.
2.
Fixed And Variable Costs.
a.
Fixed Costs: Costs that do not change when output
changes.
b.
Variable costs: Costs that do change when output
changes.
Long Run and Short run.
a.
Long Run: A long enough period of Time such that all
costs are variable
b.
Short Run: A period of time such that at least one input
(cost) is fixed.
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TC=FC+VC;
TC/Q = FC/Q +VC/Q
+AVC
which is ATC= AFC
Fixed and Variable Costs
AC
P
AVC
Total Fixed
AFC
Total Fixed
q1
12
Q
Irrelevance of Fixed Costs if you stay in
Business
1.
2.
3.
Changes in Fixed costs don't alter profit
maximizing P and Q because fixed Costs
don’t impact Marginal Costs.
Fixed Costs do impact profits, and may cause
firm to decide the leave industry.
Same with lump sum taxes.
13
Impact of Fixed Costs on Profit
AC2
MC
AC1
P*
Profits2
AC*
Profits1
AC**
D
14
q*
MR
Economies and
Diseconomies of Scale
1.
What does this imply about the AC curve?
2.
defined simply as whether or not AC rises or falls
3.
long run AC Vs. short run AC
4.
Distinguishing between economies of scale and
improvements in technology very important.
5.
Can firms have diseconomies of scale but industries
have economies of scale?
15
AC
16
Long Run AC
LRAC
MC1 SRAC1
SRAC3
MC2 SRAC2
Q1
17
MC3
Do average costs fall over time, or is average cost downward sloping?
AC1990
AC1991
P*
AC1992
AC1993
AC1994
q*
18
Can firms have diseconomies of scale but
industries have economies of scale?
1.
2.
3.
External Effects – Industry output effects
the costs of individual firms.
Positive External Effects can cause AC for
industry to fall even though each firm has
upward sloping AC curve.
Used to explain apparent decreasing costs
but multiple firms in industry.
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