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Economics, Making firm successful, Will never produce where demand Is…

- - - - Short Run
        
        Produce or shutdown?
        
        Shutdown loss=TFC
        
        Shutdown when TR<TVC or P<AVC :!:
        
        What level If producing? Produce when P>AVC
        
        Produce where P=SMC :!:
        
        TR>TVC
        
        Horizontal D crosses SMC Is output level (MR=MC) :!:
        
        SR only consider VC (avoidable)
        
        Profit Maximization output>profit margin output
        
        Ignore profit margins (avg. profit)
        
        AVG PROFIT=profit margin= P-ATC
        
        FIXED, SUNK, AVG Costs Irrelevant
        
        Fixed-No effect on MC or min AVC
        
        Sunk = unrecoverable
        
        Profit=TR-TC
        
        Loss Minimization: If ATC>P>AVC produce bc you still cover some of your ATC. but still losing money
        
        Summary of SR
        
        AVC to produce, shutdwn If P<AVC
        
        SMC tells Q of producing
        
        P>min AVC produce Q where P=SMC (D=MR=P)
        
        ATC amt profit/loss
        
        Profit=(P-ATC)Q
        
        Mathematics
        
        SRTC(y) = y^2 + 1 find the SR Supply function
        
        1st Find SR MC (will be given)...SRMC(y)=2y
        
        2ND Find portion of MC Increasing and above AVC...
        AVC(y)= y^2/y
        
        SRMC(y) > AVC(y) ...2y>y
        
        Remember: produce where p=mc so SRMC(y)=p....SRMC(y) = P, so 2Y=P, then supply function is Y=P/2
        
        Try with: SRTC (Y) = 2y^1/2 +12
        
        SR Spply
        
        MC above AVC :!:
        
        Price below AVC, supply Q=0
        
        MC IS SUPPLY LINE (MC Is cost of producing something)
        
        SR Industry Supply
        
        Horizontal Sum of individual SR supply curves
        
        Industry Equilibrium SR
        
        Industry Supply (horizontal sum)
        
        Market Demand
        
        Gives Eq. P* which is where all firms will produce :!:
        
        Value of resources to prod. last unit (SRMC) = price consumer will pay )Allocative efficiency aka firm will prod. when cost to produce=how much people value the good
      - Long Run
        
        produce where P=LRMC :!:
        
        LR Supply Curve: P=LMC ...as opposed to SR which used avc bc no fixed cost :!:
        
        Cant lose money
        
        would have shut down
        
        LMC must be increasing in output
        
        LMC > LAC
        
        Find where D (MR) crosses LMC, down to LAC is profit :!:
        
        Profit Maximizing-
        
        LR Industry Supply NOT horizontal sum due to entry & exit factor...LR industry supply with free entry will be flat line at P=min Avg cost :!:
        
        Entry/exit changes market price, in turn affect profits, therefore affects incentive to entry (profit max not = equilibrium)
        
        easy entry makes LR short
        
        firms enter market If profits are made
        
        Flat (perfectly elastic) or Upward sloping
        
        Constant cost industry (input price remain constant LAC unchanged) so P=min LAC
        
        Horizontal (Perfectly Elastic)
        
        Increasing Cost Industry
        
        Input prices rices with output, min LAC rises
        
        LR Supply price rises, curves upward
        
        All LR Producer Surplus paid to resource suppliers as economic rent
        
        LR Competitive Equilibrium
        
        Goes to where LAC minimum... (ZERO PROFITS)...where LMC crosses LAC :!:
        
        Economic Rent
        
        Scarce, superior resources
        
        Payment exceeds opportunity cost
        
        if used, zero economic profit
        
        potential profit paid as economic rent
      - profit maximizing Input Usage
        
        produces exactly level of output that maximizes profit
        
        MRP
        
        Of a unit of variable Input Is additional revenue from hiring one more unit of the input
        
        MRP= (change in)TR/(change in)L: P x MP :!:
        
        Marginal revenue product
        
        If MRP of addtl unit of Input > Price Input, that unit should be hired
        
        use amount of Input where MRP = INPUT PRICE :!:
        
        ARP: Avg rev/worker
        
        ARP=TR/L=PxAP :!:
        
        SR: ARP<MRP = SHUT DOWN :!:
        
        If ARP<MRP, TR<TVC
- - - - Lerner Index
        
        amt price exceed marginal cost
        
        Between 0 - 1
        
        Greater L.I. = more mkt pwr
        
        Lower elasticity = greater Index
      - LI = (-1/E) =
        (P - MC)/ P :!:
      - Cross price elasticity (Exy) :!:
        
        substitutes = positive
        
        complements = neg
        
        Higher Exy, greater substitute, smaller degree market power
      - Elasticity = change Q/ change P
    - - Perfectly elastic = horizontal demand= no market power
  - - - Utility Increases as more consumers buy & use
  - - - Produce when MR=SMC :!:
      - TR>TVC
      - Shutdown TR <TVC :!:
      - P<AVC
    - - Produce MR = LMC :!:
      - P>LAC
      - If LAC>P, exit industry
      - Adjust plant size to optimal level
        
        SR ACC tangent to LR AC at profit maximizing output level
- - - - different units for different prices person to person
        
        every unit for max P willing to pay
        
        Capture entire consumer surplus
        
        Requires knowledge of consumers demand
      - MR = D
      - Where MC crosses MR
    - - Differing units of output for different prices
        
        Bulk & two part pricing
        
        TE (total expenditure) = A +fq
        
        Avg price = TE/Q
        
        A = consumer surplus, f= MC
        
        Declining Block Pricing
    - - by person (senior discount)
        
        PRODUCE where MR Is same In every market = MC or you'd sell more in other markets until they are equal
        
        MR1=MR2=MR3
        
        MRT=MC=MR1=MR2
        
        Equal marginal revenue principle
      - retired person has more price elasticity
        
        Lower price to more elastic demand
  - - - Downward sloping
    - - if TR > TC, economic profit
        
        Entry occur
        
        Demand Is reduced
        
        Continues until no economicprofit
        
        Innovate
        
        Marketing
        
        Advertising
        
        MORE INELASTIC :!: DEMAND
        
        Brand managament
        
        Defending brand name
        
        perception
        
        breakeven
        
        ATC tangent to demand :!!:
- - - - economies of scale
  - - - Act like monopoly
      - Divide profits
      - Produces MC cross MR go up to D. :!:
  - - - quality
    - - MC=MR
      - also Interdependent with other firms demand
    - - prisoners dilemma
      - Dominant strategy
        
        Always better
        
        Equilibrium when all players have dominant strategy
      - Dominated strategy
        
        Never chosen
        
        eliminate all If no dominant exist
      - Nash Equilibrium
        
        choosing best action based on rivals
        
        Strategic stability
        
        Check each box from each perspective
        
        All Dominant strategy are N.E
    - - Choices are continuous (not discrete)
      - Nash Eq. occurs where firms BRC :!:Intersect
    - - One firm moves first
      - Best decision depends how rivals respond
      - Roll Back Method
      - First Mover Advantage
      - Second mover advantage
      - Strategic moves & commitments
        
        Commitments
        
        Threats
        
        Explicit
        
        Tactic
        
        Costly
        
        Promises
        
        Desirable
        
        CREDIBLE