Lecture 1 Flashcards
Assumptions
ideal traditional firm
owners=managers=firms (no separation of control & ownership)
perfect information: firms knows all relevant costs & prices for production in all future contigencies
Consumers know quality of product
no uncertainty - no unexpected changes in environment or market
Workers always do as they are told (no strikes, become9s ill, essentially act as robots
Technical Productive Efficiency
produces on production function (2 cases)
how efficient firm is in transformation process
eff. production is achieved by maximum use of resources available
each point on PPF is technical efficient, but not in/outside)
Isoquants
graphical representation of inputs that yield the same output, characteristic of production function
each isoquants gives minimu m combination of K&L for given fixed output (on isoquant production function)
convex to the origin due to imperfect subsitution (marginal rate of subsitution) - L shape or straight line are the extreme
Characteristics of P.F
Long Run: returns to scale
Short Run: returns to factor
Economic Efficiency
provides all minimum inputs for given output to ensure combination is the cheapest
-W/R (MpLAbour/Mp Capital) is tangent to insoquant
this is important to firm - wanting to determine level of ouput should produce in order to maximise profit, unit costs and demand
Costs - LongRun
Increasing RtS where average costs decreases
Constant RtS: MC = AC
Increasing RtS: Ac increases which must correspond MC cost producitng one extra unit is higher than AC
Costs - Short Run
capital is fixed - fixed cost present
Allocative Inefficiency - Monopoly
restrict output to produce maximising output and increase price as they are the only firm in the market
Thus creating DWL and making consumer worse off by making firms better of (on expense of consumer´s surplus)
Surplus
Consumer: surface under demand curve & above price
Seller: below price but above supply
profit - price minus the total variable cost
Market Imperfections
firms in perfect competition and equilibrium but quantity produced demanded doesn´t match with supplied
true social benefit/cost of production or consumption doesn´t equal to the private one involve in a particular transaction
Externalities
environment costs of production not taken into account private
Free-Rider Problem
can´t charge for consumption and make profits and thus little of these good will be provided by private perfectly competitive market
thus market has to be run publicly but doesn´t provide these goods at optimal ouput
Business RIsk
competitive firms under right assumptions are pareto optimal
inside firms don´t use market prices (renegotiating) and don´t have market relations
if market prices and relationships deliver pareto efficient why not have markets inside the firm
have a contract for several tasks
decisions aren´t based on relative market prices that can be negotiated of carrying out each decisions
don´t renegotiate a contract everyday (costly)
Cost- minimisation problem
choose input bundle which costs as little as possible
furtherst to the left for given isocurve
tangency point
a) cost mi. bundle of inputs for that specific output must lie on isoquant for same output
b) choose point from whole isoquant curve which lies on on the lowest isocost curve
Allocative Efficiency
p=Mc - additional cost incur of producing add. unit will equal to the price you receive
p=AR - average price of all units sold (Demand Curve)
produces amount customers demand and price customers are willing to pay (utility)
no deadweight loss - each experiences surplus
isoquants
one would produce on the boundary
inside - would be inefficient
and only concern on the right part of isoquant (other one implies positive MRTS . makes no sense)
least cost combination
optimum factor combination
combination of factors which a firm can produce a specific output at the lowest possible cost
Marginal product approach
isoquant/cost approach
variable factors - long run decisions
decide which technique of production to use, what design of factory to build, type of machinary etc.
profit max. by substituting the factors whose gain is higher by others until last dollar of each factor brings equal revenue
profit is maximised
Perfect Competitive EQ
achieve optimal allocation of resources without any DWL
socially optimal output of resources
industry will produce at point where S=D and no resources wasted as industry produces exactly the quantity demanded
Monopoly
can influence price
will price discriminate until reach max. profit quantity which charges higher price and lower output than the comp. equilibrium
DWL - not optimal for society as consumers are still demanding product which monopoly isn´t willing to supply
underproduction of resources - desequilibrium
Externality
impact of agent actions on expense of others which isn´t directly reflected on market prices
Social and private cost/benefit differ
under/over production
desequilibrium despite having perfect comp. market
public good
provided without profit to all members of a society either by the government or by private individual organisation
non-rival and non-excludable
positive externalities
alarm system install in the house
NHS
social services
education
public good
streetlight
beaches
human rights
defence
Solution to Market Failure
private case governmental intervention (tax revenue, subsidies) governmental regulation
free-rider problem under public good
rational persons won´t contribute to provison of public good because he doesn´t need to contribute to benefit (going to be produced anyway)
