Week 8 - Production, costs, and perfect competition

Question 1

Elasticity

Answer 1

Elasticity: measures responsiveness of economic actors (Q_d, Q_s) to changes in market factors (price, income)

How change in price of good/service affects demand for that good
How change in income will affect demand for a good
How changes in price of good/service affect demand for related goods/services

Question 2

The purpose of a firm:

Answer 2

• Produce quality, innovative, products and services for customers
• Make money / profits for owners or investors
• Provide decent, stable jobs for employees and management
• Tax revenue for government
• Drive economic growth for communities, suppliers, and creditors

Question 3

Pre-1980s businesses were seen as a

Answer 3

Pre-1980s businesses were seen as a conduit for advancements in well-being and quality of life.

• paid taxes
• offered people good jobs
• made products that made people’s lives better
• Made decent returns for shareholders
• “triple bottom line”
• Environment protection, equal opportunity, minimum wages

Example: Levi Strauss pre-1980s

• Focused on worker loyalty and trust
• In Great Depression, CEO kept people employed
• Average length of service over a decade
• Turnover at headquarters 1.5%
• Job postings attracted 600 candidate

Question 4

Post-1980s businesses were viewed as a

Answer 4

Post-1980s businesses were viewed as a “nexus of contracts”.

• Corporations don’t have power or obligations with respect to stakeholders – who are all voluntary participants
• I don’t owe you anything, if you don’t like it, you can leave
• Any broader conception of corporate purpose seemed to have vanished!

Question 5

Production

Answer 5

Production - turning inputs into outputs

• Inputs
• Outputs
• Technology (How its Made videos)
• Production function
• Learning by doing

Question 6

Fixed cost

Answer 6

doesn’t change based on output

Question 7

Variable cost

Answer 7

changes depending on output

Question 8

Accounting cost -

Answer 8

actual money spent running a business / actual costs

Question 9

Economic costs

Answer 9

accounting costs + opportunity costs

refer to an amount that you may spend if you decide an investment is worth the expenditure

Question 10

Private cost

Answer 10

cost incurred by firm/individual

Question 11

Social cost

Answer 11

accounts for negative effects on society

Question 12

Firm decisions (i.e. how to price products, how much to produce) depend on how much market power they have

Answer 12

-

Question 13

Perfect competition:

Answer 13

1. Large numbers of buyers and sellers
2. Free entry and exit
3. Product homogeneity
4. Perfect information (production functions, price of inputs, price of product)
5. No control over price of product
6. No market power

Question 14

Profits Equation

Answer 14

Profits = Total Revenue – Total costs

Question 15

Total revenue equation

Answer 15

Total Revenue = Price per unit * number of units sold

Question 16

Total Cost Equation

Answer 16

Total Cost = Fixed cost + Variable costs

Question 17

Demand curve in perfect competition

Answer 17

A firm’s demand curve in perfect competition is horizontal, making it perfectly elastic since the firm is a price taker, and it has to accept the market price. The firm can produce as much of the good as it wants to because the demand for the good will not change regardless of the level of supply.

*Can’t charge above market price

Question 18

Law of one price

Answer 18

Law of one price - Identical goods that are sold in one location should be the same price as another

Question 19

opportunity cost

Answer 19

the loss of potential gain from other alternatives when one alternative is chosen.