Week 8 - Production, costs, and perfect competition Flashcards
Elasticity
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
The purpose of a firm:
- 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
Pre-1980s businesses were seen as a
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
Post-1980s businesses were viewed as a
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!
Production
Production - turning inputs into outputs
- Inputs
- Outputs
- Technology (How its Made videos)
- Production function
- Learning by doing
Fixed cost
doesn’t change based on output
Variable cost
changes depending on output
Accounting cost -
actual money spent running a business / actual costs
Economic costs
accounting costs + opportunity costs
refer to an amount that you may spend if you decide an investment is worth the expenditure
Private cost
cost incurred by firm/individual
Social cost
accounts for negative effects on society
Firm decisions (i.e. how to price products, how much to produce) depend on how much market power they have
-
Perfect competition:
- Large numbers of buyers and sellers
- Free entry and exit
- Product homogeneity
- Perfect information (production functions, price of inputs, price of product)
- No control over price of product
- No market power
Profits Equation
Profits = Total Revenue – Total costs
Total revenue equation
Total Revenue = Price per unit * number of units sold