TR, MR and Demand

1
TR, MR and Demand

• TR PQ, MRD(TR)/DQ

E1
D
MR
2
Production and Costsan Economists view

• Q f ( L, K,.)
• Short-Run (production) K fixed
• Long-Run (planning) everything is flexible

3
Measures of productivity

• Total product (TP)
• TP Q (L, K) L1/2 K1/2
• Fixed vs variable proportion functions
• Average Product (AP)
• APL Q/L APK Q/K
• Marginal Product (MP)
• MPL DQ/DL

4

• Law of Diminishing Marginal Product
• Seen in the slope of the MP curve
• More intense usage of fixed input by the variable
  inputs may initially increase Qhowever, after a
  certain point inputs are lessproductive and
  produce less output for each additional input
  added
• Can employ additional inputs when MP is
  decreasing. Do not employ additional inputs when
  MP is negative

5

• Relationships between MP, AP, and TP
• If MPgt0 then TP is rising
• If MPlt0 then TP is falling
• If MP is rising then the output function is
  convex
• If MP is falling then the output function is
  concave
• MP as the slope of the production function
• If MPgtAP then AP is rising
• If MPltAP then AP is falling

6
Costs of Production

• fixed vs. variable vs. sunk
• Opportunity cost (explicit implicit)
• Cost of Labor wage bill
• User Cost of Capital Economic Depreciation
  Interest Rate Value of Capital

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costs

• TC w L r K
• Variable (w L), fixed (r K)
• Averages
• ATC TC/Q AVC TVC/Q AFC TFC/Q
• Marginal MC DTC/DQ DTVC/DQ

8
Some cost identities and profit maximization in
the short-run

• MCMR
• MC w / MPL
• W VMPLMRMPL
• AVC w / APL

9
Long-run costs

• Everything is variable
• Isoquant and Isocost analysis
• Input substitution

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Isocostw L r K C

• K

C/r
-(slope) (C/r)/(C/w) w/r
L
C/w
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IsoquantQ f ( L, K ) constant

K
-(slope) (dK/dL) dQ MPL dL MPK dK dK/dL
MPL/MPK dK/dL MRTS of labor for capital Set dL
1
L
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Equilibriumcost minimization

K
MPL/MPK w/r w/MPL r/MPK the last spent on
capital brings the same change in output as the
last spent on labor
L
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• returns to scale
• change in inputs gt change in output
• (D output) gt (D inputs) increasing returns
• Q Ka Lb if a b gt 1 then we have increasing
  returns to scale.
• economies of scale and the LRAC
• specialization and technology
• economies of scope
• sharing of inputs

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Cost minimization

• MPL/MPK w/r
• w/MPL r/MPK
• the last spent on capital brings the same
• change in output as the last spent on labor

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Profit maximization

• Profit total revenues total costs
• Profits are maximized when MC MR
• MC W/MPL gt W MR MPL

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market structure

oligopoly
mc
monopoly
Perfect competition
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Perfect competition and the internet

• Assumptions
• number of firms
• Ease of entry and exit
• Perfect information
• Identical transaction costs
• Homogeneous good
• Horizontal demand and MR.
• Shut down and break even price levels
• Long-run and cost structure of the industry

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monopoly

• Market power MR
• What is Monopoly and why do they exist?
• natural monopoly
• barriers to entry (legal, brand loyalty.)
• is Microsoft a monopoly?
• Measures of monopoly power
• elasticity approach
• Learner index (P-MC)/P

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Monopolistic competition

• Large number of firms and heterogeneous goods

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oligopoly

• Few players and strategic behavior
• Oligopolies arise because of the same reasons as
  monopolies.
• Models for studying Oligopoly
• Kinked Demand Model (discontinuous MR)
• Cournot Duopoly Model
• Game Theory
• Bertrand and Stackelberg Models

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Game theory

• Cooperative vs non-cooperative games
• Basic 2X2 game framework analysis
• Price leadership models, airlines
• Tacit collusion (explicit)
• Implicit collusions and the MIT case
• Tree form games and entry deterrence

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Multi-plant production obtaining total
MC Multi-market marketing price discrimination
vs price differentiation obtaining total
marginal cost curve