List several fixed and variable costs associated with owning and operating an automobile. Suppose you are considering whether to drive your car or fly 1,000 miles to Florida for spring break. Which costs–fixed, variable, or both–?would you take into account in making your decision? Would any implicit costs be relevant? Explain
This chapter develops a number of crucial cost concepts employed to analyze the four basic market models. A firm’s implicit and explicit costs are explained for both short and long run periods. The explanation of short run costs includes arithmetic and graphic analyses of the total-, average-, and marginal-cost concepts. These concepts prepare you for both total-revenue–total-cost and marginal-revenue — and marginal-cost approaches to profit maximization.
The law of diminishing returns is explained as an essential concept for understanding average and marginal cost curves. The general shape of each cost curve and the relationship they bear to one another are analyzed with special care.
The final part of the chapter develops the long run average cost curve and analyzes the character and factors involved in economies and diseconomies of scale. The role of technology as a determinant of the structure of the industry is presented through several specific illustrations.
Class, distinguish between explicit and implicit costs, and between normal and economic profits.
How does a generic drug differ from its brand-name, previously patented equivalent? Explain why the price of a brand-name drug typically declines when an equivalent generic drug becomes available? Explain how that drop in price affects allocative efficiency.
This chapter analyzes the four basic market models–pure competition, pure monopoly, monopolistic competition, and oligopoly. Explanations and characteristics of the four models are outlined at the beginning of this chapter. Then the characteristics of a purely competitive industry are detailed. There is an introduction to the concept of the perfectly elastic demand curve facing an individual firm in a purely competitive industry. Next, the total, average, and marginal revenue schedules are presented in numeric and graphic form. Using the cost schedules from the previous chapter, the idea of profit maximization is explored.
The total-revenue–total-cost approach is analyzed first because of its simplicity. More space is devoted to explaining the MR = MC rule, and to demonstrating that this rule applies in all market structures, not just in pure competition.
Next, the firm’s short run supply schedule is shown to be the same as its marginal-cost curve at all points above the average-variable-cost curve. Then the short run competitive equilibrium is discussed at the firm and industry levels.
The long run equilibrium position for a competitive industry is shown by reviewing the process of entry and exit in response to relative profit levels in the industry. Long run supply curves and the conditions of constant, increasing, and decreasing costs are explored.
Finally, the chapter concludes with a detailed evaluation of pure competition in terms of productive and allocative efficiency (P = minimum ATC, and P = MC).
Class: Briefly (in a few words) state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most accurately fit? (a) a supermarket in your hometown; (b) the steel industry; (c) a Kansas wheat farm; (d) the commercial bank in which you or your family has an account; (e) the automobile industry. In each case justify your classification.
In your text, Chap 12, the author talks about optimal combination of resources. What is he referring to?
This chapter looks at the demand for resources – specifically the pricing and employment of resources. All resources that enter into production are owned by someone, including the most important resource of all for most people, self-owned labor. The most basic significance of resource pricing is that it largely determines people’s incomes. Resource pricing allocates scarce resources among alternative uses. Firms take account of the prices of resources in deciding how best to attain least cost production. Finally, resource pricing has a great deal to do with income inequality and the debate as to what government should or should not do to lessen this inequality. It is here that the factors that determine resource demand are most different from those that determine demand for products. Demand for products is a question of income and tastes. But resource demand is more passive in the sense that it is derived from the demand for the products the resource can produce. If a resource can’t be used in production of a desired product, there will not be any demand for it. Additionally, resources are often less mobile than products, so their geographic location relative to demand for the output they produce may be an important factor determining demand for resources in particular geographic areas. Resources, factors of production, are not hired or bought because their employer or buyer desires them for themselves. The demand for resources is entirely derived from what the firm believes the resources can produce. If there were no demand for output, there would be no demand for input.
Class: Why do you think the resource demand curve slopes downward? What are some determinants of resource demand?
Have you ever worked for the minimum wage? If so, for how long? Would you favor increasing the minimum wage by a dollar? By two dollars? By five dollars? Explain your reasoning.
Do you think exceptionally high pay to CEOs is economically justified? Why or why not?