PAM200Lecture12

PAM200Lecture12 - PAM 200 Lecture 12 Agenda Relation...

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Unformatted text preview: PAM 200, Lecture 12 Agenda Relation between SRAC and LRAC Economies of Scope Competitive Firms and Markets Firm’s Output Decision Firm’s Shutdown Decision The Short-Run Supply Curve LRAC and SRAC Interaction between LRAC and SRAC Suppose there are five plant sizes Note firm will always have lower costs in LR because can adjust LRAC is the outer envelope of the SRAC curves, LRAC is always equal to or below the SRAC Economies of Scope Consider a firm that produces 2 goods: q 1 and q 2 The cost of producing q 1 may depend on the amount of q 2 produced That is, it may be cheaper to produce the two goods together than to produce them separately Economies of Scope (con’t) EX: A number of products can be produced from crude oil; it may be cheaper for the Postal Service to deliver both parcels and letters, etc. Economies of Scope (con’t) Called economies of scope SC = C(q 1 , 0) + C(0, q 2 ) - C(q 1 , q 2 ) C(q 1 , q 2 ) Where C(q, 0) is the cost of producing q 1 units of the good by itself, C(0, q 2 ) is the cost of producing q 2 units of the good by itself So if SC > 0 economies of scope exist Competitive Firms and Markets Here we look at the behavior of firms in a stylized situation. Assume There are many firms Each firm produces the same homogenous good (buyers view products produced by different firms as perfect substitutes) Competitive Firms and Markets (con’t) Firms can easily enter and exit the industry Buyers and sellers know the prices charged Transaction costs are low If all these conditions hold, then this is a perfectly competitive market Competitive Firms and Markets (con’t) Each firm produces only a small share of the market output, and output is identical to that of other firms So the firm is a price-taker , it cannot...
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This note was uploaded on 03/03/2009 for the course PAM 2000 taught by Professor Evans,t. during the Spring '07 term at Cornell.

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PAM200Lecture12 - PAM 200 Lecture 12 Agenda Relation...

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