PAM200Lecture12 - PAM 200 Lecture 12 Agenda Relation...

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    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
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     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 
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    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
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    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.
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    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
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    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)
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    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
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    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  raise its price above the market price  If it did it, then it would sell nothing (i.e.  a very small increase in price means  that q goes to zero)
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