Chapters 7 and 8 PowerPoint Slides -Efficiency and Profit Max

Chapters 7 and 8 PowerPoint Slides -Efficiency and Profit Max

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Efficiency and Exchange and the Quest for Profit and the Invisible Hand Chapters 7 and 8
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Efficiency Efficient or Pareto Efficient in a market means that there is no change to the market that will make some people better off without making others worse off In other words, we cannot organize buyers and sellers differently and improve social welfare
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Efficiency There are two kinds of efficiency, productive and allocative efficiency Productive efficiency means that we produce our product at the lowest possible cost Allocative efficiency means that we produce goods such that marginal benefit equals marginal cost
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Efficiency Productive efficiency occurs in perfect competition in the long run where firms produce output at the minimum of the LRAC. Let’s look at LRAC
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Long Run Costs Assume a firm can only choose among three plant sizes-small, medium, or large. Each plant has an associated short run average cost curve (ATC) The plant size chosen depends upon the amount of output the firm thinks it will need to produce
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Long Run Costs The long run average cost curve (LRAC) is also called the firm’s planning curve The LRAC is generated by connecting points of tangency with the SRAC curves. The LRAC curve represents the least cost way of producing each particular level of output, given current technology and resource prices.
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Economies of Scale The LRAC is U-shape due to economies and diseconomies of scale Economies of scale are forces that reduce average production costs as the firm’s scale of operation (plant size) gets larger in the long run. Larger scale firms may take advantage of cost savings through bulk buying, specialization of labor, and better capital
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Economies of Scale Eventually, as firms expand, diseconomies of scale take over, resulting in a rise in LRAC at higher levels of output. As a firm gets larger, the job of coordinating all of the resources gets more complicated, increasing bureaucracy and hurting productivity.
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U-Shaped Cost Curves Economies and diseconomies of scale are long run concepts that result in U- shaped LRAC Diminishing marginal returns are a short run concept that results in U- shaped MC, AVC and ATC
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Other Concepts Constant long run average costs-over some range of output, a firm may be able to expand output without increasing average costs Minimum efficient scale-the smallest level of output where the firm is at the minimum LRAC and is taking full advantage of economies of scale
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Efficiency Perfect Competition achieves productive efficiency, i.e. perfectly competitive firms produce at the minimum point of the LRAC Entry and exit of firms ensure this happens Firms that do not minimize LRAC will suffer losses until they either exit or make scale adjustments to achieve min LRAC
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Efficiency Allocative efficiency means that firms produce the goods that consumers value the most. In the market, we see that perfectly
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Chapters 7 and 8 PowerPoint Slides -Efficiency and Profit Max

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