Econ_11_Main_Points_11

# Econ_11_Main_Points_11 - Chapter 11 Main Points to Know 1 1...

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Chapter 11: Main Points to Know: 1 1. Comparative Statics (Destination) and Economic Dynamics (Process) 2. Why Firms? Save on Transactions Costs, Make Long Term Relationships 3. Goal: Maximize Profit. Criticisms of this. 4. How do Firms Maximize Profit? They pick a Q where MR = MC dR = dC dQ dQ 5. MR, MC and Elasticity: MR = p (1 + 1/e) MC = p (1 + 1/e) 6. If e < -1 MR > 0 If e = -1 MR = 0 if e > -1 MR > 0 7. Produce vs. Shut Down Decision: Short Run: If P < AVC, shut down; If P > AVC, produce something, even if you make a loss Long Run: If P < AVC, exit the industry

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Chapter 11: Main Points to Know: 2 8. Profit Function: Π = pf(k,l) vk wl Profit = Total Revenue capital expense labor expense 9. Profit Function is homogeneous of degree one in all prices. This means that if input prices (v or r, and w) and output price (p) all rise X%, so does Π . An across-the-board inflation will not change the optimal q*. 10. But if input prices change differently from output prices:
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Econ_11_Main_Points_11 - Chapter 11 Main Points to Know 1 1...

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