Producer Decisions in Perfectly Competitive Markets

Producer Decisions in Perfectly Competitive Markets -...

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UNC-Wilmington ECN 321 Department of Economics and Finance Dr. Chris Dumas Producer Choice in Perfectly Competitive Markets Production is the act of rearranging resources called "inputs" or "factors of production" into more valuable forms called "outputs" or "products." As discussed in lecture, many types of activities qualify as production, including "making products and providing services," such as manufacturing cars and creating computer software programs, but also just moving things around to more valuable locations, as is done by the transportation industry, and preventing damage (preventing loss of value) to things by protecting them from harm, as occurs in the storage/warehousing industry. A Producer, or Firm, is a person or group of people who engages in production. From the producer's point of view, the value of the input resources used in production is called Total Cost, the value of output resources used in production is called Total Revenue, and the difference between the two values is called Profit. Profit = Total Revenue - Total Cost or, π = TR - TC, where the Greek letter pi "π " is used as a symbol for profit, and TR and TC are abbreviations for Total Revenue and Total Cost, respectively. As economists, we analyze a producer's behavior under the assumption that the producer is "allocating resources under constraints to meet objectives." Different producers have different objectives, but a common objective is to maximize profit. Let's assume that the producers we will analyze have profit maximization as their objective. Given this assumption, the producer's decision problem can be written as an optimization problem: max π = TR - TC subject to: constraints The economic analyst's problem now is simply to determine the appropriate variables, parameters and relationships to substitute for TR, TC and the constraints in the problem above, and then to carry out the maximization using linear or non-linear programming. 1
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UNC-Wilmington ECN 321 Department of Economics and Finance Dr. Chris Dumas The appropriate variables, parameter, and relationships depend on the situation faced by a particular producer. The analyst must talk with the producer to get an understanding of the key variables, parameters and relationships facing producer. Based on many economic studies of many producers in many industries, economists have discovered that several variables, parameters and relationships commonly arise in many situations. Number of products/outputs. To keep things simple as we begin to model producers, let's assume that the producer makes just one output . Number of factors/inputs. To keep things simple, let's assume that the producer makes just two inputs . Output prices--parameters or variables?
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This note was uploaded on 10/22/2009 for the course ECN 321 taught by Professor Dumas during the Fall '08 term at University of North Carolina Wilmington.

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Producer Decisions in Perfectly Competitive Markets -...

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