Lecture 11 _Feb 25_ - Economics 100A Lecture #11: Thursday,...

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Economics 100A Lecture #11: Thursday, Feb. 25 1) Competition & competitive firm supply 2) Competitive market supply 3) Increasing/decreasing cost industries 4) Comparative statics of supply
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(1) What is competition? Sports analogy Players: firms, consumers Rules: property rights Referees: courts Scoring: profit & loss Winners/losers: growth/bankruptcy Indicators of competition Many, small suppliers (and demanders) Easy entry and exit Undifferentiated, homogeneous product Perfect information about market conditions Turnover in size ranking
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The competitive firm Its insignificance makes the firm passive relative to market conditions Takes input and output prices as given Takes its technology as given Realistic in markets where: Firm in powerless to affect its input and output prices E.g., (firm) demand curve is perfect elastic (horizontal) because many, close substitutes Classic example: Kansas wheat farmer Modern example: an eBay “PowerSeller”
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How do firms measure success? Economic profit One-shot firm: Π = sales – economic cost = pq – C(q) Long-lived firm: expected, present value of net revenue stream Other financial measures of success Earnings before interest, taxes, depreciation and amortization (EBITDA) Economic Value Added (EVA) Tobin’s q = stock market value / book value ) ( 1 1 ) ( 2 2 1 1 TC TR E r TC TR E
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The questions How will a competitive firm make its decisions? What “scale” of production? What price to charge for the product? Applications of modeling competitive behavior Will gasoline retailers pass through part or all of wholesale increases caused by higher crude oil prices? How could U.S. steel firms operate at huge losses for years? Will the hike in the minimum wage drive some fast food franchises out of business? Other phenomena to explain Why firms differ in size? Why industries differ in number and size of firms?
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Two steps to maximizing profit To maximize its profit, any firm (not just competitive firms) must answer two questions: (1) output decision : if the firm produces, what output level, q*, maximizes its profit?
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This note was uploaded on 03/18/2010 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

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Lecture 11 _Feb 25_ - Economics 100A Lecture #11: Thursday,...

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