204_summer_2009_lecture_16

204_summer_2009_lecture_16 - University of Toronto...

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Unformatted text preview: University of Toronto Department of Economics ECO 204 Summer 2009 Sayed Ajaz Hussain Lecture 16 1 Ajaz Hussain. Department of Economics Last Time Long Run Equilibrium Market Shocks: Adjustment Dynamics Short Run Response Long Run Response o Constant cost industry o Increasing cost industry o Decreasing cost industry o Summary of results Ajaz Hussain. Department of Economics 2 Today Avoiding or Escaping Competition Monitoring preferences Sustainable cost advantage Barriers to Entry Exogenous Endogenous Firms with Market power Pricing and output Without opportunity cost With opportunity cost Ajaz Hussain. Department of Economics 3 Perfect Competition Long Run Equilibrium Recall: If all firms are rational, there are no barriers to entry and there is perfect foresight, then equilibrium number of firms is the largest number of firms that can (all) break even: = R C = PQ AC Q = (P AC)Q = 0 Produce where P = min AC Ajaz Hussain. Department of Economics 4 Long Run Equilibrium Ajaz Hussain. Department of Economics 5 A FIRM Q P D MR P MC q MARKET Q S P D P Q AC Here: P = min AC = 0 All firms earning = 0 Escaping / Avoiding Competition Ajaz Hussain. Department of Economics 6 Competitive Firm Output Inputs Price Taker Price Taker Input prices Secure inputs at lower prices or Raise rivals input prices Antitrust issues Cost of Production Superior technology Superior organization High MES Survival of the fittest Price Product differentiation Barriers to Entry Input Prices For > 0 try to lower AC: min AC < P Examples of securing lower prices: Vertically integrate? Robert Mondavi Starbucks? Example of raising rivals prices: Vertically integrate? Toys R Us? Industrialized economies for obvious reasons frown on this. Further explored in ECO 310 Ajaz Hussain. Department of Economics 7 Production Costs For > 0 try to lower min AC: min AC < P To be effective, cost advantage must be sustainable : Example: Matching Dell Dells cost advantage stems from: o Direct distribution and shorter inventory period o This Friday, we quantify this cost advantage Ajaz Hussain. Department of Economics 8 Natural Monopoly S. Ajaz Hussain. sayed.hussain@utoronto.ca 9 AC Suppose C = TFC + constant*q...
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This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto- Toronto.

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204_summer_2009_lecture_16 - University of Toronto...

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