Menu_28_Feb_11

Menu_28_Feb_11 - -buyers and sellers know whats going on in...

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TODAY’S MENU: Monday 28 February 2011 I. BUSINESS A. Practice Problems 1. Chapter 14: 1-5, 7, 8, 10, 11, 13-15, 20 B. Second exam: Three weeks from today (21 March) II. SUBSTANCE A. Theory of the Firm: The Basics How business make decisions on how much to purchase and how much to charge in order to maximize profit 1. Costs a. Average/Marginal cost relationship b. Examples 2. Time a. Short run i. Definition period of time when fixed cost is greater than 0 b. Long run i. Definition there are no fixed cost, fixed cost = 0 they become variable B. Perfect competition 1. Market structure a. Many small buyers and sellers -all small relative to the size of the market -in total amount -small amount has no control in market prices b. Homogeneous good -good or service is homogeneous (exactly the same) -all sellers in market are selling exactly the same goods; buys only care about is price—buyers are going to be perfectly elastic—not just substitutes=perfectly substitue c. Perfect information
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Unformatted text preview: -buyers and sellers know whats going on in the market-know their competition -customers only care about price-all market participants know what is going on in the market! d. No barriers to entry/exit-if anyone wants to sell—free to enter market and set up shop OR if deems to leave market—allowed to leave -implication to this is in the long run economic profit will be equal to 0 -in the long run, implication is going to be 0 2. Firm behavior in the short run: How much to produce? (marginal revenue= marginal cost) a. Case 1: P > ATC i. Equilibrium quantity Q* > 0 ii. Profit > 0-positive economic profit b. Case 2: P = ATC i. Equilibrium quantity Q* > 0 ii. Profit = 0 c. Case 3: ATC > P ≥ AVC i. Equilibrium quantity ii. Profit < 0 d. Case 4: P < AVC i. Equilibrium quantity ii. Profit e. Conclusions 3. Graphically III. NEXT TIME A. Finish Chapter 14: “Perfect Competition” B. Begin Chapter 15: “Monopoly”...
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Menu_28_Feb_11 - -buyers and sellers know whats going on in...

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