microeconomics notes for IP

Introduction to Unit Three

• Weekly live chat discusses the Unit Three individual project.
• Focus on the "theory of the firm" and its relevance in economic markets.

Market Models Overview

• Firms operate within markets; they are the primary units in these competitive environments.
• Current focus is on "perfect competition".
• Four market models introduced:
• Perfect Competition: Ideal market structure with many firms, none of which can control prices.
• Monopolistic Competition: Characterized by many firms competing with differentiated products but still somewhat competitive.
• Oligopoly: A few firms dominate the market, influencing prices and output.
• Monopoly: One firm controls the entire market, dictates prices.
• Real-world examples indicate monopolistic competition and oligopoly as the most prevalent in the U.S. market.
• Economists favor perfect competition for its maximization of social welfare.

Theory of the Firm

• Firms are generally motivated to make and maximize profits.
• The profit maximization rule indicates firms should produce a quantity that maximizes profits.
• Debate exists over whether firms strictly act as profit maximizers or consider other factors (e.g., shareholder value).

Short Run vs. Long Run Operations

• Firms can operate at a loss in the short run under specific conditions.
• Short Run Shutdown Rule:
• If a firm can cover its variable costs with total revenues, it can remain operational despite losses.
• Changes must be internal (layoffs, production changes) to regain profitability.

Cost Concepts

• Total Variable Costs (TVC): Costs that vary with output including labor costs and materials.
• Fixed Costs: Constant costs that do not vary with the level of output, like building mortgages.
• The distinction between fixed and variable costs is critical for firms in loss situations.

Calculating Costs for Firms

• Total costs = Total variable costs + Fixed costs.
• Example:
• Labor costs = Number of workers (50,000) × Daily wage ($100) = $5,000,000.
• Other variable costs = $500,000.
• Total Variable Costs = $5,000,000 + $500,000 = $5,500,000.
• Fixed costs = $1,000,000.
• Total costs = Total Variable Costs ($5,500,000) + Fixed Costs ($1,000,000) = $6,500,000.

Revenue Calculations

• Total Revenue = Price × Quantity sold.
• (e.g. $60/light bulb × 100,000 bulbs = $6,000,000).
• Determine profit:
• Profit = Total Revenue - Total Costs.
• Using example: Profit = $6,000,000 (revenue) - $6,500,000 (cost) = -$500,000 (loss).

Profit Determination

• If total revenue > total cost: profit is made.
• If total revenue < total cost: loss occurs.
• Short-run shutdown rule explained:
• If total revenue > total variable costs, the firm should continue operations.
• If total revenue < total variable costs, shutdown is required.
• Also uses price in relation to average variable cost.:
• If price > average variable cost, continue operation; otherwise, shut down.

Conclusion

• Emphasized importance of understanding calculations and conditions for profitability.
• Encouraged student interaction for clarifying doubts during project preparation.