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Theory of the Firm,[object Object],Section 2.3 HL,[object Object]
2.3 A Tale of Two Firms,[object Object],Apple is currently the most popular and well loved firm in the US while JAL, to the dismay of the Japanese, recently declared itself bankrupt with 2.3 Trillion Yen in debt. ,[object Object],How can one firm be so successful while fail so spectacularly?,[object Object]
2.3 A Tale of Two Firms and Theory of the Firm,[object Object],What advice could an economist give Apple to help it stay so successful and what advice could they give JAL so that it once again becomes the most successful airline in Asia. ,[object Object]
Crucial Questions  All Firm Face ,[object Object]
Theory of the Firm Defined,[object Object]
Theory of the Firm The Goal,[object Object],Provide advice ,[object Object],about the following:,[object Object],The best price,[object Object],The best output,[object Object],The most profit,[object Object],To breakeven price,[object Object],The shutdown price,[object Object]
Theory of the Firm,[object Object],X,[object Object]
Cost Theory,[object Object]
Types of Costs: Fixed and Variable Costs,[object Object]
Costs and Output (Product),[object Object],Variable Costs (VC)are the focus as Fixed Costs (FC)cannot change in the short term.,[object Object]
Ways to Measure Output,[object Object]
Theory of the firm
The Total Product Curve,[object Object]
Average and Marginal Product Curves,[object Object]
Diminishing Average Returns,[object Object]
Diminishing Marginal Returns,[object Object]
Theory of the firm
Total Costs,[object Object]
Average Costs,[object Object]
Marginal Costs,[object Object]
TFC, TVC and TC,[object Object]
Cost Curves,[object Object]
LRAC A firm altering all its factors to meet increasing demand,[object Object]
Economies and Diseconomies of Scale,[object Object]
Economies and Diseconomies of Scale,[object Object]
Economies of Scale,[object Object]
Economies of Scale,[object Object]
Revenue Theory,[object Object]
Total Revenue,[object Object],X,[object Object],=,[object Object]
Total Revenue,[object Object],X,[object Object],=,[object Object]
Marginal Revenue,[object Object],÷,[object Object],=,[object Object]
Revenue Curves,[object Object],Example 1 Demand is perfectly elastic PED = Infinity,[object Object]
Revenue Curves: Perfectly Elastic Demand,[object Object],Price,[object Object],D=AR=MR,[object Object],5,[object Object],Output,[object Object]
Revenue Curves for Normal Demand Curves,[object Object]
Profit Theory,[object Object]
Accounting Profit,[object Object]
Economic Profit,[object Object]
Profit and Loss,[object Object],Which firm is making a Profit, which is making and Abnormal Profit and which is making a loss? ,[object Object]
Profit and Loss,[object Object],Abnormal Profit,[object Object],Normal Profit,[object Object],Loss ,[object Object]
What advice would you give these firms?,[object Object],Shut Down Price and the Break Even Price ,[object Object]
Firm X should shut down as TR <TVC and TFC,[object Object],Firm Y should continue production as TR >TVC.,[object Object],Firm Z should continue to produce as TR >TVC,[object Object],& part of its TFC,[object Object]
Determining the Shut Down Price and the Break Even Price,[object Object]
Shut Down Price,[object Object],Break Even Price = P1 = ATC,[object Object]
Profit Maximizing Level of Output,[object Object]
Profit Maximizing Level of Output with Perfectly Elastic Demand,[object Object]
Profit Maximizing Level of Output with Perfectly Elastic Demand,[object Object]
Profit Maximizing Level of Output with Normal Demand,[object Object]
Profit Maximizing Level of Output with Normal Demand,[object Object]
Profit Maximizing Level of Output with Normal Demand,[object Object]
Normal Profit Normal Demand,[object Object]
Abnormal Profit Normal Demand,[object Object]
Loss Normal Demand,[object Object]
Is it always about profit?,[object Object]
Profit, Sales and Revenue Maximization?,[object Object]
Profit, Sales and Revenue Maximization?,[object Object]
Profit, Sales and Revenue Maximization?,[object Object]
Price Discrimination ,[object Object]
Definition,[object Object]
Types of Price Discrimination,[object Object]
Third Degree Discrimination,[object Object]
Theory of the firm
Pre-conditions for Price Discrimination,[object Object]
Price Discrimination ExampleTotal Ticket Sales,[object Object]
Price Discrimination ExampleAdult Tickets,[object Object]
Price Discrimination ExampleAdult Tickets,[object Object]
Price Discrimination Example,[object Object]
Efficiency,[object Object]
Productive Efficiency and Allocative Efficiency,[object Object]
Productive Efficiency: Resources are not wasted,[object Object]
Allocative Efficiency / Socially Optimum Level of Output,[object Object]
Perfect Competition Versus Monopoly,[object Object]
Perfect Competition Versus Monopoly,[object Object]
 Monopolies,[object Object]
Competition & the Theory of Contestable Markets,[object Object]
Efficiency,[object Object]
Traditional Theories of Market Structure and Competition,[object Object],Inverse Relationship,[object Object]
Theory of Contestable Markets,[object Object],Inverse Relationship,[object Object]
Theory of Contestable Markets,[object Object]
Theory of Contestable Markets,[object Object]

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Notas del editor

  1. Images from istockphoto.com
  2. Law of increasing returnConstantLaw of diminishing return
  3. Total Fixed Costs (TFC) = total cost of fixed assets used in a given time period. TFC is constant amount.Total Variable Costs (TVC) = total cost of the variable assets that a firm uses in a given period of time. TVC increases as the firm increases output.
  4. Average Fixed Cost (AFC) = fixed cost per unit = TFC/qAverage Variable Cost (AVC) = variable cost per unit = TVC/qAverage Total Cost (ATC) = total cost per unit = TC/q
  5. Image Source: Flickr Member Tracy O
  6. AR = Price and this falls as output increases as the price will be lowered in order to sell more productsMR falls but at a steeper rate MR is below the AR because the firm, in order to sell more products, has to lower the price and thus revenue is lost on the products that could have been sold at a higher price. In this way the firm will get more revenue from increased sales.TR rises then falls. At first the firm gains extra revenue by lowing price because more are sold but eventually this is outweighed by the loss in revenue from the units that were being sold at a higher price but must now be sold at a lower price.MR becomes a negative value when a loss of revenue results from lowering the price
  7. images from istockphoto.com
  8. While an accountant only considers tangible costs, revenue and profit, an economist also considers opportunity costTotal Profit for the accountant = Total Revenue – Total costs (variable and fixed)Total Profit for the economist = Total Revenue - Total Cost (viable, fixed and opportunity)
  9. Rule:If a firm wishes to maximize profits, it should produce at the level of output where MC cuts MR from below.
  10. To determine the amount of profit the AC must be added.
  11. Normal profit is the minimum level of profit needed for a company to remain competitive in the market. Normal Profit takes place when TR = TC (fixed, variable and opportunity)AC is the key for a firm to avoid loss and do better than normal profits to achieve abnormal profits.
  12. If a frim reduces its AC it will realize abnormal profits.
  13. Some Entrepreneurs measure success by sales and revenue and they may not realize that they could make more profit by selling less and charging more. For strategic reasons, some firms may aim to increase market share in the short run.Maximizing Employment Some firms may aim to have a large workforce believing that to be a measure of success.Environment AimsSome firm may increase cost by buy more expensive but environmentally sustainable raw materialsSatisficing New theories suggest that firm are often run on behalf of shareholders and managers make enough to keep them satisfied.
  14. Images form istockphoto.com
  15. Time (e.g. peak and off peak rates)Age (usually child tickers and senior discounts)IncomeGeographical Distance e.g. CDs cheaper in US than EUType of Consumer e.g. domestic and industrial users of electricity
  16. Time (e.g. peak and off peak rates)Age (usually child tickers and senior discounts)IncomeGeographical Distance e.g. CDs cheaper in US than EUType of Consumer e.g. domestic and industrial users of electricity
  17. Increase profits Increase output to gain economies of scaleGain market share by predatory pricing Build brand loyaltyPromote goodwill e.g. free parking for the disabledTo achieve fairness e.g. higher income groups pay more for government provided child care, at some universities international students pay more than domestic student
  18. Different market segment = different demand curvesArbitrage = reselling
  19. Image from istockphoto.com
  20. Firms are producing the optimal mix of goods and services required by consumers
  21. Assumptions concerning Free CompetitionLarge number of firmsHomogeneous productsPrice takersPerfect knowledgeNo barrier to entry
  22. Assumptions about MonopoliesOne firmPrice SetterBarriers to entry Some monopolies are considered Natural Monopolies i.e. barriers to entry are very high and the enjoys economics of scale where it can produce at a lower cost than many small firms combined e.g water supply, gas, electricity
  23. Some monopolies are considered Natural Monopolies i.e. barriers to entry are very high and the enjoys economics of scale where it can produce at a lower cost than many small firms combined e.g water supply, gas, electricity
  24. Images from istockphoto.com
  25. This theory has been challenged as to its assumption that barriers to entry are minimal in nature. Empirical testing of the theory is still underway.