Mini Candy Bars TU 00 18 218 330 440 548 652 7 850 Referring to the table: A.What is the MU of each unit consumed? B. At what point will consumption stop?

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Presentation transcript:

Mini Candy Bars TU Referring to the table: A.What is the MU of each unit consumed? B. At what point will consumption stop? Stop consumption after 7 units.

A switch -  We have been looking at how you, the customer, makes decisions.  We are now going to look at how firms make decisions.  We will focus on short-run decisions.

Factors of Production Key to the discussion:  Land,  Labor,  Capital,  Entrepreneurship  (and technology)  FoP are owned by individuals  We will keep the cost of FoP constant to simplify our discussion.

Supply  More complicated than demand.  All supply comes from individuals not firms (because people own the FoP) Supply exists because of incentives – (work or stay home?) (sell or keep?) It depends on opportunity cost.

 Definition: Transforming the supply of factors of production into goods and services that we use.  We will also separate the supply of produced goods from the factors of production (FoP) to make analysis easier. Prices of produced goods and services will be allowed to vary.  Remember: Our focus is on a firms short-run decisions..

Roles of the Firm  3 Roles Organize the factors of production Produce goods and services Sell produced goods and services  A firm may participate in one or more of these activities. Opportunity cost usually determines which ones Virtual Firms ○ Perdue Chickens,

Profits – Different types  Accounting Profits = Total Revenue – Total Cost Explicit, “visible costs”  Econ Profits =(Exp. + Implicit Rev) – (Exp. + Implicit Costs) Implicit revenue includes increases in asset value. Implicit costs involve opportunity costs.  E.g. Implicit Revenue  Increase in real estate value  E.g. Implicit Cost  Salary you could have had

Try # 3 Page 291 CostsRevenue 4,000100,000 40,000 5,000 (50,000) (4,000) a.) Accounting Profit = 100,000-49,000 = b.) Economic Profit = 100, ,000 = $51,000 $-3,000

Real World Examples  Netflix Did not consider opportunity costs.  Mergers, SpinoffsChic-fil-a, PowerSchools, Netflix, Southwest and Airtran  Value-added The Value added by all firms must be 100% Image can add value. Medicine, Sports equipment, coffee, designer clothes. Anything with a name brand really!

Short-Run vs. Long-Run  Long-run: Firms choose the least expensive method of production. All inputs are variable.  Short-run: Firsts adjust its long-run planning decisions as they get new information. Some inputs are fixed.

Demand vs. Supply  Quick Recap! Demand ○ Individuals Maximize Utility Supply ○ Firms Maximize profits

Production Tables and Graphs  Production Table- Shows the output form various FoP input combinations.  Total Product – Overall production output. Marginal Product - Additional output per each additional worker. ○ When MP=0 TP is maximized. Average product – Output per worker.

 Diminishing Marginal Productivity vs. Diminishing Marginal Utility

Economies of Scope  T-shirts  Sewing Shop, Tuxedos  P & G, Amazon & ZAPPOS, ABC & DISNEY & ESPN

Behavioral Side  (We are focusing on the standard model)  Social Norms What are people used to. What has always been done Loyalty, Giving back, attention to customers. Other Examples

Behavioral Side  Learning By Doing – Part of standard analysis Will do better the next time. ○ You will do better if you retake micro in college Increase production by 1-2% My Uncle John…experience matters.  Output Analysis Not just costs and output numbers “Think game theory”. It’s how we analyze not just a model. Multi-dimensional

Tech Changes Increased efficiency and new and better products are produced. In the long run standard model, tech change is a given. Moore’s law- computing costs are cut in half every 18 months. (Improvements keep the prices similar.)

Costs Just like individuals companies often fail to look at costs from an economic standpoint. The focus on the accounting side. ○ Depreciation – an assets decline in value over time. Firms like Google and other innovative companies are try to look at the bigger picture in terms of costs and payoffs.