Notes for Besanko, et al. 9-37 Review the definitions and draw graphs for these concepts (Refer to PPT microeconomics review): Costs in the Short Run...

Notes for Besanko, et al., pp. 9-37

Review the definitions and draw graphs for these concepts (Refer to PPT microeconomics review):

1.  Costs in the Short Run (SR)

a.   Total Cost equals Total Variable Cost plus Total Fixed Cost [TC = TVC + TVC]

b.  Fixed v. variable in SR:

                                              i.     Average Total Cost equals Average Variable Cost plus Average Fixed Cost [ATC = AFC + AVC]

                                           ii.     Marginal Cost (MC) equals the change in Total Cost as output increases [MC = dTC / dQ], which ONLY includes variable costs [dTFC / dQ = 0]

2.  [SR v.] the Long Run (LR)

a.   Economies of scale

b.  LR Average Cost is the envelope curve of the SR Average Cost curves

3.  Sunk costs v. avoidable costs

4.  Costs & profitability

a.   Economic costs v. accounting costs -Economic costs are all opportunity costs, unlike the rules of accounting.

b.  Economic profit v. accounting profit depends on the extent of opportunity costs in the accounting costs.

5.  Demand & Total Revenue (TR)

a.   Demand curve

                                              i.     Relationship of Quantity Demanded to different prices

                                           ii.     Effects of other variables on Demand - shown with SHIFTS in the Demand Curve

b.  Price elasticity of demand

                                              i.     Formula for elasticity 

[% change in Quantity Demanded / % change in Price]

                                           ii.     Firm's elasticity of demand is higher than the market elasticity of demand (more close substitutes)

                                         iii.     What influences elasticity

1.  substitutes

2.  complements

3.  time factor

4.  preferences

5.  income

6.  demographics

c.   TR & Marginal Revenue (MR) functions       

                                              i.     MR = dTR / dQ 

                                           ii.     (MR(Q) = P(1 - (1/h))

6.  Pricing & output decisions: produce where MR = MC to maximize profit

7.  Perfect competition - for the firm & for the market

a.   Profit is possible in the SR [but this attracts new firms in the LR]

b.  LR equilibrium has enough entering so that LR profit goes to zero for the typical firm.

8.  Game theory - to analyze competition when firms are interdependent/rival

a.   Matrix form

                                              i.     Any firms exhibit a dominant strategy - but not necessarily all

                                           ii.     Nash equilibrium - when all firms select their own positions/decisions no matter what others may do 

Is advertising a dominant strategy for both of these two restaurants, with the matrix showing what they believe to be their likely profits? Do they reach a Nash Equilibrium?

Taqueria Jalisco

Do not advertise

Advertise

La Playa

Do not advertise

 200    200

 -0-    300

Advertise

 300     -0-

100    100

b.  Game trees to illustrate sequential games

What outcome would you expect for these 2 cereal firms, deciding whether to introduce a crispy cereal ORa sweet cereal?

                                                               Crispy                (-5, -5)

                           Crispy        Firm 2                

                                                               Sweet                 (10, 20)