Production with Two Outputs—Economies of Scope

Many firms produce more than one product. Sometimes a firm’s products are closely linked to one another: A chicken farm, for instance, produces poultry and eggs, an automobile company produces automobiles and trucks, and a uni- versity produces teaching and research. At other times, firms produce physically unrelated products. In both cases, however, a

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Dynamic Changes in Costs—The Learning Curve

Our discussion thus far has suggested one reason why a large firm may have a lower long-run average cost than a small firm: increasing returns to scale in production. It is tempting to conclude that firms that enjoy lower average cost over time are growing firms with increasing returns to scale. But this need

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Estimating and Predicting Cost of Production

A business that is expanding or contracting its operation must predict how costs will change as output changes. Estimates of future costs can be obtained from a cost function, which relates the cost of production to the level of output and other variables that the firm can control. Suppose we wanted to characterize the

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Production and Cost Theory—A Mathematical Treatment

This appendix presents a mathematical treatment of the basics of production and cost theory. As in the appendix to Chapter 4, we use the method of Lagrange multipliers to solve the firm’s cost-minimizing problem. 1. Cost Minimization The theory of the firm relies on the assumption that firms choose inputs to the production process

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Perfectly Competitive Markets

In Chapter 2, we used supply–demand analysis to explain how chang- ing market conditions affect the market price of such products as wheat and gasoline. We saw that the equilibrium price and quantity of each product was determined by the intersection of the market demand and market supply curves. Underlying this analysis is the

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Profit Maximization of the firm

We now turn to the analysis of profit maximization. In this section, we ask whether firms do indeed seek to maximize profit. Then in Section 8.3, we will describe a rule that any firm—whether in a competitive market or not—can use to find its profit-maximizing output level. Finally, we will consider the special case

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Marginal Revenue, Marginal Cost, and Profit Maximization

We now return to our working assumption of profit maximization and examine the implications of this objective for the operation of a firm. We will begin by looking at the profit-maximizing output decision for any firm, whether it operates in a perfectly competitive market or is one that can influence price. Because profit is

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Choosing Firm’s Output in the Short Run

How much output should a firm produce over the short run, when its plant size is fixed? In this section we show how a firm can use information about revenue and cost to make a profit-maximizing output decision. 1. Short–Run Profit Maximization by a Competitive Firm In the short run, a firm operates with

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The Competitive Firm’s Short-Run Supply Curve

A supply curve for a firm tells us how much output it will produce at every pos- sible price. We have seen that competitive firms will increase output to the point at which price is equal to marginal cost, but will shut down if price is below average variable cost. Therefore, the firm’s supply

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The Short-Run Market Supply Curve

The short-run market supply curve shows the amount of output that the industry will produce in the short run for every possible price. The indus- try’s output is the sum of the quantities supplied by all of its individual firms. Therefore, the market supply curve can be obtained by adding the supply curves of

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Choosing Firm’s Output in the Long Run

In the short run, one or more of the firm’s inputs are fixed. Depending on the time available, this may limit the flexibility of the firm to adapt its production process to new technological developments, or to increase or decrease its scale of operation as economic conditions change. In contrast, in the long run,

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Industry’s Long-Run Supply Curve

In our analysis of short-run supply, we first derived the firm’s supply curve and then showed how the summation of individual firms’ supply curves gener- ated a market supply curve. We cannot, however, analyze long-run supply in the same way: In the long run, firms enter and exit markets as the market price changes.

Evaluating the Gains and Losses from Government Policies—Consumer and Producer Surplus

We saw at the end of Chapter 2 that a government-imposed price ceil- ing causes the quantity of a good demanded to rise (at the lower price, consumers want to buy more) and the quantity supplied to fall (pro- ducers are not willing to supply as much at the lower price). The result is

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The Efficiency of a Competitive Market

To evaluate a market outcome, we often ask whether it achieves economic efficiency—the maximization of aggregate consumer and producer surplus. We just saw how price controls create a deadweight loss. The policy therefore imposes an efficiency cost on the economy: Taken together, producer and con- sumer surplus are reduced by the amount of the

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Minimum Prices

As we have seen, government policy sometimes seeks to raise prices above market-clearing levels, rather than lower them. Examples include the former regulation of the airlines by the Civil Aeronautics Board, the minimum wage law, and a variety of agricultural policies. (Most import quotas and tariffs also have this intent, as we will see

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Price Supports and Production Quotas

Besides imposing a minimum price, the government can increase the price of a good in other ways. Much of American agricultural policy is based on a system of price supports, whereby the government sets the market price of a good above the free-market level and buys up whatever output is needed to maintain that

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Import Quotas and Tariffs

Many countries use import quotas and tariffs to keep the domestic price of a product above world levels and thereby enable the domestic industry to enjoy higher profits than it would under free trade. As we will see, the cost to taxpay- ers from this protection can be high, with the loss to consumers

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The Impact of a Tax or Subsidy

What would happen to the price of widgets if the government imposed a $1 tax on every widget sold? Many people would answer that the price would increase by a dollar, with consumers now paying a dollar more per widget than they would have paid without the tax. But this answer is wrong. Or

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Introduction to Monopoly

As the sole producer of a product, a monopolist is in a unique position. If the monopolist decides to raise the price of the product, it need not worry about competitors who, by charging lower prices, would capture a larger share of the market at the monopolist’s expense. The monopolist is the market and

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Monopoly Power

Pure monopoly is rare. Markets in which several firms compete with one another are much more common. We say more about the forms that this competition can take in Chapters 12 and 13. But we should explain here why each firm in a market with several firms is likely to face a downward-sloping demand

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