B ECON 300
Lucas Perin (firstname.lastname@example.org)
Managers, Profits, Markets
Overall goal of managers: maximizing profits ( ) Accounting profits: Total Revenues – Explicit Costs Economic profits: Total Revenues – Explicit Costs – Implicit Costs = Accounting Profits – Implicit Costs Accounting profits usually overstate economic profits (but make sure you check the baseball example in the book) Opportunity Cost: value of next best foregone alternative Explicit Costs (not owner supplied) Cost of resources purchased in the market, taxes Leases Wages Capital – plant, machinery, equipment Implicit Costs Value of owner-supplied resources - Value of time of owner-manager - Forgone returns on owner’s equity capital - Opportunity cost of using owned equipment, plant, machinery
Market structure: market characteristics that determine the economic environment in which a firm operates. Characteristics: Number and size of firms (size refers to % of industry output supplied) Degree of product differentiation Barriers to entry (high vs. low/no barriers to entry)
Market power: a firm is said to have market power when it can raise the price of its output without losing all of its sales. Price taker: firm in the industry take the market price for their output as given: must charge the same market price as everyone else or demand will drop nearly to zero. The price-taking firm faces a perfectly elastic (horizontal) firm demand curve. Price setter: a price setting firm has some degree of market power, i.e., some ability of increasing price without losing all sales. The firm faces a downward sloping demand curve.
No market power
High degree of market power
Number and Size
Large # of small firms supplying small % of output No product differentiation/ homogeneous Low barriers to entry
Large # of small firms supplying small % of output...