The Firm and Its customers PDF

Preview

Summary

The Firm and Its Customers – Week 10In the US, 52% of private-sector employees work in large firms.Growth strategies - Low profit margins, ever increasing scale: Tesco, Amazon - High profit margins, exclusivity: Apple, luxury brandsHow do firms determine its price? - Know your demand - Know your pro...

Description

Monday 25th November 2019

The Firm and Its Customers – Week 10 In the US, 52% of private-sector employees work in large firms. Growth strategies - Low profit margins, ever increasing scale: Tesco, Amazon - High profit margins, exclusivity: Apple, luxury brands How do firms determine its price? - Know your demand - Know your profits, given prices, quantities and costs - You maximum profit, given demand, will give your price Knowing your potential profits. Assume: - The quantity you produce is Q, and your price is P - Assume your unit costs of production are AC = 2 Then: - Total revenues are TR = P x Q - Total costs are TC = AC x Q - Profit π = TR – TC = PQ – ACQ = (P – AC) Q = (P – 2) Q What should your P be if you target π = 0 With P = AC = 2, π = 0. Notice π = const for all Q

Monday 25th November 2019

Monday 25th November 2019

This demonstrates average costs constant. In reality they are not due to economies of scale: When a firm grows, its average costs decline. - Technological advantages: Large-scale production uses fewer inputs per unit of output (increasing returns to scale) - Cost advantages o Fixed costs are distributed across larger output  Advertising  Research and Development o Bargaining power over input costs (w, r, pm) - Demand advantages: network goods (Facebook and instagram, google and android etc) - However this can lead to diseconomies of scale: when a firm becomes too large, average costs start increasing

Monday 25th November 2019

Monday 25th November 2019

Monday 25th November 2019

Constrained optimization = a decision-maker chooses the values of one or more variable 1. To achieve an objective 2. Subject to a constraint that determines the feasible set

Consumer surplus = net benefit of market participation for consumers Producer surplus = net benefit of market participation for producers

Monday 25th November 2019...