HL: RATIONAL PRODUCER BEHAVIOR
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WHAT: COSTS, REVENUES AND PROFITS
Understand the concept of rational producer behavior
Be aware that Neo-classical theory assumes that the aim of firms is to maximize profits |
WHY: SO THAT YOU ARE ABLE TO EXPLAIN THE MARKET OUTCOMES (ALLOCATIVE EFFICIENCY AND PRODUCTIVE EFFICIENCY) OF DIFFERENT MARKET STRUCTURES
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HOW AN ECONOMIST UNDERSTANDS PROFITS (BE AWARE BM STUDENTS)
COSTS
Define and explain the idea of economic costs
Define between explicit costs and implicit costs
Define, illustrate, calculate and give examples of short run costs
Define between explicit costs and implicit costs
Define, illustrate, calculate and give examples of short run costs
| costs_2020_rev.docx |
| costs_2020_rev_-_workings.docx |
REVENUES
Define, explain and illustrate total, average and marginal revenues.
Explain and illustrate the relationship between total, average and marginal revenue and price elasticity of demand.
Explain and illustrate the relationship between total, average and marginal revenue and price elasticity of demand.
| revenues_2020.docx |
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PROFITS
- Define and explain the measurement of profit
- Distinguish between normal, abnormal profit and losses
- Define, explain and illustrate the concept of profit maximisation
- Describe alternative business objectives of firms
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“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages” |
| profits.docx |
Describing alternative business objectives of firms:
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mARKET STRUCTURES
PERFECT COMPETITION
- Describe, using examples, the assumed characteristics of perfect competition: a large number of firms; a homogeneous product; freedom of entry and exit; perfect information; perfect resource mobility.
- Explain, using a diagram, the shape of the perfectly competitive firm’s average revenue and marginal revenue curves, indicating that the assumptions of perfect competition imply that each firm is a price taker.
- Explain, using a diagram, that the perfectly competitive firm’s average revenue and marginal revenue curves are derived from market equilibrium for the industry.
- Explain, using diagrams, that it is possible for a perfectly competitive firm to make economic profit (abnormal profit), normal profit (zero economic profit) or negative economic profit in the short run based on the marginal cost and marginal revenue profit maximisation rule.
- Explain, using a diagram, why, in the long run, a perfectly competitive firm will make normal profit (zero economic profit).
- Explain, using a diagram, how a perfectly competitive market will move from short- run equilibrium to long-run equilibrium.
- Explain, using a diagram, when a loss-making firm would shut down in the short run.
- Explain, using a diagram, when a loss-making firm would shut down and exit the market in the long run.
- Explain the meaning of the term allocative efficiency.
- Explain that the condition for allocative efficiency is P = MC (or, with externalities, MSB = MSC).
- Explain, using a diagram, why a perfectly competitive market leads to allocative efficiency in both the short run and the long run.
- Explain the meaning of the term productive efficiency.
- Explain that the condition for productive efficiency is that production takes place at minimum average total cost.
- Explain, using a diagram, why a perfectly competitive firm will be productively efficient in the long run, though not necessarily in the short run.
The most competitive market imaginable. Perfect COMPETITION is rare and may not even exist. It is so competitive that any individual buyer or seller has a negligible impact on the market PRICE. Products are homogeneous. INFORMATION is perfect. Everybody is a price taker. FIRMS earn only normal PROFIT, the bare minimum profit necessary to keep them in business. If firms earn more than that (excess profits) the absence of barriers to entry means that other firms will enter the market and drive the price level down until there are only normal profits to be made. OUTPUT will be maximised and price minimised. Contrast with MONOPOLISTIC COMPETITION, OLIGOPOLY and, above all, MONOPOLY.
| perfect_competiton__-_rational_producer_behavior.docx |