microeconomics the cost of production.ppt

Fernando in 1970 they bought 1083 billion.Was this increase due to economies of scale or to other factors?If it was the result of economies of scale, it would be economically inefficient for regulators to “break up” electric utility monopolies.TABLE 7.4Scale Economies in the Electric Power IndustryOutput (million kwh) 43 338 1109 2226 5819Value of SCI, 1955 .41 .26 .16 .10 .04Chapter 7: The Cost of Production50 of 50Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e.ESTIMATING AND PREDICTING COST7.7Average Cost of Production in the Electric Power IndustryThe average cost of electric power in 1955 achieved a minimum at approximately 20 billion kilowatt-hours. By 1970 the average cost of production had fallen sharply and achieved a minimum at an output of more than 33 billion kilowatt- hours.Figure 7.16Chapter 7: The Cost of Production51 of 50Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e.Chapter 7: The Cost of Production52 of 50Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e.CHAPTER 8 OUTLINE8.1 Perfectly Competitive Markets8.2 Profit Maximization8.3 Marginal Revenue, Marginal Cost, and ProfitMaximization8.4 Choosing Output in the Short Run8.5 The Competitive Firm’s Short-Run Supply Curve8.6 The Short-Run Market Supply Curve8.7 Choosing Output in the Long Run8.8 The Industry’s Long-Run Supply CurveChapter 7: The Cost of Production53 of 50Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e.PERFECTLY COMPETITIVE MARKETS8.1The model of perfect competition rests on three basic assumptions: (1) price taking, (2) product homogeneity, and (3) free entry and exit.Price TakingBecause each individual firm sells a sufficiently small proportion of total market output, its decisions have no impact on market price.● price taker Firm that has no influence over market price and thus takes the price as given.Product HomogeneityWhen the products of all of the firms in a market are perfectly substitutable with one another—that is, when they are homogeneous— no firm can raise the price of its product above the price of other firms without losing most or all of its business.Chapter 7: The Cost of Production54 of 50Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e.PERFECTLY COMPETITIVE MARKETS8.1Free Entry and Exit● free entry (or exit) Condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry.When Is a Market Highly Competitive?Because firms can implicitly or explicitly collude in setting prices, the presence of many firms is not sufficient for an industry to approximate perfect competition. Conversely, the presence of only a few firms in a market does not rule out competitive behavior.Chapter 7: The Cost of Production55 of 50Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e.PROFIT MAXIMIZATION8.2Do Firms Maximize Profit?The assumption of profit maximization is frequently used in microeconomics because it predicts business behavior reasonably accurately and avoids unnecessary analytical complications. For smaller firms managed by their owners, profit is likely to dominate almost all decisions. In larger firms, however, managers who make day-to-day decisions usually have little contact with the owners.In any case, firms that do not come close to maximizing profit are not likely to survive. Firms that do survive in competitive industries make long-run profit maximization one of their highest priorities.Alternative Forms of Organization● cooperative Association of businesses or people jointly owned and operated by members for mutual benefit.Chapter 7: The Cost of Production56 of 50Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e.PROFIT MAXIMIZATION8.2Nationwide, condos are a far more common than co-ops, outnumbering them by a factor of nearly 10 to 1. In this regard, New York City is very different from the rest of the nation—co-ops are more popular, and outnumber condos by a factor of about 4 to 1.What accounts for the relative popularity of housing cooperatives in New York City? Part of the answer is historical. Housing cooperatives are a much older form of organization in the U.S.The building restrictions in New York have long disappeared, and yet the conversion of apartments from co-ops to condos has been relatively slow.The typical condominium apartment is worth about 15.5 percent more than a equivalent apartment held in the form of a co-op.It appears that in New York, many owners have been willing to forgo substantial amounts of money in order to achieve non-monetar。