Producer Theory

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# Producer Theory
## EC 201: Principles of Microeconomics
### Kyle Raze
### Winter 2020

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# Prologue

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# Agenda

**Goal:** Understand the tradeoffs that producers face.

- How do producers make decisions?

- Where does the supply curve come from?

**Outline**

1. Costs of production.

2. Firms in competitive markets (today).

3. Monopoly (next week).

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# Firms in Competitive Markets

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# (Perfectly) Competitive Markets

## Conditions

1. Many buyers and sellers.

2. Identical, undifferentiated products.

3. Free entry and exit.

4. Each firm is small relative to the market.

## Result

**No market power:** Firms have no control over the market price.

- Each firm is a **price taker**.

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# Competitive Markets

## Examples?

**Q:** Is a stock market perfectly competitive? .purple[Why] or .pink[why not]?

- .purple[Many buyers and sellers of a single stock .mono[+] real-time information.]

- .pink[Large institutional investors big enough to influence prices.]

**A:** .pink[Competitive, but far from perfectly.]

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# Competitive Markets

## Examples?

**Q:** Is a farmers' market perfectly competitive? .purple[Why] or .pink[why not]?

- .purple[Many buyers and sellers .mono[+] similar products .mono[+] sellers can enter at low cost.]

- .pink[Sometimes there are few sellers .mono[-->] ability to set higher prices.]

**A:** .purple[Not perfectly competitive, but close in some settings.]

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# Competitive Markets

## Examples?

**Q:** Is an online ticket auction perfectly competitive? .purple[Why] or .pink[why not]?

- .purple[Many buyers and sellers of the same event.]

- .pink[Some companies get special privileges to buy or sell tickets before others .mono[-->] barriers to entry.]

**A:** .purple[Not perfectly competitive, but close.]

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# Competitive Markets

## Examples?

**Q:** Is the Amazon.com marketplace perfectly competitive? .purple[Why] or .pink[why not]?

- .purple[Many buyers and sellers of similar products.]

- .pink[Differentiated products .mono[+] imperfect information .mono[+] Amazon big enough to force other sellers out by temporarily undercutting prices.]

**A:** .pink[Probably not.]

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# Competitive Markets

## Examples?

**Q:** Is the market for corn perfectly competitive? .purple[Why] or .pink[why not]?

- .purple[Many buyers and sellers .mono[+] genetically identical crops.]

- .pink[Farm consolidation .mono[+] government manipulation of prices (*e.g.,* subsidies).]

**A:** .purple[Not perfectly competitive, but close.]

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# Competitive Markets

## Examples?

**Q:** Is the market for corn seed perfectly competitive? .purple[Why] or .pink[why not]?

- .pink[Few sellers (*e.g.,* Monsanto and Syngenta) .mono[+] barriers to entry (*e.g.,* patents).]

**A:** .pink[Not a chance.]

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# Competitive Markets

**Q:** If there are no examples of a perfectly competitive market, why bother modelling one?

**A.sub[1]:** Lay groundwork for modelling more-realistic scenarios.

- Simple, but not for simplicity's sake.

- Insights for other market structures.

**A.sub[2]:** Establish a benchmark to compare the "real world" against.

- Helps us answer the question "can we do better?"

- Can address "how can we do better?" by comparing market conditions of "real world" to benchmark conditions.

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# Market Structure

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# Market Structure

.pink[Price elasticity of demand] for a particular firm's product is an important determinant of market structure.

.pull-left[
.center[**Monopolist**]
<img src="15-Producer_Theory_files/figure-html/unnamed-chunk-2-1.svg" style="display: block; margin: auto;" />
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.pull-right[
.center[**Perfectly Competitive Firm**]
<img src="15-Producer_Theory_files/figure-html/unnamed-chunk-3-1.svg" style="display: block; margin: auto;" />
]

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# Marginal Revenue

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## Definition

> Change in total revenue that arises from a one-unit increase in output.

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<img src="15-Producer_Theory_files/figure-html/unnamed-chunk-4-1.svg" style="display: block; margin: auto;" />
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# Marginal Revenue

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For a firm in a perfectly competitive market,

- MR .mono[<=>] D.

- MR .mono[=] P.

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.more-left[
<img src="15-Producer_Theory_files/figure-html/unnamed-chunk-5-1.svg" style="display: block; margin: auto;" />
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# Profit Maximization

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<img src="15-Producer_Theory_files/figure-html/unnamed-chunk-6-1.svg" style="display: block; margin: auto;" />
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