In a perfectly competitive market, individual firms are price-takers . This means that firms have no control over price. Price is determined by the interaction of market supply and demand.
Demand Facing a Single Firm in a Perfectly Competitive Market
If a representative firm in a perfectly competitive market rises the price of its output above $2.45, the quantity demanded of that firm’s output will drop to zero. Each firm faces a perfectly elastic demand curve, d .
The normal rate of return is a rate of return on capital that is just sufficient to keep owners and investors satisfied.
For relatively risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds.
Calculating Total Revenue, Total Cost, and Profit $ 1,000 a Profit = total revenue total cost $15,000 Belts from supplier 14,000 Labor Cost 2,000 Normal return/opportunity cost of capital ($20,000 x .10) $31,000 $30,000 $20,000 .10 or 10% a There is a loss of $1,000. Total Cost Costs Total Revenue (3,000 belts x $10 each) Initial Investment: Market Interest Rate Available:
The long run is a period of time for which there are no fixed factors of production. Firms can increase or decrease scale of operation, and new firms can enter and existing firms can exit the industry.
The production function or total product function is a numerical or mathematical expression of a relationship between inputs and outputs. It shows units of total product as a function of units of inputs.
The law of diminishing marginal returns states that:
When additional units of a variable input are added to fixed inputs, the marginal product of the variable input declines.
Production Function for Sandwiches 7.0 0 42 6 8.4 2 42 5 10.0 5 40 4 11.7 10 35 3 (4) AVERAGE PRODUCT OF LABOR (2) TOTAL PRODUCT (SANDWICHES PER HOUR) (3) MARGINAL PRODUCT OF LABOR Production Function 12.5 15 25 2 10.0 10 10 1 0 0 (1) LABOR UNITS (EMPLOYEES)
As long as marginal product rises, average product rises.
When average product is maximum, marginal product equals average product.
When average product falls, marginal product is less than average product.
Production Functions with Two Variable Factors of Production
In many production processes, inputs work together and are viewed as complementary.
For example, increases in capital usage lead to increases in the productivity of labor.
Given the technologies available, the cost-minimizing choice depends on input prices.
2 10 E 3 6 D UNITS OF CAPITAL (K) UNITS OF LABOR (L) Inputs Required to Produce 100 Diapers Using Alternative Technologies 4 4 C 6 3 B 10 2 A TECHNOLOGY
Production Functions with Two Variable Factors of Production 20 21 24 33 $52 (5) COST WHEN P L = $1 P K = $1 12 9 8 9 $12 (4) COST WHEN P L = $1 P K = $1 2 10 E 3 6 D (2) UNITS OF CAPITAL (K) (3) UNITS OF LABOR Cost-Minimizing Choice Among Alternative Technologies (100 Diapers) 4 4 C 6 3 B 10 2 A (1) TECHNOLOGY