Chapter 10 1 Command System A method of allocating resources by the order command of someone in authority a Example Your labor is allocated to specific tasks by a command If you have a job most likely someone tells you what to do 2 Economic Efficiency A situation that occurs when the firm produces a given output at the least cost a Example When my bakery produces 50 cakes a day using 2 ovens and 3 workers total cost is 350 When my bakery produces 50 cakes a day using 3 ovens and 2 workers total cost is 400 Economic efficiency occurs when my bakery produces 50 cakes a day using 2 ovens and 3 workers 3 Economies Of Scale Features of a firm s technology that make average total cost fall as output increases the LRAC curve slopes downward a Example If GM produces 100 cars a week each worker must perform many different tasks and the capital must be general purpose machines and tools But if GM produces 10 000 cars a week each worker specializes in a small number of tasks uses task specific tools and becomes highly proficient 4 Economies Of Scope Decrease in average total cost that occur when a firm uses specialized resources to produce a range of goods and services a Example Toshiba uses its designers and specialized equipment to make the hard drive for an iPod But it makes many different types of hard drives and other related products As a result Toshiba produces the iPod hard drive at a lower cost than a firm making only the iPod hard drive could achieve 5 Four Firm Concentration Ratio A measure of market power that is calculated as the of the value of sales accounted for by the 4 largest firms in an industry sales so the four firm concentration ratio is 80 6 Herfindahl Hirschman Index A measure of market power that is 14 firms produce tires The largest 4 have 80 of the a Example calculated as the square of the market share of each firm as a summed over the largest 50 firms or over all firms if there are less than 50 firms in a market If there are 4 firms in a market and the market shares of the firms are 50 25 15 and 10 the Herfindahl Hirschman Index is 50 2 25 2 15 2 10 2 3 450 a Example 7 Principal Agent Problem The problem of devising compensation rules that induce an agent to act in the best interest of a principal a Example working on the next generation iPhone agents to work efficiently Steve Jobs a principal must induce the designers who are 8 Technological Efficiency A situation that occurs when the firm produces a given output by using the least amount of inputs a Example My bakery can produce 50 cakes a days using 2 ovens and 3 workers It can also produce 50 cakes a day using 3 ovens and 3 workers Using 2 ovens and 3 workers is technologically efficient Chapter 11 1 Average Fixed Cost Total fixed cost per unit of output a Example then the average fixed cost is 5 a pizza if the total fixed cost of producing 10 pizzas is 50 a day 2 Minimum Efficient Scale The smallest quantity of output at which the long run average cost curve reaches its lowest level a Example When Tony s pizza produces 19 pizzas in an hour the average cost of each pizza is 6 And when Tony s pizza produces 20 pizza in an hour the average cost of each pizza is 5 50 But when Tony s produces the 21st pizza in an hour the average cost of each pizza rises to 5 75 When Tony s produces 20 pizzas in an hour it is producing at its minimum efficient scale 3 Sunk Cost The past expenditure on a plant that has no resale value a Example A year ago I paid 1 700 for car repairs Now my car needs more repairs I can spend 1 200 for the repairs or but a new car The 1 700 that I paid for repairs a year ago is a sunk cost and is irrelevant to my current decision 4 Marginal Product The increase in total product that results from a one unit increase in the variable input with all other inputs remaining the same It is calculated as the increase in total product divided by the increase in the variable input employed when the quantities of all other inputs remain the same a Example I own a computer and can complete 2 assignments in 1 week and 3 assignments in 2 weeks My marginal product is the increase in the number of assignments I can complete as a result of increasing my variable input the time spent My marginal product is 1 assignment 5 Marginal Cost The opportunity cost of producing one more unit of a good or service Best alternative foregone Calculated as the increase in total cost divided by the increase in output a Example 2 bookshelves The marginal cost of 3rd table is 2 bookshelves When I produce my 3rd table in a week I give up producing Chapter 12 1 External Diseconomies Factors outside the control of a firm that raise the firm s costs as the market output increase a Example With bigger airline industry output there is greater congestion of both airports and airspace which results in longer delays and extra waiting time for passengers and airplanes 2 External Economies Factors beyond the control of a firm that lower the firm s costs as the market output increase a Example As farm output increased in the 19th and early 20th centuries support industries for farmers expanded and the costs of farm machinery and fertilizers fell decreasing total costs for farmers 3 Long Run Market Supply Curve A curve that shows how the quantity supplied in a market varies as the market price varies after all the possible adjustments have been made including changes in each firm s plant and the number of firms in the market a Example When there is an increase in the number of firms in an industry and each firm has made all of the necessary changes in plant size then the industry is on its long run market supply curve 4 Perfect Competition A market in which there are many firms each selling an identical product There are many buyers there are no restrictions on entry into the industry firms in the industry have no advantage over potential new entrants and firms and buyers are well informed about the price of each firm s product a Example Every family in a small town owns a gas station There are so many gas stations that no one can control the price of gas and no one can stop another family from opening another station The gas station business in perfectly competitive 5 Short Run Market Supply Curve A curve that shows the quantity supplied in a market at each price when each firm s plant and the number of firms remain the same a Example …