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Purdue ECON 25100 - Costs, Industry, and Concentration
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+ ECON 251 1st Edition Lecture 15Outline of Last Lecture I. TermsII. Profit, Production, and CostsIII. ProductionIV. Relationship Between MPl and APlV. CostsOutline of Current Lecture I. TermsII. CostIII. Relationship Between MC and ATCIV. Long Run CostsV. Four Types of IndustryVI. Two Measures of ConcentrationCurrent LectureI. TermsMarginal Cost: additional cost of producing one more unit of outputMinimum Efficiency Scale: lowest Q where LRAC is minimumConcentration Ratio: percent of sales controlled by the top four firmsII. Cost(from last lecture)L Q FC = $10 VC TC AFC =FC/QAVC =VC/QATC =TC/QMC0 0 10 0 10 - - - -1 25 10 5 15 0.4 0.2 0.6 0.22 58 10 10 20 0.17 0.17 0.34 0.153 75 10 15 25 0.13 0.2 0.33 0.294 85 10 20 30 0.12 0.23 0.35 0.55 90 10 25 35 0.11 0.28 0.39 1.0MC = “hook shape”These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.AFC = FC/QAVC = VC/Q = WL/Q = W(L/Q) = Q/APLATC = TC/Q = AFC + AVCMin ATC is NOT equal to min AVCATC > AVCQ where ATC is min > ATC Q where AVC is minATC-AVC = AFC (which is always decreasing)ATC does NOT depend on QMarginal CostMC = ΔT/ ΔQ = Δ(FC+VC)/ ΔQ = ΔFC/ ΔQ + ΔVC/ ΔQ = Δ(WL)/ ΔQ = W(ΔL/ ΔQ) = W/MPL =MCIII. Relationship Between MC and ATCIF MC > ATC => inc ATCIF MC<ATC => dec ATCIF MC=ATC => no change in ATC At min of ATC(same for AVC – everywhere you see ATC, the statement holds true if you replace it with AVC)MC cross ATC and AVC at the min of eachIV. Long Run Costs FC = $0Three possible plant sizes: small (ATC1), medium (ATC2), large (ATC3)Which plant size is the cheapest at a given Q?* is the LONG RUN AVERAGEMore plant sizes => LRAC smooths out and start to look like:LEFT SIDE: economics of scale= LRAC dec as Q decRIGHT SIDE: diseconomics of scale = LRAC inc as Q incAt this point: min efficiency scaleV. Four Types of Industry1. Perfect competitiona. Lots of firmsb. Perfect substitutionsc. No barriers to entry2. Monopolya. One firmb. No close substitutionsc. Significant barriers to entry3. Monolistic competitiona. Many firms – products are differentiatedb. No barriers to entry4. Oligopolya. Few firmsb. Significant barriers to entryVI. Two Measures of Concentration1. Concentration RatioEx) 6 firms30% 30% 10% 10% 10% 10%CR = 802. Herfindahl-Hirschman Index (HHI)= sum of squared market shares of all firms (for this class: the top 50)20% 20% 20% 20% 10% 10%HHI = (4)(400) + (2)(10) = 1800Department of Justice GuidelinesHHI < 1000 => unconcentrated1000<=HHI<=1800 => moderately


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