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Industrial organization
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The study of how firms' decisions about prices and quantities depend on the market conditions they face
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Assumption
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the goal of a firm is to maximize profit
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profit
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total revenue - total cost
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Total cost (TC)
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market value of the inputs a firm uses in production
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costs as opportunity costs
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the cost of something is what you give up to get
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explicit costs
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input costs that require an outlay of money by the firm
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implicit costs
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input costs that do not require an outlay of money by the firm
ignored by accountants
ignored by accountants
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total costs
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explicit costs + implicit costs
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economic profit
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TR - TC
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Accounting profit
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TR - TEC (total explicit cost)
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Fixed costs
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costs that do not vary with the quantity of output produced
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variable costs
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Costs that vary with the quantity of output produced
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rising marginal cost curve
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because of diminishing marginal product
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efficient scale
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quantity of output that maximizes ATC
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many decisions
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fixed in the short run
variable in the long run
variable in the long run
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economies of scale
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long run average total cost falls as the quantity of output increases
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constant returns to scale
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long run average total cost stays the same as the quantity of output changes
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diseconomies of scale
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long run average total cost rises as the quantity of output increases
increasing coordination problems
increasing coordination problems
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