OUTLINE -- CHAPTER 10
Producer Decisions: Benefits (Pure Competition)

I. Benefit-Cost Analysis and Producer Decisions

A. Decision: How Many to Produce:
B. Goal: Maximize Profits
C. Benefit Cost Analysis:

all where: MB > MC
up to where: MB=MC
but never where: MB<MC

II. The Product Market

A. Circular Flow Model
B. Four Product Market Models

1. Pure Competition (Ch. 10)
2. Pure Monopoly (Ch. 11)
3. Monopolistic Competition (Ch. 12)
4. Oligopoly (Ch. 12)

III. Pure Competition

A. Characteristics of Competitive Markets

1. NUMBER OF FIRMS: very large numbers
2. TYPE OF PRODUCT: homogeneous product
3. CONTROL OVER PRICE: "price takers"
4. EASE OF ENTRY: free entry
5. NONPRICE COMPETITION: none

B. Examples / Relevance

1. applying benefit cost analysis
2. competitive markets used as the "standard" of efficiency
3. agriculture

C. Demand and Competitive Markets

1. demand faced by the firm is perfectly elastic
2. market demand is downsloping

IV. Profit Maximization: Benefit-Cost Analysis Approach

A. Benefit-Cost Analysis

1. short run
2. marginal costs = MC
3. marginal benefits = MR

a) total revenue (TR)
b) marginal revenue (MR)

B. Profit Maximization -- Applying Benefit-Cost Analysis

1. step 1: find best quantity (where MR = MC)
2. step 2: be sure AR > AVC
3. calculate profits

a) profits = total revenue - total costs
b) check to see if profits are maximized

C. Three Cases -- using BOTH cost schedules and graphs

1. profit maximizing case

a) step 1: find quantity where MR = MC
b) step 2: are AR > AVC? If yes, then produce
c) calculate profits

2. loss minimizing case

a) step 1
b) step 2
c) calculate profits
d) check to see if losses are minimized
e) why not close down?

3. close-down case

a) step 1
b) step 2
c) calculate profits/check

4. Quick Review Quiz / Quick Review Quiz

D. Marginal Cost and the Short Run Supply Curve

V. Profit Maximization: total cost minus total revenue approach

A. Short Run
B. Graphs

VI. Profit Maximization in the Long Run

A. Assumptions
B. LR Equilibrium: competitive markets

1. "After all long-run adjustments are completed, product price will be exactly equal to, and production will occur at, each firm's point of minimum average total cost"
2. zero profit (normal profit) model

C. Why?

1. entry of firms eliminates profits
2. exodus of firms eliminates losses

F. Long Run Supply Curve

1. constant cost industry
2. increasing cost industry

VII. Pure Competition and Efficiency !!!!!!!!!!!!!!!!

A. Competitive Markets Used as Standard of Efficiency
B. Productive Efficiency

1. definition
2. P = minimum ATC (MC=ATC)

C. Allocative Efficiency

1. definition
2. MSB = MSC
3. allocative efficiency: P = MC
4. allocative inefficiency

a. underallocation of resources: P>MC
b. overallocation of resources: P<MC

5. marginal cost pricing

a. telephone rates
b. electricity rates
c. plane fares
d. rent with utilities included
e. bus fares
f. parking meters
g. garbage collection and recycling
h. tollway fares
i. spillover costs and benefits
j. other

D. Dynamic Adjustments

 VIII. Qualifications (Shortcomings) of the Competitive Price System

A. Income Distribution Problems (Equity)
B. Market Failures: Spillovers and Public Goods
C. Productive Techniques

1. natural monopolies
2. technological progress (Dynamic Efficiency)

a. incentive
b. means

D. Range of Consumer Choice