Introduction

What is the firm? The firm is an organization that produces goods and services for consumers
(other firms and households).

Firms make a large number and variety of decisions during the production process. First of all, they make decisions regarding the products they produce (outputs), the quantities of outputs, the number of workers they will employ, the amount of capital they will invest, the quantities of inputs they will use, etc.

Firms make a large number and variety of decisions during the production process. First of all, they make decisions regarding the products they produce (outputs), the quantities of outputs, the number of workers they will employ, the amount of capital they will invest, the quantities of inputs they will use, etc.

The owner provides capital and controls the firm. The firm is managed by the owner or by professional managers appointed by the owner.

The neoclassical theory assumes that firms have only one objective, profit maximization, and they
have full information about technology and market conditions (the demand function, etc.) so that they can indeed maximize profit.

Market structure refers to a market’s persistent characteristics and composition that determine how firms (buyers and sellers) interact.

What is the market? The market is a space where buyers and sellers exchange a specific product in return for a money payment.

Market structure provides information about the environment within which a firm operates.

To summarize, the market structure determines the conduct of firms, which, in turn, determines micro- and macro-performance.

To summarize, the market structure determines the conduct of firms, which, in turn, determines micro- and macro-performance. Then, what determines the market structure? Some “basic conditions” like technology, consumer preferences, factor endowments, laws, and regulations determine market structure.

The difference between total utility and total expenditures for the product (P1Q1) is called the “consumer surplus” (the area between the demand function and the price line, see Figure 1.2).

The derivative of the revenue function with respect to output, dR / dq, is the marginal revenue (MR), and it shows how much the revenue changes in response to a one-unit change in output.

If the revenue of the firm is a linear function of output (see R1 in Figure 1.3), the MR is constant because the MR is the derivative of the revenue function (MR = dR / dQ).

The price-cost margin shows how much a firm can raise the product price above the marginal cost. It is a measure of profitability and market power.

The definition of a market has three dimensions: product, time, and space

The cross-price elasticity of demand is used to measure if two products are close substitutes.

The market gets more competitive as the CRk gets closer to 0, and more monopoly if it gets closer to 1.

What is the cost of a monopoly? Social welfare is equal to the consumer surplus plus the producer surplus. There is no producer surplus under perfect competition (no profit), and the consumer surplus is the area between the demand function and the price (marginal cost) line.

Sunk cost: Fixed costs that cannot be recovered when the firm exists from the market.

The long-run average cost curve could be U-shaped because diminishing returns to the
management function will cause an increase in average costs after a certain size.