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Firms and customers I
MPA 612: Public Management Economics February 12, 2018
Fill out your reading report on Learning Suite!
Current events
Now expanded to take advantage of your new vocabulary!
Firms and customers I MPA 612: Public Management Economics - - PowerPoint PPT Presentation
Firms and customers I MPA 612: Public Management Economics - - PowerPoint PPT Presentation
Firms and customers I MPA 612: Public Management Economics February 12, 2018 Fill out your reading report on Learning Suite! Current events Now expanded to take advantage of your new vocabulary! Plan for today Outsourcing revisited Demand
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Costs and profit Demand and profit maximization Outsourcing revisited
Plan for today
Popsicle Sticks, Inc.
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Outsourcing
When should government privatize stuff?
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Conditions for contracting
The bigger the adverse consequences of cost-cutting
- n quality, the stronger the
case for in-house provision
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Should governments
- utsource…
Snowplows Garbage Mail Schools Prisons Police Healthcare Military
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Demand and profit maximization
How much stuff should you make and how much should you charge for it?
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1 2 3 4 5 6 7 8 8,000 16,000 24,000 32,000 40,000 48,000 56,000 64,000 72,000 80,000 Quantity Q: pounds of Cheerios Price P: dollars per pound
Demand and WTP
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Total costs (TC) Unit cost × quantity $2 × Q Total revenue (TR) Price × quantity P × Q Profit (TR − TC) P × Q − $2 × Q (P − $2) × Q
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1 2 3 4 5 6 7 8 9 10 8,000 16,000 24,000 32,000 40,000 48,000 56,000 64,000 72,000 80,000 Price P: dollars per pound Quantity Q: pounds of Cheerios $60,000 $34,000 $23,000 $10,000 $0
Isoprofit curves
(P − $2) × Q
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Profit maximization
Feasible Set
1 2 3 4 5 6 7 8 9 10 8,000 16,000 24,000 32,000 40,000 48,000 56,000 64,000 72,000 80,000 Price, P: dollars per pound Quantity, Q: pounds of Cheerios $60,000 $34,000 $23,000 $10,000 $0 Demand curve E
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Popsicle Sticks, Inc.
Sister company to XYZ Airlines, probably
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Specifications
Squares attached at all four corners using labels Labels cannot be wider than sticks Squares must be square when inspected Labels must be cut with the scissors, not be torn
Costs
Table rental: $1.00 Scissor rental: $0.50 Popsicle stick: $0.10 Label per corner: $0.05 Wage per active employee: $0.40
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Round 1 1 worker allowed
Table rental: $1.00 Scissor rental: $0.50 Popsicle stick: $0.10 Label per corner: $0.05 Wage per employee: $0.40
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Round 1 1 worker allowed
Table rental: $1.00 Scissor rental: $0.50 Popsicle stick: $0.10 Label per corner: $0.05 Wage per employee: $0.40
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Round 2 2 workers allowed
Table rental: $1.00 Scissor rental: $0.50 Popsicle stick: $0.10 Label per corner: $0.05 Wage per employee: $0.40
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Round 2 2 workers allowed
Table rental: $1.00 Scissor rental: $0.50 Popsicle stick: $0.10 Label per corner: $0.05 Wage per employee: $0.40
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Round 3 Unlimited workers allowed
Table rental: $1.00 Scissor rental: $0.50 Popsicle stick: $0.10 Label per corner: $0.05 Wage per employee: $0.40
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Round 3 Unlimited workers allowed
Table rental: $1.00 Scissor rental: $0.50 Popsicle stick: $0.10 Label per corner: $0.05 Wage per employee: $0.40
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Round 4 Unlimited workers allowed
Table rental: $1.00 Scissor rental: $0.50 Popsicle stick: $0.10 Label per corner: $0.05 Wage per employee: $0.40
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Round 4 Unlimited workers allowed
Table rental: $1.00 Scissor rental: $0.50 Popsicle stick: $0.10 Label per corner: $0.05 Wage per employee: $0.40
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Round 5 Unlimited workers allowed
Table rental: $1.00 Scissor rental: $0.50 Popsicle stick: $0.10 Label per corner: $0.05 Wage per employee: $0.40
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Round 5 Unlimited workers allowed
Table rental: $1.00 Scissor rental: $0.50 Popsicle stick: $0.10 Label per corner: $0.05 Wage per employee: $0.40
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Fixed costs Variable costs Average costs Cost function shape
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Costs and profit
Making stuff costs money and affects profits
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2000 2200 2400 2600 2800 3000 3200 3400 3600 3800 4000 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80
Average cost
- 2000
48000 98000 148000 198000 248000 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71
Total cost of production, C(Q)
F Quantity of cars, Q Average cost of production Total cost of production, C(Q) 350,000 Quantity of cars, Q A Q0= 20 4,000 A Q0= 20 C0 = 80,000 AC at A = slope of OA = C0/Q0= 4,000 Q1= 40 B B Q1= 40 3,400 AC at B = slope of OB = 3,400 Q2= 60 D D Q2= 60 3,600 AC at D = slope of OD = 3,600
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2000 2500 3000 3500 4000 4500 5000 5500 6000 3032343638404244464850525456586062646668707274767880
Average cost
- 2000
48000 98000 148000 198000 248000 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71
F Q2= 60 D Quantity of cars, Q D A Total cost of production, C(Q) 350,000 Quantity of cars, Q Q2= 60
4,600
A Q0= 20 C0 = 80,000 1 ΔC
A
ΔC= 2,200 1 ΔC
D
ΔC= 4,600
AC MC
6,000
Average and marginal costs
- f production
3,400
Q1= 40 B Q1= 40 ΔC= 3,400 Q0= 20
2,200
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2000 2200 2400 2600 2800 3000 3200 3400 3600 3800 4000 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80
A Q0= 20 Quantity of cars, Q Average and marginal costs
- f production
4,000 2,000
MC
B Q1= 40 D Q2= 60
AC
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Size and location
Economies of scale Economies of agglomeration Network effects
Cost to make stuff goes down as you make more stuff Cost to make stuff goes down as you clump together Cost to make stuff goes down when everyone uses your stuff
(Dis-)
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Long-run vs short-run costs
LRAC SRAC
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Costs and scale
Economies
- f scale
Constant returns to scale Diseconomies
- f scale
LRAC SRAC
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