ECC1000 Lecture Notes - Lecture 8: Endangered Species Act Of 1973, Historical Cost, Market Power
23 May 2018
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○Solution:
1. Property rights (public or private ownership)
●Owner of fish has incentive to maintain population of fish
2. Legislation (eg: Endangered Species Act)
3. International agreements for global common resources: some
worked, some didn’t
●
Topic V: Market Power
Market Power
●The ability of an individual economic agent, or small number of economic agents, to
influence the market price of a good or service. In this case, because the car dealership
is the only source of cars, the car dealership faces no competition from other potential
suppliers, enabling the car dealership the ability, or market power, to restrict the
output of cars and charge higher prices. In short, the market power of the car
dealership prevents the invisible hand from guiding the market to the efficient
outcome.
Week 8 To do: Read Chap 13, Complete Aplia test by Sunday 23:30
Costs of Production
●Always assume that the firm seeks to maximise profits
●ALL firms have costs
Economic Profit
●Firms exist to create ‘value’
●Aim to increase ‘shareholder value’ ie maximise profits
Profit Maximisation as the Firm's Objectives
●Firm makes profits over many periods in the future
●Present value of all future profits = stock market value of the firm
●If all future profits can be ‘reasonably expected’, then maximising profits and
maximising stock market value of the firm coincide
●Maximise profits = maximise shareholder value
Behavioural Assumption
●Firm’s objective is to maximise economic profit (provided they act in the interest of
shareholders)
○Economic profit = revenue - cost (including opportunity cost)
●Assume that firm’s act in their self interest -> must give CEO’s incentive such as
stocks to act in the interest of increasing shareholder value
●To maximise profit, employing the most efficient technology (producing a given
quantity at a minimum cost) is a prerequisite
Opportunity Cost Revisited
●Opportunity Cost of an activity is the value of your est alternative you give up for that
activity
●OC = Explicit costs + implicit costs
○Explicit costs involves direct money outlay for factors of production (concept
of accounting cost)
○Implicit costs does not involve direct money outlay
■Eg: owner’s own time
■Eg: cost of own capital - when your own capital is invested in the
business, economists count a normal rate of return on capital as its
opportunity cost
■Eg: uber drivers implicit costs of maintenance, fuel, depreciation etc
Economic Profit vs Accounting Profit
●NOTE: Accountants include implicit cost of depreciation
Exercise 1 - Should you make this investment?
●Revenue = 0.5
●Accounting Costs = OC + Int on Borrowed Funds + Depreciation Costs
○= 0.1 + 0.06 + 0.2 = 0.36
●Accounting Profit = 0.5 - 0.36 = 0.14
●Additional Implicit Costs = OC of owner’s tiem + OC of foregone interest on owner’s
funds = 0.15 + x (x>0)
Document Summary
Solution: property rights (public or private ownership) Owner of fish has incentive to maintain population of fish: legislation (eg: endangered species act, international agreements for global common resources: some worked, some didn"t. The ability of an individual economic agent, or small number of economic agents, to influence the market price of a good or service. In short, the market power of the car dealership prevents the invisible hand from guiding the market to the efficient outcome. Week (cid:551) to do: read chap (cid:544)(cid:546), co(cid:299)plete aplia test by )u(cid:300)day (cid:545)(cid:546):(cid:546)(cid:543) Always assume that the firm seeks to maximise profits. Aim to increase shareholder value" ie maximise profits. Firm makes profits over many periods in the future. Present value of all future profits = stock market value of the firm. If all future profits can be reasonably expected", then maximising profits and maximising stock market value of the firm coincide.
