ECON 2200 Lecture Notes - Lecture 12: Profit (Economics)
16 Dec 2016
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Question: did the increase in firm size reflect a desire to: (1) achieve economies of scale or (2) gain monopoly power within a market? (note alfred chandler"s research on this question. ) As firms grew & markets expanded: firms became increasingly aware of competition. Recall: economic profit = tr tc = (p q) (atc q) = _q(p-atc)_ (price of product x quantity) (average total cost x quantity) # of competing firms puts downward pressure on p (firms wanted to avoid p falling below atc because they would then earn economic losses. Additionally, many firms had made large investments in capital (linked to mechanization and mass production), which increased their _fixed costs_. Variable costs go up as production goes up; fixed costs do not change regardless of output. They wanted to spread their fixed costs over large quantities in order to lower their at. In other words, they wanted to take advantage of economies of scale.
