This is the opportunity cost to the firm of using its own plant and equipment. If it did not use the plant and equipment it self, the firm could rent them to some other firm and earn the market rental rate. By using the plant and equipment it self, them firm gives up the opportunity to earn this rental income. That decision transforms the foregone rental income into a cost, as far as the firm is concerned.

If the firm does rent its plant and equipment in a competitive rental market, the rent includes a normal profit to the owner of the capital assets. For this Read more …

For short time periods, it is often useful to think of the inputs employed by a firm as being of two types. The firm employs a given amount of fixed inputs, determined by its past investment decisions. These cannot be changed in the short run and are used in the fixed available amount regardless of the short-term level of output.

In contrast, the firm can increase or decrease the use of variable inputs at will, even in the short run. The use of variable factors as its output increases. Read more …

When economists speak of a competitive market, they have in mind a market with four characteristics:

• There are many small buyers and sellers.

We are usually as vague as our student will let us be about what small means. What is important is that no single buyers or sellers should be large enough to influence the market price.

• The product is standardized.

Physically identical goods sold in the same place but at different from are different product time an economic point of view. The same is true of physically identical goods sold in different places at the same time. The Read more …

Adam smith’s notion of an invisible hand as the guiding mechanism of an economy is essential to the economist’s idea of a competitive market. The formal model of competition abstracts from many aspect of real-world competition to highlight the essential elements of resource allocation under competition. The pattern of resource allocation under competition is optimal in a way that we will explain subsequently. In this sense, competition is a Shang-La up to which no real-world market can measure. Perhaps the most interesting parts of industrial economic involve modeling more realistic Read more …