1) “Price and wage takers”

• Price taking means, literally, that prices come as given for producers perfect competition

• In words, with their actions, they cannot affect prices• Producers, individually, represent a tiny fraction of

the market• Is it really so? Why do we do this? Assumption

• In the labor market we should replace producers by employers and prices by wages

• Again, a simple assumption we can live with

2) Decision rule: output / labor

• Maximizing firm expand output…insofar asMR > MC YC up

• When will output be diminished?MR < MC YC down

• Equilibrium MR = MC YC constant

• For ΔYC Δ inputs (L, K) In terms of inputs:MRPL > MCL L up

MRPL < MCL L down

MRPL = MCL L constant

3) Output and labor decision in the SR

• Economics is about understanding reality with a few assumptions

• Assumptions / models simplify reality for us as to make it more understandable

• Perfect competition is one assumption

• The capital input being fixed in the SR in another

• Therefore, deciding how much to produce equates how much labor to use (in the SR)

4) Diminishing returns

• Use of land

• Making line to use the only printer at the office

• Additional workers in a small room

• Additional singers in a chorus

• Why such firms as Wal-mart or Microsoft seem to become more profitable with size? (increasing returns?)

5) Zone 2…

• “Zone of production” because:– At least we want to move to max. efficiency of L– At the most we might want to move to max. efficiency of K

• Why not zone 3?

• Why not zone 1?– Exception: monopoly– Why?