Producer Theory and Imperfect Competition

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Producer Theory and Imperfect Competition
Microeconomics does not just evaluate the choices made by consumers but also those made by producers. Producers in the market do not make rapid decisions on whether to engage in production, the quantity to produce, and the input variable to change in the bid of maximizing producers’ output. Moreover, producers have to consider factors such as costs, competition, and pricing strategy to gain adequate market power to establish market dominance in producing particular goods or services. For example, a company such as Coca-Cola cannot randomly decide to produce their beverage without considering market factors such as costs, having a pricing strategy, and understanding the dynamics of supply in the competitive beverage market. This paper will focus on analyzing the microeconomics of producers relating to factors such as producer behavior, costs factor in the market, supply dynamics in a competitive market, market power, and producers’ pricing strategies.
Producer Behavior
Before delving into understanding produce behavior, it is important to understand the definition of the production process. Production simply refers to the process inputs are utilized to create goods or services that participants in the market (buyers) are willing to buy. Production can be done by an individual, company, non-profit organization, or even government. For this paper firms or companies will be used as the producer. The microeconomics theory of producer behavior makes several assumptions. The main assumption made is that firms aim at maximizing profit by minimizing all costs linked to production. There are also the assumptions that a company has decided on what to produce and only concentrates on the production of a single good or service. Producer behavior is only understood by assuming that only capital and labor matter in the production process.
The aforementioned assumptions set the basis for understanding producer behavior through mathematical function or a production function. The function establishes a correlation between the inputs invested by the producer and the yields or output obtained from the investment. Mathematically, the function is expressed as Q = f (K, L) where Q represents the output quantity and K and L represents capital invested and labor respectively. Cobb-Douglas production function which is expressed as Q = KαLβ with α and β being constants is the most popular form of a production function. The production function is especially important when considering the timeframe of a firm concerning production. With this regard, the short-run pertains to the period where one or more inputs of production cannot be varied while the long-run refers to the period where all inputs of production can be adjusted. For instance, many firms consider the short run as the period when capital is fixed and only labor can be varied. In such a scenario the production function is expressed as Q = f (K̅, L) where K̅ represents a constant value of capital. In the long run, a firm has the luxury of varying both variables of production. This gives a company an adva...