Project: "Exploring the Competition Model: A Production and Cost Simulation"



Competition Model: Production e Cost


In the study of economics, understanding how firms make production decisions is a fundamental concept. One model, in particular, that helps explain these decisions is the Competition Model of Production and Cost.

This model assumes that firms are profit maximizers, meaning they aim to produce the quantity of goods or services that will generate the highest profit. It also assumes that firms operate in a competitive market where there are many buyers and sellers, and no single firm can influence the market price.

The first component of this model is the Production Function, which shows the maximum amount of output a firm can produce with a given set of inputs. In other words, it maps the relationship between inputs and outputs.

The second component is the Cost Function, which shows the lowest cost of producing a given level of output. This function is determined by the prices of inputs such as labor, capital, and raw materials.

The third component is the Profit Maximizing Level of Output, which is where the marginal cost of production, or the cost of producing one more unit, equals the marginal revenue, or the revenue from selling one more unit.

Understanding these components and how they interact can help businesses make informed decisions about what and how much to produce, how to price their products, and how to use their resources efficiently.

Importance and Real-World Context

The Competition Model of Production and Cost is not just a theoretical concept; it has real-world applications and implications. Almost every business, whether it's a small family-run store or a multinational corporation, has to make decisions about what and how much to produce and how to price their products.

Understanding this model can also help us understand the dynamics of the market. In a competitive market, for example, if one firm tries to charge a much higher price than others, customers can simply choose to buy from another firm. This helps keep prices down and encourages firms to be efficient.

Moreover, this model can also help us understand issues such as economic inequality. If, for example, a small group of firms in an industry has a lot of market power, they may be able to charge higher prices and make more profit at the expense of consumers. This can contribute to income inequality.


To delve deeper into the Competition Model of Production and Cost, you can consult the following resources:

  1. "Microeconomics: Production, Costs, and Perfect Competition" by Robert S. Pindyck and Daniel L. Rubinfeld. This textbook provides a comprehensive introduction to microeconomic theory, including the Competition Model.

  2. "Principles of Economics" by N. Gregory Mankiw. This book covers fundamental economic principles, including those related to production and cost.

  3. Khan Academy's microeconomics course. It offers a series of video lessons and practice exercises on various microeconomic topics, including the Competition Model.

  4. Investopedia's articles on the Competition Model and related concepts. It provides a more practical, real-world perspective on these topics.

  5. YouTube channels such as ACDC Economics and CrashCourse. They offer engaging, easy-to-understand videos on various economic concepts.

Remember, the goal isn't just to understand the theory but also to see how it applies to real-world situations. So, as you learn, try to think about how these concepts can help explain the economic decisions we see around us every day.

Practical Activity

Activity Title: "Exploring the Competition Model: A Production and Cost Simulation"

Objective of the Project

This project aims to provide a hands-on experience of how firms make production decisions in a competitive market using the concepts of the Production Function and the Cost Function. The students will simulate a simple competitive market, where each group represents a firm and will make decisions about what and how much to produce based on the given inputs and prices.

Detailed Description of the Project

The students will be divided into groups of 3 to 5 and each group will simulate a firm in a competitive market. The teacher will act as the "market" and set the prices of the inputs (e.g., labor, capital, raw materials) and the price at which the product will be sold.

The groups will then use these prices to determine their production level, cost, and profit. They will do this by constructing a Production Function and a Cost Function and using these functions to find the profit-maximizing level of output.

The simulation will be conducted over a series of "rounds," where each round represents a period of time (e.g., a month). At the end of each round, the groups will report their production level, cost, and profit to the market, and the market will adjust the prices for the next round based on the reported data.

The goal of each group is to maximize their profit over the course of the simulation.

Necessary Materials

  • Paper and pens for note-taking and calculation
  • Access to a computer with spreadsheet software (e.g., Microsoft Excel, Google Sheets) for constructing the Production and Cost functions and for keeping track of the simulation results.

Detailed Step-by-Step for Carrying Out the Activity

  1. Formation of Groups and Introduction to the Simulation (1 hour): The students will be divided into groups and the teacher will explain the rules and objectives of the simulation. The groups will then have some time to discuss their strategy.

  2. Construction of the Production and Cost Functions (1 hour): Each group will construct their Production and Cost functions based on the given inputs and prices. They can use a spreadsheet software to do this.

  3. Simulation Rounds (2-3 hours): The simulation will be conducted over several rounds. At the beginning of each round, the market will announce the prices for that round. The groups will then use these prices to determine their production level, cost, and profit. They will report their results to the market at the end of each round.

  4. Discussion and Reflection (1 hour): After the simulation, the groups will have a discussion about their results and what they learned from the simulation. They will also prepare their report.

  5. Report Writing (2-3 hours): Each group will write a report on the project, following the structure of Introduction, Development, Conclusion, and Used Bibliography.

Project Deliverables

The main deliverable of this project is a written report. The report should be structured as follows:

  1. Introduction: The students should introduce the topic, explain its relevance, and state the objective of the project.

  2. Development: The students should describe the theory behind the Competition Model of Production and Cost, explain the methodology of the simulation, and present and discuss their results.

  3. Conclusion: The students should revisit the main points of their work, state the lessons they learned from the project, and draw conclusions about the Competition Model of Production and Cost based on their experiences in the simulation.

  4. Used Bibliography: The students should list the sources they used to work on the project.

The report should not only demonstrate the students' understanding of the Competition Model but also their ability to apply this knowledge, work as a team, and think critically and creatively.

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