economic

Week 3

Chapter 9

Opportunity cost is the cost of any activity measured in terms of sacrifice made in doing it.

Measuring opportunity cost:

Factors not owned by the firm: explicit costs because they involve direct payment of money of firms.

Factors already owned by the firm: implicit costs, they are equal to what the factors could earn for the firm in some alternative use, either within the firm or hired out to some other firm.

Historic cost, sunk cost and replacement costs are irrelevant.

A fixed factor is an input that cannot be increased within a given time period. A variable factor is one that can.

The short run is a time period during which at least one factor of production is fixed. In the short run, output can be increased only by using more variable factors.

Long run is a time period long enough for all of a firm’s input to be varied.

the law of diminishing marginal return: when increasing amounts of a variable factor are used with a given amount of a fixed factor, there will come a point when each unit of the variable factor will produce less additional output than the previous unit.当一种或多种生产要素(如土地、建筑)被固定下来时，总会有一个点，超过这个点，可变要素的额外产量就会减少

Total physical product: the relationship between inputs ad outputs is shown in a production function.

· MPP rises at first: the slope of the TPP curve get steeper

· MPP reaches a maximum at the point b, at the point the slope of the TPP curve is at the steepest.

· After point b, diminishing return set in. MPP falls. TPP become less steep.

· MPP is greater than zero, TPP will go rising, new workers add to total output

· At the point d, TPP is at a maximum (its slope is zero). An additional worker will add noting to output.

· Beyond point d, TPP falls. MPP is negative.

Costs and inputs

一个公司的cost of production将取决于factors of production. The more factors it uses, the greater its cost will be.

The productivity of the factors: the greater their physical productivity, the smaller will be the quantity of them that is needed to produce a given level of output and hence, the lower will be the cost of output.

The price of factors: the higher their price, the higher will be the costs of production.

TC=TVC+TFC

The shape of the TVC curve follows the law of diminishing returns. Before diminishing returns set in, TVC rise less and less rapidly as more variable factors are added.

Marginal cost is the extra cost of producing one more unit. All marginal cost is variable, there is no extra fixed cost as output rise.

Average fixed cost: this falls continuously as output rise, since total fixed costs are being spread over a greater and greater output.

Average variable cost: the shape of the AVC curve depends on the shape of the APP curve. As the average product of workers rise, the average labor cost per unit of output falls. APP falls, AVC MUST RISE（APP=TPP/QV).AFC falls, the gap between AVC and AC narrows.

MC is less than AC, AC must be falling. MC与AC和AVC 的交点，也是minimum points.

the scale of production (the scale means that all inputs increase by the same proportion)

constant return to scale: a given % increase in input leads to the same % increase in output.

Increasing return to scale: 2 input 4 output

Decreasing return to scale: 2 input 0.5 output

Economics of scale: 当增加产量导致单位产出成本降低时

if costs per unit of output fall as the scale of production increase. If a firm is getting increasing returns to scale from its factors of production，it produces more, it will be using smaller and smaller amounts of factors per unit of output.

With this specialization and division of labor, less training is needed, worker is highly efficient， especially with long production runs. Less time lost in workers switching from one operation to another; supervision is easier.

The ‘container principle’ will tend to cost less per unit of output, the larger its size.

By product (副产品，意外收获): with production on a large scale, there may be sufficient waste products to enable them to make some by-product

Multi-stage production

Plant economic of scale: economics of scale that arise because of the large size of the factory.

The greater the firm’s output, the more these overhead costs are spread.

Economic of scope: when increasing the range of products produced by a firm reduces the cost of producing each one.

When LRATC is declining as Q increases: Economies of scale

当LRATC随着Q的增加而下降时:规模经济-

Due to gains from specialisation (improvements in efficiency)

由于专业化带来的好处(提高效率) 满足整个市场的需求

Diseconomic of scale: where costs per unit of output increase as the scale of production increases. (比如说工厂太复杂，workers feel alienated)

When LRATC is increasing as Q increases: Diseconomies of scale

当LRATC随着Q的增加而增加时:规模不经济性

-Due to coordination problems as firm gets larger

公司规模越大，协调问题就越多

External diseconomic of scale: an industry grows larger, this may create a growing shortage of specific raw material or skilled labor.

Very short term（ immediate run）: all factors are fixed, output is fixed, the supply curve is vertical

Short term: at least factor is fixed in supply, more can be produced by increasing the quantity of the variable factor, but the firm will come up against the law of diminishing return. It will not be able to increase output.

Long run: all factors are variable, the firm may experience constant, increasing, or decreasing returns to scales,

Very long run: all factors are variable. Labor productivity can increase as a result of education, training.

The minimum efficient scale is the size beyond which no significant additional economies of scale can be achieved.the MES can be expressed as a % the total size of the market of total domestic production.

If a firm gains economies of scale, it is because it is able to exploit existing technologies and make better use of the existing factors of production. As technology improves, the curves will shift downwards.

Firms choose the least-cost combination of factors for each output. If the firm did not choose the optimum factor combination, it would be producing at a point above the LRAC curve.

In the long run, it can build more factories or expand its existing facilities, each successive factor will allow it to produce with a new lower SRAC curve.

Chapter 10 revenue and profit

Marginal revenue is the extra total revenue gained by selling one more unit per time period.

Average revenue: if a firm is very small relative to the whole market, it is likely to be a price taker. 这意味着公司必须接受市场supply 与demand 的价格，

at the price, this firm can sell as much as it is capable of producing, but if it increase the price, it would lose all its sales to competitors. Being so small, any change in the firm’s output will be too insignificant to affect the market price. Thus, a horizontal demand curve at this price.

Price maker: firms generally would prefer to be a price maker. If a firm wants to sell more, it must lower its price.

Average revenue=price, the price has to be reduced to sell more output, average revenue will fall as output increase.

Marginal revenue: when a firm faces a downward-sloping demand curve, marginal revenue will be less than average revenue. It is the extra revenue gained by the firm from selling one more unit.

Marginal revenue is positive, demand is price elastic.

Profit maximum

两种方法：

Using total cost and total revenue curves

Using average and marginal curve:

The first stage is to find the profit-maximizing : MR=MC

The second stage is find out how much profit is at this output

MR>MC, this means that by producing more units there will be a bigger addition to revenue (MR) than to cost (MC). total profit will increase. As long as MR exceed MC, profit can increased by increasing production.

Long term profit maximization

The opportunity cost to the owners is sometimes known as normal profit.

什么决定normal rate of profit?

1. setting up in business invests capital in it, 因此 an opportunity cost of capital

2. Normal profit (%)= rate of interests on a riskless loan+ a risk premium

Short run, fixed cost have to be paid, even if the firm is producing nothing at all. The firm is more than covering its variable costs.

The firm will shut down if the loss it would make from doing so (i.e the fixed costs that must still be paid), AR 低于 AVC

Long run: all cost are variable, if a firm cannot cover its long-run average costs (which include normal profit) it will close down. The long-run shut down point will be where the AR curve is tangential to LRAC curve.