Microeconomics ii

Please choose a company and explain how this company has been dealing with the coronavirus pandemic and economic crisis. You must focus on the company's production costs and mention in three sentences how the production structure and the costs have been changing recently. An example from me: Airplane manufacturing has been hit hard by the coronavirus pandemic due to different restrictions on international travel. Airbus cut sharply the production of its three main models (about 30%). The aerospace sector is a key consumer of aluminum, so the global demand for it dropped by about 8% in the first half of the year . (Source: https://www.fastmarkets.com/article/3927455/airbus-to-cut- aircraft-production-by-30-on-covid-19-aviation-headwinds)

Deadline: 16th of July 2021 at 17:00 CET

Discussion Forum W5: Changing production costs

Law of Diminishing Returns Long Run and the Short Run Economies of scale Different cost concepts: fixed, variable, marginal, average Revenues in Perfect Competition

Class content

Firms goal: o ma imi e profi Key determinant of production and pricing decisions: costs

Total revenue: the amount a firm receives for the sale of its output Total cost: the market value of the inputs a firm uses in production Profit: total revenue minus total cost

Firm behavior

GOALS OF THE FIRM OTHER THAN FINANCIAL PROFIT?

A firm s cost of production includes all the opportunity costs of making its output of goods and services. Explicit and Implicit Costs: a firm s cos of prod c ion incl de explicit costs and implicit costs

Explicit costs are input costs that require a direct outlay of money by the firm. Implicit costs are input costs that do not require an outlay of money by the firm.

Costs of production

Assumptions for analysis in the short run:

The size of the firm is fixed The quantity produced can only vary by changing the inputs

Production function: the relationship between quantity of inputs used to make a good and the quantity of output of that good

Production function

Marginal product: the increase in output that arises from an additional unit of input Marginal product declines! Diminishing marginal product: the property whereby the marginal product of an input declines as the quantity of the input increases

Reasons: sharing equipment, more crowded working conditions, etc.

The slope of the production function measures the marginal product of an input

Marginal product

Total cost curve: graphs the relationship of quantity produced and total cost of production

It gets steeper as the amount produced rises

Total cost

Total costs (TC) of two types: 1. Fixed costs (TFC): costs that do not vary with the quantity of output produced

(they are incurred even if the firm produces nothing) Rents, maintenance costs

2. Variable costs (TVC): costs that vary with the quantity of output produced Ingredient costs of the product (ice cream: milk, sugar), salaries

TC = TFC + TVC To decide on production quantities we need to calculate average costs:

Average total cost (ATC): total cost divided by the quantity of output Average fixed cost (AFC): fixed costs divided by the quantity of output Average variable cost (AVC): variable costs divided by the quantity of output ATC = AFC + AVC

Marginal cost (MC): the increase in total cost that arises from producing one extra unit (change in total cost divided by change in quantity of output)

Various measures of costs

Graphing all the costs

The marginal cost rises with the quantity of output produced It reflects the diminishing marginal product

The average total cost curve is U-shaped ATC = AFC + AVC AFC is constantly declining AVC is constantly increasing At low levels of production ATC is high due to the high fixed costs but it declines as output rises Then ATC starts rising due to the increasing AVC The bottom of the U-shape = efficient scale of the firm: the quantity of output that minimizes ATC

The marginal cost curve crosses the average total cost curve at its minimum (= efficient scale)

Features of cost curves

Costs in the short run and long run

The long-run ATC curve lies along the lowest points of the short- run ATC curves because the firm has more flexibility in the long run:

The long-run ATC curve is typically U-shaped, but is much flatter than a typical short-run ATC curve. In the short-run some factors of production cannot be changed. In the long-run all factors of production can be altered.

Constant returns to scale the property whereby long-run average total cost stays the same as the quantity of output change. Economies of scale the property whereby long-run average total cost falls as the quantity of output increases. Diseconomies of scale the property whereby long-run average total cost rises as the quantity of output increases.

Returns to scale

The Heal h Harr s J ice bar sells freshl sq ee ed j ices in a competitive market. Calculate all the missing costs in the table.

Exercise 1.

Quantity Total cost $

Fixed cost Variable cost

Average fixed cost

Average variable

cost

Average total cost

0 3 1 5 2 8 3 12 4 17 5 23 6 30

Firms are price takers Firms can freely enter and exit the market

Total revenue (TR) = P x Q Average revenue (AR): total revenue divided by the quantity sold = price of the good! Marginal revenue (MR): the change in total revenue from an additional unit sold = price of the good!

Firms in competitive markets

Consider total cost and total revenue given in the table below:

Calculate marginal revenue and marginal costs for each quantity!

Exercise 2.

Quantity 0 1 2 3 4 5 6 7 Total cost ($) 8 9 10 11 13 19 27 37

Total revenue

0 8 16 24 32 40 48 56

Marginal revenue Marginal cost

Before the COVID-19 pandemic rocked the world, small businesses and retailers were already at a disadvantage trying to remain competitive with e- commerce companies that could offer low prices and fast deliveries. Convenience is king. When COVID-19 forced physical shops to close and consumers to stay home, online shops were in a prime spot to capitalize. The multinational tech company reported a 70% increase in earnings in the first nine months of 2020, up US$5.8 billion from a year earlier. The company reported a near 200% rise in profits, accelerated by much of Nor h America s s if shif o e cl si el online shopping. Sales ere US$96.1 billion, up 37% from 2019, with profits rising to a jaw-dropping US$6.3 billion. The pandemic hasn onl increased he compan s profi s but also its expansion. It expanded its fulfillment infrastructure by 50% in 2020, adding more than 250,000 employees in the process.

P i i el hi b COVID hich c m a ?

Explicit versus implicit costs Production function and marginal product Diminishing marginal product: the property whereby the marginal product of an input declines as the quantity of the input increases Costs:

TC = FC + VC TC/Q = FC/Q + VC/Q (ATC = AFC + AVC) MC = change in TC change in quantity

Revenues: TR = P x Q AR = TR/Q = P MR = change in TR change in quantity = P

Summary