aleveleconomics基础讲义专题培训课课件

aleveleconomics基础讲义aleveleconomics基础讲义121WhatisEconomicsabout?

Theproblemofscarcity Economicsisthestudyofhowsocietychoosestoallocateitsscarceresourcestotheproductionofgoodsandservicesinordertosatisfyunlimitedwants.21WhatisEconomicsabout?

Th2Humanwantsareunlimited,butResources

arelimited(scarce)Acentralproblemthereforeexists…wecallthistheproblemofSCARCITYHumanwantsareunlimited,but343Definitionofeconomics Economicsisthestudyofsociety’sdecisionsaboutproductionconsumptionallocationofscarceresources inordertosatisfyasmanyunlimitedwantsaspossible.43Definitionofeconomics Eco454TwobranchesofeconomicsMicroeconomicsisthebranchofeconomicsthatstudiesdecision-makingbyasingleindividual,household,firm,industryorlevelofgovernment.Macroeconomicsisthebranchofeconomicsthatstudiesdecision-makingfortheeconomyasawhole.54TwobranchesofeconomicsMi565MacroeconomicIssuesaggregatedemand,aggregatesupplyeconomicgrowthunemploymentinflationbalanceoftradeexchangerates65MacroeconomicIssuesaggrega676MicroeconomicIssuesdemandandsupplydecisionsofwhattoproduce,howtoproduce,forwhomtoproducetheconceptofopportunitycostbasedoncomparingwhatyouhavedecidedvswhatisthenextbestalternativeyouhavegivenuprationaldecisionmakingbasedoncostvsbenefit;bestvalueformoneyweighingupmarginalcostsandmarginalbenefitsbasedoncomparingtheextrabenefitwiththeextracostthesocialimplicationsofchoicesocietyi.e.takingintoconsiderationhowacertainchoicemayhaveanindirectcoston76MicroeconomicIssuesdemand7ResourcesResourcesarethebasiccategoriesofinputsusedtoproducegoodsandservices.Resourcescanalsobecalledthefactorsofproduction.ResourcesResourcesarethebasThreecategoriesofresourcesLandLabourCapitalThreecategoriesofresourcesLResources:landAnynaturalresourceprovidedbynatureusedintheprocessofproductionForexample:forests,minerals,wildlife,oil,rivers,lakes,oceansMayberenewableornon-renewable

Resources:landAnynaturalresResources:labourThementalandphysicalcapacityofworkerstoproducegoodsandservicesForexample:farmers,nurses,lawyersEntrepreneurshipisaspecialtypeoflabourthecreativeabilityofindividualstomanagethecombinationofresourcestoproduceproducts.Resources:labourThementalanEntrepreneurshipOrganisesandmanagestheresourcesneededtoproducegoodsandservicesEntrepreneurshipOrganisesandResources:capitalCapitalisthephysicalplant,machineryandequipmentusedtoproduceothergoods.Thatis,human-madegoodsthatdonotdirectlysatisfyhumanwants,forexample:Earlier:axe,bowandarrowNow:buildings,productionequipment,software,factories.Resources:capitalCapitalistAnoteaboutfinancialcapitalEconomistsdonotincludemoneyintheirdefinitionofcapitalmoneysimplygivesameasuretothevalueofassets.AnoteaboutfinancialcapitalOpportunitycostThebestalternativesacrificedforachosenalternativeOpportunitycostappliestopersonal,groupandnationaldecision-making,forexampleWhatcouldyoubedoingifyouwerenotcurrentlystudying?Howmanynewroadshavetobeforgoneifthegovernmentspendstaxrevenuesonhomelandsecurity?OpportunitycostThebestalterMarginalanalysisMarginalanalysisexamineshowthecostsandbenefitschangeinresponsetoincrementalchangesinactions.Anyadditionalactionbyanindividualorafirm,suchasbuyinganadditionalpairofshoesorincreasingproductionofaproductbyanadditionalunit,bringsadditionalcost.ThecentralquestioninmarginalanalysisiswhethertheexpectedbenefitsofthatactionexceedtheaddedcostMarginalanalysisMarginalanalysisMarginalanalysishelpsbusinessesandindividualsbalancethecostsandbenefitsofadditionalactions---whethertoproducemore,consumemore,orotherdecisions---anddeterminewhetherthebenefitswillexceedcosts,thusincreasingutility.MarginalanalysisMarginalanalMarginalanalysisMarginalanalysisbenefitsgovernmentpolicymakers,aswell.WeighingthecostsandbenefitscanhelpgovernmentofficialsdetermineifallocatingadditionalresourcestoaparticularpublicprogramwillgenerateadditionalbenefitsforthegeneralpublicMarginalanalysisMarginalanalShort-RunvLongRunShort-Run: Atimeperiodinwhichatleastonefactorofproductionisfixed(i.e.cannotincreaseitsamount) itisnotdefinedintermsofnumberofdays/weeks)LongRun: Atimeperiodlongenoughforallinputstobevaried Itisnotadefinedperiodoftime; Short-RunvLongRunShort-Run:CostconceptsTotalfixedcostsarecoststhatdonotvaryasoutputvariesandmustbepaidevenifoutputiszero.Totalvariablecostsarecoststhatarezerowhenoutputiszeroandvaryasoutputvaries.Totalcostisthesumoffixedcostandvariablecost.

TC=TFC+TVCCostconceptsTotalfixedcostsTotalcostsNote:ThexandyaxisunitshereareunrelatedtothepreviousdiagramTotalcostsNote:ThexandyaAveragecostconceptsAveragefixedcost(AFC)–totalfixedcostdividedbythequantityofoutputproduced:Averagevariablecost(AVC)–totalvariablecostdividedbythequantityofoutputproduced:AFC=TFCAVC=TVCQQAveragecostconceptsAveragefAveragetotalcostTotalcostdividedbythequantityofoutputproducedATC=AFC+AVC=TCQAveragetotalcostTotalcostdMarginalcostMeasureshowmuchtotalcostincreaseswhenanadditionalunitofoutputisproduced. MC:thechangeintotalcostwhenoneextraunitofoutputisproducedMC=TC

=TVCQQMarginalcostMeasureshowmuchTotalcostsTotalcostsInverserelationship:MP&MCNote:ThexandyaxisunitshereareunrelatedtothepreviousdiagramInverserelationship:MP&MCNaleveleconomics基础讲义专题培训课课件aleveleconomics基础讲义专题培训课课件AverageandmarginalcostsThisgraphusesinformationfromthepreviousslideAverageandmarginalcostsThisNotethemarginal-averageruleWhenMC<AC,ACisfalling.WhenMC>AC,ACisrising.WhenMC=AC,ACisatitsminimumpoint.Notethemarginal-averageruleLong-runsituationAllfactorsofproductionarevariable.thereistimeforthefirmtobuildanewfactorytoinstallnewmachines,tousedifferentproductiontechniques,tocombineinputsinwhateverproportionandquantitiesitchooses;thefirmwillneedtodecideaboutthescaleofitsoperationandtheproductiontechniquesthatituses;thesedecisionswillaffectproductioncostssoitisimportanttogetthesedecisionsright.Long-runsituationAllfactorsRelationbetweenLRACandSRACCurvesAfirmwithjustonefactoryandfacesSRACcurve(followingdiagrams);Inthelong-runitcanbuildmorefactoriesandexperienceseconomiesofscaleduetoadministrativesavings,eachsuccessivefactorywillallowittoproducewithanewlowerSRACcurve;Thuswith2factoriesitwillhavecurveSRAC2andwiththreethenSRAC3,andsoon;EachSRACcurvecorrespondstoaparticularamountofthefactorthatisfixedintheshort-run(inthiscasethefactory);TherearemanySRACcurvesasmanydifferentfactoriesofdifferentsizesorextensionstoexistingonecouldbemade.TheLRACcurveisanENVELOPECURVERelationbetweenLRACandSRACCostsOutputOExamplesofshort-runaveragecostcurvesSRAC1SRAC2SRAC3SRAC4SRAC5ConstructingaLong-runAverageCostCurvefromShort-runAverageCostCurvesCostsOutputOExamplesofshort-LRACCostsOutputOSRAC5SRAC4SRAC3SRAC2SRAC1ConstructingaLong-runAverageCostCurvefromShort-runAverageCostCurvesLRACCostsOutputOSRAC5SRAC4SRACScalesofproductionThelong-runaveragecostcurveis U-shaped.Thisreflectsreturnstoscale–threetypesarerecognised:Economiesofscale(LRACfallsasoutputrises)ConstantreturnstoscaleDiseconomiesofscale(LRACrisesasoutputrises).ScalesofproductionThelong-rScalesofproductionScalesofproductionEconomiesofscaleAsituationinwhichthelong-runaveragecostcurvedeclinesasthefirmincreasesoutputSourcesofeconomiesofscale:SpecialisationandDivisionofLabourGreaterefficiencyoflargermachines(egcombineharvester,‘super’photocopier’.EgmachineAcosts$1000&produces1000unitsdaily.MachineBcosts$4000butcanproduce8000unitsdaily.Unitcostis$1vs$0.50.)ByproductsOrganisationaleconomies(centraliseadminorI.T.supportfunctions;eliminateduplication)Financialeconomies

(bulkdiscounts)EconomiesofScope(producingarangeofproductsmayincreasesalesandspreadoutoverheadsEg:CD,DVD,players,amplifiersetcvsonlyCD)

(RefertoSlomanp87,88formoreinfo)EconomiesofscaleAsituationConstantreturnstoscaleAsituationinwhichthelong-runaveragecostcurvedoesnotchangeasthefirmincreasesoutput.ConstantreturnstoscaleAsitDiseconomiesofscaleAsituationinwhichthelong-runaveragecostcurverisesasthefirmincreasesoutputSourcesofdiseconomiesofscale:BureaucracyBarrierstocommunicationManagementdifficulties(e.g.lackofcoordination).Production-lineprocessesand‘interdependencies’DiseconomiesofscaleAsituatiLong-runCosts

“ToScale”meansthatallinputsincreasebythesameproportion’Decreasingreturnstoscalearequitedifferentfromdiminishingmarginalreturns(whereonlythevariablefactorincreases)DMR(short-run)andDRS(long-run)Long-runCosts“ToScale”meanProfitMaximisationSlomanCh5BUECO1507ProfitMaximisationBUECO1507RevenueDefiningtotal,averageandmarginalrevenuetotalrevenue:TR=P×Qaveragerevenue:AR=TR

/

Q

marginalrevenue:

MR=

TR

/

QRevenueDefiningtotal,averageRevenueRevenuecurveswhenpriceisnotaffectedbythefirm’soutput(horizontaldemandcurve)averagerevenue(AR)marginalrevenue(MR)RevenueRevenuecurveswhenpriExaminingrevenuecurvesin2situations1)Ifafirmisverysmallrelativetothewholemarket.2)IfafirmhasarelativelylargeshareofthemarketExaminingrevenuecurvesin2OOAR,MR($)PeSDD=AR=MRQ(millions)Q(hundreds)(a)ThemarketThefirmBeingsosmall,itsoutput,whateveritis,doesnotaffectmarketpriceatallAverageRevenueandMarginalRevenuecurves

(1)ofafirmthatisverySMALLrelativetothewholemarket.(Price-takingfirm)Price($)OOAR,MR($)PeSDD=ARQ(milliTRQuantity(units)020040060080010001200Price=AR=MR($)5555555TR($)0100020003000400050006000TotalRevenuecurve(1)ofafirmthatisverySMALLrelativetothewholemarket.(Price-takingfirm)QTR($)TRQuantity0Price=AR5TR0TotalQ(units)1234567P=AR($)8765432TR($)8141820201814MR($)6420-2-4MRAR,MR($)QuantityARAverageRevenueandMarginalRevenuecurves

(2)ofafirmthathasarelativelyLARGEshareofthewholemarket.Ifsuchafirmwantstosellmore,itcan onlydosobyloweringprice.Ifitchoosestoraiseitsprice,itwillhaveto acceptlowersales.ThereforeAR(price)slopesdownward.HowabouttheMRcurve?Q1P=AR8TR8MR6MRAR,MR($)QuanQ(units)1234567P=AR($)8765432TR($)8141820201814MR($)6420-2-4MRAR,MR($)QuantityARAverageRevenueandMarginalRevenuecurves

(2)ofafirmthathasarelativelyLARGEshareofthewholemarket.Supposingfirmisselling2unitsat$7 each.Itcansellthe3rdunitonlyby reducingthepriceofallunitsto$6.Sellingthe3rdunitgains$6butreducingthe priceofunits1&2loses$1x2=$2.MRtherefore=$6-$2=$4Q1P=AR8TR8MR6MRAR,MR($)QuanTRTR($)Quantity(units)1234567P=AR($)8765432TR($)8141820201814TotalRevenuecurve

(2)ofafirmthathasarelativelyLARGEshareofthewholemarket.QuantityTRTR($)Quantity1P=AR8TR8TotRevenuecurvesandpriceelasticityofdemand

RevenuecurvesandpriceelastElasticity=-1Elastic(a)Inelastic(b)AR,MR($)QuantityMRARRevenuecurvesandpriceelasticityofdemandRecall:a)Whendemandiselasticandprice isreduced,totalrevenueincreases. TotalrevenueincreasingmeansMRispositiveb)Whendemandisinelasticandpriceisreduce,totalrevenuedecreases.TotalrevenuedecreasingmeansMRisnegativeElasticity=-1Elastic(a)InelTRElasticity=-1ElasticInelasticTR($)TRCurveforaFirmFacingaDownward-slopingDemandCurveQuantityTRElasticity=-1ElasticInelasRevenueRevenuecurveswhenpricevarieswithoutput(downward-slopingdemandcurve)averagerevenue(AR)marginalrevenue(MR)totalrevenue(TR)revenuecurvesandpriceelasticityofdemandShiftsinrevenuecurvesHiddenRevenueRevenuecurveswhenpriDetermining

a) Outputwhereprofitismaximised

b) Profitatthatoutput1)UsingtotalcurvesmaximisingthedifferencebetweenTRandTC2)UsingmarginalandaveragecurvesDetermining

a) OutputwherepTR,TC,TP

($)TP

TRTCdefQuantity1)Usingtotalcurvesa)Profitismaximizedwhenoutputis3b)Maximumprofitisd-eTR,TC,TP($)TPTRTCdefQuantiQuantityCostsandrevenue($)eMRMCProfit-maximisingoutput2a)Usingmarginalandaveragecurves

todetermineprofitmaximisingoutputa)Profitismaximizedatoutputof3Below3units,thefirmshouldincreaseoutputbecausetherewillbeabiggeradditiontorevenue(MR)thantocost(MC).Beyond3unitsadditionalcost(MC)isbiggerthanadditionalrevenue(MR)thereforeshouldn’tgobeyonditQuantityCostsandrevenue($)e6.004⅔QuantityCostsandrevenue($)MCACARbaTotalprofit=$1⅓x3=$4.00

2b)Usingmarginalandaveragecurves

tomeasuremaximumprofitTotalProfitMR6.004⅔QuantityCostsandreveLOSSOCostsandrevenue($)QuantityMCACARMRQACAR2b)Usingmarginalandaveragecurves

todeterminelossminimisingoutputLOSSOCostsandrevenue($)QuanTheshutdownruleIfpricedropsbelowtheAVCcurve,therevenuefromeachunitproduceddoesnotevencoverthevariablecost/sofproduction.Thefirmshouldshutdown.Illustration: (A) (B) (C) (D)Sales $60 0 60 60VC (40) 0 (70) (60)Grossprofit 20 0 (10) 0FC (30) (30) (30) (30)Loss (10) (30) (40) (30)TheshutdownruleIfpricedropTheshutdownrule(cont.)(MR)NeedtochangeTheshutdownrule(cont.)(MR)NRevenue,CostsandProfitSomequalificationslong-runprofitmaximisationthemeaningof‘profit’lossminimising:stillproducewhere

MR=MCshort-runshut-downpoint:P=AVClong-runshut-downpoint:P=LRACHiddenRevenue,CostsandProfitSomeNormal,Supernormal,EconomicprofitNormalprofit:Theminimumprofitnecessarytokeepafirminoperation(i.e.$85,00intheexample)Afirmthatearnsnormalprofithasearnedenoughtocoveritsopportunitycost.IfyouearnmorethanopportunitycostyouareearningSupernormal(orEconomic)profit.Normal,Supernormal,EconomicAccountingprofit,Normalprofit,Supernormalprofit,EconomicprofitAccountingprofit,Normalprofaleveleconomics基础讲义aleveleconomics基础讲义64651WhatisEconomicsabout?

Theproblemofscarcity Economicsisthestudyofhowsocietychoosestoallocateitsscarceresourcestotheproductionofgoodsandservicesinordertosatisfyunlimitedwants.21WhatisEconomicsabout?

Th65Humanwantsareunlimited,butResources

arelimited(scarce)Acentralproblemthereforeexists…wecallthistheproblemofSCARCITYHumanwantsareunlimited,but66673Definitionofeconomics Economicsisthestudyofsociety’sdecisionsaboutproductionconsumptionallocationofscarceresources inordertosatisfyasmanyunlimitedwantsaspossible.43Definitionofeconomics Eco67684TwobranchesofeconomicsMicroeconomicsisthebranchofeconomicsthatstudiesdecision-makingbyasingleindividual,household,firm,industryorlevelofgovernment.Macroeconomicsisthebranchofeconomicsthatstudiesdecision-makingfortheeconomyasawhole.54TwobranchesofeconomicsMi68695MacroeconomicIssuesaggregatedemand,aggregatesupplyeconomicgrowthunemploymentinflationbalanceoftradeexchangerates65MacroeconomicIssuesaggrega69706MicroeconomicIssuesdemandandsupplydecisionsofwhattoproduce,howtoproduce,forwhomtoproducetheconceptofopportunitycostbasedoncomparingwhatyouhavedecidedvswhatisthenextbestalternativeyouhavegivenuprationaldecisionmakingbasedoncostvsbenefit;bestvalueformoneyweighingupmarginalcostsandmarginalbenefitsbasedoncomparingtheextrabenefitwiththeextracostthesocialimplicationsofchoicesocietyi.e.takingintoconsiderationhowacertainchoicemayhaveanindirectcoston76MicroeconomicIssuesdemand70ResourcesResourcesarethebasiccategoriesofinputsusedtoproducegoodsandservices.Resourcescanalsobecalledthefactorsofproduction.ResourcesResourcesarethebasThreecategoriesofresourcesLandLabourCapitalThreecategoriesofresourcesLResources:landAnynaturalresourceprovidedbynatureusedintheprocessofproductionForexample:forests,minerals,wildlife,oil,rivers,lakes,oceansMayberenewableornon-renewable

Resources:landAnynaturalresResources:labourThementalandphysicalcapacityofworkerstoproducegoodsandservicesForexample:farmers,nurses,lawyersEntrepreneurshipisaspecialtypeoflabourthecreativeabilityofindividualstomanagethecombinationofresourcestoproduceproducts.Resources:labourThementalanEntrepreneurshipOrganisesandmanagestheresourcesneededtoproducegoodsandservicesEntrepreneurshipOrganisesandResources:capitalCapitalisthephysicalplant,machineryandequipmentusedtoproduceothergoods.Thatis,human-madegoodsthatdonotdirectlysatisfyhumanwants,forexample:Earlier:axe,bowandarrowNow:buildings,productionequipment,software,factories.Resources:capitalCapitalistAnoteaboutfinancialcapitalEconomistsdonotincludemoneyintheirdefinitionofcapitalmoneysimplygivesameasuretothevalueofassets.AnoteaboutfinancialcapitalOpportunitycostThebestalternativesacrificedforachosenalternativeOpportunitycostappliestopersonal,groupandnationaldecision-making,forexampleWhatcouldyoubedoingifyouwerenotcurrentlystudying?Howmanynewroadshavetobeforgoneifthegovernmentspendstaxrevenuesonhomelandsecurity?OpportunitycostThebestalterMarginalanalysisMarginalanalysisexamineshowthecostsandbenefitschangeinresponsetoincrementalchangesinactions.Anyadditionalactionbyanindividualorafirm,suchasbuyinganadditionalpairofshoesorincreasingproductionofaproductbyanadditionalunit,bringsadditionalcost.ThecentralquestioninmarginalanalysisiswhethertheexpectedbenefitsofthatactionexceedtheaddedcostMarginalanalysisMarginalanalysisMarginalanalysishelpsbusinessesandindividualsbalancethecostsandbenefitsofadditionalactions---whethertoproducemore,consumemore,orotherdecisions---anddeterminewhetherthebenefitswillexceedcosts,thusincreasingutility.MarginalanalysisMarginalanalMarginalanalysisMarginalanalysisbenefitsgovernmentpolicymakers,aswell.WeighingthecostsandbenefitscanhelpgovernmentofficialsdetermineifallocatingadditionalresourcestoaparticularpublicprogramwillgenerateadditionalbenefitsforthegeneralpublicMarginalanalysisMarginalanalShort-RunvLongRunShort-Run: Atimeperiodinwhichatleastonefactorofproductionisfixed(i.e.cannotincreaseitsamount) itisnotdefinedintermsofnumberofdays/weeks)LongRun: Atimeperiodlongenoughforallinputstobevaried Itisnotadefinedperiodoftime; Short-RunvLongRunShort-Run:CostconceptsTotalfixedcostsarecoststhatdonotvaryasoutputvariesandmustbepaidevenifoutputiszero.Totalvariablecostsarecoststhatarezerowhenoutputiszeroandvaryasoutputvaries.Totalcostisthesumoffixedcostandvariablecost.

TC=TFC+TVCCostconceptsTotalfixedcostsTotalcostsNote:ThexandyaxisunitshereareunrelatedtothepreviousdiagramTotalcostsNote:ThexandyaAveragecostconceptsAveragefixedcost(AFC)–totalfixedcostdividedbythequantityofoutputproduced:Averagevariablecost(AVC)–totalvariablecostdividedbythequantityofoutputproduced:AFC=TFCAVC=TVCQQAveragecostconceptsAveragefAveragetotalcostTotalcostdividedbythequantityofoutputproducedATC=AFC+AVC=TCQAveragetotalcostTotalcostdMarginalcostMeasureshowmuchtotalcostincreaseswhenanadditionalunitofoutputisproduced. MC:thechangeintotalcostwhenoneextraunitofoutputisproducedMC=TC

=TVCQQMarginalcostMeasureshowmuchTotalcostsTotalcostsInverserelationship:MP&MCNote:ThexandyaxisunitshereareunrelatedtothepreviousdiagramInverserelationship:MP&MCNaleveleconomics基础讲义专题培训课课件aleveleconomics基础讲义专题培训课课件AverageandmarginalcostsThisgraphusesinformationfromthepreviousslideAverageandmarginalcostsThisNotethemarginal-averageruleWhenMC<AC,ACisfalling.WhenMC>AC,ACisrising.WhenMC=AC,ACisatitsminimumpoint.Notethemarginal-averageruleLong-runsituationAllfactorsofproductionarevariable.thereistimeforthefirmtobuildanewfactorytoinstallnewmachines,tousedifferentproductiontechniques,tocombineinputsinwhateverproportionandquantitiesitchooses;thefirmwillneedtodecideaboutthescaleofitsoperationandtheproductiontechniquesthatituses;thesedecisionswillaffectproductioncostssoitisimportanttogetthesedecisionsright.Long-runsituationAllfactorsRelationbetweenLRACandSRACCurvesAfirmwithjustonefactoryandfacesSRACcurve(followingdiagrams);Inthelong-runitcanbuildmorefactoriesandexperienceseconomiesofscaleduetoadministrativesavings,eachsuccessivefactorywillallowittoproducewithanewlowerSRACcurve;Thuswith2factoriesitwillhavecurveSRAC2andwiththreethenSRAC3,andsoon;EachSRACcurvecorrespondstoaparticularamountofthefactorthatisfixedintheshort-run(inthiscasethefactory);TherearemanySRACcurvesasmanydifferentfactoriesofdifferentsizesorextensionstoexistingonecouldbemade.TheLRACcurveisanENVELOPECURVERelationbetweenLRACandSRACCostsOutputOExamplesofshort-runaveragecostcurvesSRAC1SRAC2SRAC3SRAC4SRAC5ConstructingaLong-runAverageCostCurvefromShort-runAverageCostCurvesCostsOutputOExamplesofshort-LRACCostsOutputOSRAC5SRAC4SRAC3SRAC2SRAC1ConstructingaLong-runAverageCostCurvefromShort-runAverageCostCurvesLRACCostsOutputOSRAC5SRAC4SRACScalesofproductionThelong-runaveragecostcurveis U-shaped.Thisreflectsreturnstoscale–threetypesarerecognised:Economiesofscale(LRACfallsasoutputrises)ConstantreturnstoscaleDiseconomiesofscale(LRACrisesasoutputrises).ScalesofproductionThelong-rScalesofproductionScalesofproductionEconomiesofscaleAsituationinwhichthelong-runaveragecostcurvedeclinesasthefirmincreasesoutputSourcesofeconomiesofscale:SpecialisationandDivisionofLabourGreaterefficiencyoflargermachines(egcombineharvester,‘super’photocopier’.EgmachineAcosts$1000&produces1000unitsdaily.MachineBcosts$4000butcanproduce8000unitsdaily.Unitcostis$1vs$0.50.)ByproductsOrganisationaleconomies(centraliseadminorI.T.supportfunctions;eliminateduplication)Financialeconomies

(bulkdiscounts)EconomiesofScope(producingarangeofproductsmayincreasesalesandspreadoutoverheadsEg:CD,DVD,players,amplifiersetcvsonlyCD)

(RefertoSlomanp87,88formoreinfo)EconomiesofscaleAsituationConstantreturnstoscaleAsituationinwhichthelong-runaveragecostcurvedoesnotchangeasthefirmincreasesoutput.ConstantreturnstoscaleAsitDiseconomiesofscaleAsituationinwhichthelong-runaveragecostcurverisesasthefirmincreasesoutputSourcesofdiseconomiesofscale:BureaucracyBarrierstocommunicationManagementdifficulties(e.g.lackofcoordination).Production-lineprocessesand‘interdependencies’DiseconomiesofscaleAsituatiLong-runCosts

“ToScale”meansthatallinputsincreasebythesameproportion’Decreasingreturnstoscalearequitedifferentfromdiminishingmarginalreturns(whereonlythevariablefactorincreases)DMR(short-run)andDRS(long-run)Long-runCosts“ToScale”meanProfitMaximisationSlomanCh5BUECO1507ProfitMaximisationBUECO1507RevenueDefiningtotal,averageandmarginalrevenuetotalrevenue:TR=P×Qaveragerevenue:AR=TR

/

Q

marginalrevenue:

MR=

TR

/

QRevenueDefiningtotal,averageRevenueRevenuecurveswhenpriceisnotaffectedbythefirm’soutput(horizontaldemandcurve)averagerevenue(AR)marginalrevenue(MR)RevenueRevenuecurveswhenpriExaminingrevenuecurvesin2situations1)Ifafirmisverysmallrelativetothewholemarket.2)IfafirmhasarelativelylargeshareofthemarketExaminingrevenuecurvesin2OOAR,MR($)PeSDD=AR=MRQ(millions)Q(hundreds)(a)ThemarketThefirmBeingsosmall,itsoutput,whateveritis,doesnotaffectmarketpriceatallAverageRevenueandMarginalRevenuecurves

(1)ofafirmthatisverySMALLrelativetothewholemarket.(Price-takingfirm)Price($)OOAR,MR($)PeSDD=ARQ(milliTRQuantity(units)020040060080010001200Price=AR=MR($)5555555TR($)0100020003000400050006000TotalRevenuecurve(1)ofafirmthatisverySMALLrelativetothewholemarket.(Price-takingfirm)QTR($)TRQuantity0Price=AR5TR0TotalQ(units)1234567P=AR($)8765432TR($)8141820201814MR($)6420-2-4MRAR,MR($)QuantityARAverageRevenueandMarginalRevenuecurves

(2)ofafirmthathasarelativelyLARGEshareofthewholemarket.Ifsuchafirmwantstosellmore,itcan onlydosobyloweringprice.Ifitchoosestoraiseitsprice,itwillhaveto acceptlowersales.ThereforeAR(price)slopesdownward.HowabouttheMRcurve?Q1P=AR8TR8