代写MUF0061 MicroeconomicsMUF0061 Microeconomics
Study Area 4
Firms, production & costs
Week 7 & 8, 2-2016
Reading: Layton Chapter 6

Key questions

What is the driving force for business firms?

In Economics, we assume the main goal of firms is to maximize their PROFIT.

Firms sometimes have other goals such as:

The production function

The production function deals with the maximum output that can be produced with a minimum about of input.
How do we measure a firm’s profit?
 
A simple example:
A firm produces and sells 1000 cakes.
The ingredients needed for each cake (flour, eggs) cost $10.
It takes one person 1/2 hour to make each cake. Wage per hour is $20.
The hire of the kitchen is $100 per day, and during that day 50 cakes can be made.
Cake costs= $10 for ingredients + $10 for labour + $2 for the hire of the kitchen = $22.
If a firm sells 250 cakes a week, at selling price of $40, its
Profit is:
Total Revenue   $10,000
Minus Total Costs      $5,500
Equals Profit    $4,500



Accounting profit

ACCOUNTING PROFIT = Total Revenue – Explicit costs
Accountants only consider the actual costs (explicit costs) of running a business e.g. wages, rent.

Cake example: 
Total revenue   $10,000
minus explicit costs      $5,500
Equals Accounting Profit:      $4,500

Economic profit
ECONOMIC PROFIT = Total Revenue – Explicit costs – Implicit costs
Economists also consider opportunity costs of running a business i.e. the company resources (money, labour, kitchen) that could have been used to produce something else.
Implicit cost (opportunity cost) can include:
E.g. For a business in one year, it cost $60,000 to maintain production, but earned $100,000 in revenue. The accounting profit would be $40,000 ($100,000 in revenue - $60,000 in explicit costs). However, if the firm could have made $50,000 by renting its land and capital, its economic profit would be a loss of $10,000 ($100,000 in revenue - $60,000 in explicit costs - $50,000 in opportunity costs).

Source: Boundless. “Difference Between Economic and Accounting Profit.” Boundless Economics. Boundless, 08 Aug. 2016. Retrieved 24 Aug. 2016 from https://www.boundless.com/economics/textbooks/boundless-economics-textbook/production-9/economic-profit-65/difference-between-economic-and-accounting-profit-245-12343/




MCQ 2-2015
Implicit costs are:
Answer:



Normal profit
Total revenue = explicit costs + implicit costs

Normal profit is the minimum profit (break-even) to keep a firm in operation.

Normal profit is when the accounting profit is just enough to ensure that all resources used by the firm earn their opportunity cost  (normal profit).

In the example above, normal profit required is $525,000 (explicit costs) and  $105,00 (implicit costs) – a total of $630,000. 
The business needs to earn this amount to breakeven and cover costs.
Activity 1.1 Walter’s race horses
Activity 1.1 Walter’s race horses
Why is it important to distinguish between the short-run and the long-run?

What is the difference between fixed and variable inputs?



Activity
Exam Question 1-2016
From the following costs, the best example of a fixed cost is:

Answer:
Measuring the production function in the short term
Three measures of production and productivity:
Total product
Total product (TP) is the total quantity of output produced by a firm.

Activity – Buzzy Beer’s Production
Task 1 & 2

Average product
Average product (AP) is the total quantity of output per unit of variable input or labour. This tells us how much output each unit of labour (each worker) produces on average.

  AP =   Total output
  Units of variable input e.g. labour
Marginal product
Marginal product (MP) is in the short run, the extra or additional output resulting from one additional unit of the variable input, i.e. labour.
MP tells us how much output increases as for example, labour (the variable input) increases by one worker.
  MP =        Δ in total output
Δ in variable input (e.g. labour)


Marginal product curve
Note: Marginal product is plotted at the midpoints because the change in total output occurs between each additional unit of labour used.


Marginal product and the law of diminishing returns
As more and more units of variable inputs  (e.g. labour) are added to one or more fixed inputs (e.g. land or machine), the marginal product at first increases, but there comes a point when it begins to decrease – this is known as the law of diminishing returns.
Explanation:
Even though there are more workers, they now need to share the machines.  Eventually workers become inefficient as they have  to wait to use a machine to do their work.



MCQ 2-2015
The law of diminishing returns states that beyond some level of production:
Answer:

Costs and cost curves
When firms use resources to produce, they incur costs of production which include purchases of resources, e.g. land, labour and capital.

To examine production costs, economists study the following short run cost curves:


EXAMPLE: This table shows the costs involved in baking cakes, where fixed cost is the hire of kitchen, and variable costs are wages ($20 per hour) and ingredients ($8 per cake):

Baking cakes – total costs
Past exam question 2-2015
The shape of the total fixed cost curve is:
ANSWER:

Baking cakes average costs
Baking cakes – average cost curves

Exam Question 1-2016
Eggspress Omelettes is a fast food restaurant who produces omelettes.
Using the data provided calculate:

Marginal average rule
The Marginal Cost (MC) curve intersects/cuts the Average Cost curves (ATC and AVC) at the minimum point.

MC first falls as output expands, reaches a minimum and then rises.
When MC < AC, AC falls.
When MC > AC, AC rises.
When MC = AC, AC is at its minimum point.



MC curve

Initially the MC curve is downward sloping but later is upward sloping.
 
 

MC & AC rules



Average and Marginal Cost Curves
The relationship between MP & MC
Summary – TC & MC Cost Curves


Short run versus long run
Long-run production costs
Long-run average cost curve
Different scales of production
The long-run average cost curve is U-shaped. This reflects returns to scale:
Economies of scale
A situation in which the LRAC declines as the firm increases output.

Examples of sources of economies of scale:


Constant returns to scale
A situation in which the long-run average cost curve does not change as the firm increases output.

Diseconomies of scale
As a firm expands, diseconomies of scale, eventually occur, long-run average cost increase as output expands.
Sources of diseconomies of scale:

Exam Question 1-2016
Refer to the graph below and answer the question that follows:  The range at which diseconomies of scale occur is:
Answer:

Formulas
Revenue = price x quantity
Profit = Revenue – Costs
Total Cost = TFC + TVC
Average Total Costs = (TFC + TVC) / Q
Average Fixed cost  (AFC) = TFC / Q
Average Variable cost (AVC)= TVC / Q
Marginal Cost = ∆ total cost / ∆ total output

Short Run Cost Data
Exam Question 1-2016

Using the data provided in Table 1, above, calculate the profit maximising level of output per hour for the firm. (1 mark)
Imagine the Australian government initiates a nation-wide advertising campaign promoting the health benefits of eating eggs, the main ingredient in an omelette.
On Figure 3, illustrate the likely effects on the market price and quantity of eggs.



Explain how the price mechanism operates to allocate resources, using this scenario and market as an example. (1 + 3 = 4 marks)

Past Examination Questions
Exam question 1-2015
代写MUF0061 Microeconomics