9
Long Run Costs and Out put Decisions
Short Run Conditions and Long Run Directions
Pro t= TR TC (total revenue total cost)
When a rm is earning an above normal rate of return, it has a
positive pro t level.
When a rm is breaking even, or earning a zero level of pro t, they
earn a normal rate of return.*breaking even: a rm earning a normal
rate of return
Maximizing Pro ts
Example: The Blue Velvet Car Wash
In short runs rm will do their best to minimize losses.If the
price are very high or very low, manager start to think a long run
strategy, expand the business or leave the business.
Picture9.1 Firm Earning a Positive Pro t in the Short Run
The industry price=5,10 rm producing 800 units.
Pro t>0, p>ATC, TR>TC
The representative rm
The industry
fi
fi
fi
-
fi
-
fi
-
-
-
fi
-
fi
fi
fi
fi
-
-
fi
-
fi
fi
-
fi
fi
Average variable cost(AVC):what happens to the per units cost of
workers and the other variable factors.It goes up when productivity
decline.
Average total cost(ATC):Falls at the rst, and begins to rise as
the inef ciencies in labor take their toll.
Marginal cost(MC):rise because of xed factors of production.
Any units produced beyond 800 would add more to cost than they
would bring revenue.
ATC=TC/q,TC=ATC*q,TR TC=p*q ATC*q=(p ATC)*q
AFC=ATC AVC=TFC/q,TFC=AFC*q when q rises,AFC fall, cause when q
rise,ATC and AVC will get closer
Minimizing Losses
Firm suffering losses
(1)shutdown:loss = total
xed cost(TFC),TR<TVC(p*q<AVC*q=p<AVC)
(2)continue to operate to minimize their losses: 收益
以付變動成本AVC
TVC<TR<TC(AVC*q<p*q<ATC*q=AVC<p<ATC)
足
fi
Firms cannot exit the industry in the short run.
Fixed cost is always has to be paid, whether or not it shut
down. Revenue and variable cost will exist with the store.
Sometimes the best strategy still loss money, just make it
loss fewer.
The decision depends solely on whether TR>TVC.
Producing at a Loss to Offset Fixed Cost
-
fi
*shutdown point:The lowest point on AVC, the price below will cause
TR<TVC, and the rm will shut down and bear TFC, the optimal short
run output is 0.
The Short Run Industry Supply Curve
Price per unit
Picture9.2 Short Run Supply Curve of a Perfectly Competitive Firm
Picture9.3 The Industry Supply Curve in the Short Run Is the
Horizontal Sum of the Marginal Cost Curves(above AVC) of All the
Firms in an Industry
Units of output
Units of output
Units of output
Units of output
Pro ts
TR>TC
P=MC,operate
Expand:new rms enter
Losses
TR>=TVC
P=MC, operate
(Loss<TFC)
Contract: rms exit
TR<TVC
Shut down
Loss=TFC
Contract: rms exit
-
Long-Run Decision
fi
Short-Run Decision
-
Short-Run Condition
fi
fi
fi
fi
fi
p=6, each rm produce 150, the total amount in industry=450
p=4.5, all rms shut down, cause p is less than AVC
Long Run Costs:Economies and Diseconomies of Scale
Internal of Scale
(1)increase the rm scale of production, lower average cost(LRAC
fall):*increasing returns to scale / economies of scale
Input rise n times, Output rise n times higher
(2) average cost do not change with scale of production(LRAC
still):*constant returns to scale(CRTS)
Input rise n times, Output=n times
fi
fi
-
(3)decrease the rm scale of production, higher average cost(LRAC
rise):*decreasing returns to scale / diseconomies of scale
Input rise n times, Output rise n times lower
Increasing Returns to Scale
-
fi
fi
fi
If a rm double or tripled inputs, it would more than double or
triple output.
Picture9.4 A Firm Exhibiting Economies of Scale
Each scale of operation de nes a different short run. Moving the
scale 1 to 2 reduces average cost.
*Minimum ef cient scale(MES):The smallest size at which long run
average cost is at its minimum.
Most of the economies of scale that we think the rst are
technology in nature. Large size at the plant level brought cost
savings.Some economies of scale result not from technology but from
rm level ef ciencies and bargaining power.For instance, a rm can
buy a large volume of things in a lower price to reduce their cost.
Constant Returns to Scale
Constant returns:the quantity relationship between input and
outputs stays constant, or the same, when output increased.Which
means constant return scale mean that LRAC remains at.
Diseconomies of Scale
When average cost increase with scale of production, the
diseconomies of scale = LRAC slopes up.
rm face
U Shaped Long Run Average Costs
It looks same as short run curvet is U shape because the xed scale
of plant constrains production and drives marginal cost upward as a
result of diminishing returns.
In long run scale the U shape is the scale translates into rst
cost saving and then later cost increases.
Picture9.5 A Firm Exhibiting Economies and Diseconomies of Scale
fi
fi
fi
fi
fi
fl
fi
-
-
-
fi
-
-
fi
-
-
*optimal scale of plant: which minimizes long run average cost.
Economies of scale push this rm’s average cost down to q*, the rm
experiences diseconomies of scale.Q* is the long run average costs,
using optimal scale.
-
fi
The Sources of Economies of Scale
Long Run Adjustments to Short Run Conditions
Short Run Pro ts: Moves In and Out of Equilibrium
Picture9.6 Equilibrium for an Industry wiU shaped Cost Curves
There are 100 rms and each produce2000 unique things.
A representative rm
Price per unit($)
The industry
Units of output, Q
Units of output, q
Picture9.7 Industry Response to an Increase in Demand
SRMC rise, which make new rms go into the industry and cause the
picture below
P=SRMC=SRAC=LRAC : rms make no economic pro t
Otherwise SRMC=SRAC=LRAC
Picture9.8 New Equilibrium with Higher Demand
fi
-
-
fi
fi
fi
fi
fi
-
-
When supply rise, price fall down, p back to p*, the optimal scale
The Long Run Adjustment Mechanism: Investment Flows
Toward Pro t Opportunities
*long run competitive equilibrium: whenP=SRMC=SRAC=LRAC and
pro ts=0(TR=TC)
Industries in which rms are suffering losses will gradually
contract from disinvestment.
Industries in which pro ts are being made will expanding new
rm.
APPENDIX:
External Economies and Diseconomies
*External economies: when long run average costs decrease as a
result of industry growth. rm rise, LRAC falls
*External diseconomies: when average costs increase as a result of
industry growth. rm rise, LRAC rise
Tips:internal economies of scale are found within rms, and
external economies occur on an industry wide basis.
The Long Run Industry Supply Curve
(1)decreasing cost industry: average cost decrease as the industry
grows.The long run supply curve for such an industry has a negative
slope.
Figure 9A.1 A Decreasing Cost Industry: External Economies
The long run industry supply curve(LRIS) slope downward in a
decreasing cost industry.
fi
-
-
fi
-
fi
fi
fi
-
-
fi
fi
-
-
-
-
-
fi
fi
A representative rm
The industry
(2)increasing cost industry: average coat increase as the industry
grows.The Long run supply curve for such an industry has a positive
slope.
Figure9A.2 An Increasing Cost Industry: External Diseconomies
The long run industry supply curve(LRIS) slopes up in an
increasing cost industry.The short run point makes more rm go
into the industry, which make supply curve shift.
The industry
A representative rm
fi
-
fl
-
-
-
-
fi
-
-
(3)constant cost industry: no economies or diseconomies of
scale.Such industries have at, or horizontal long run supply
curve.
10 Input Demand : The Labor and Land Markets
Input Market:Basic Concepts Demand for Inputs:
A Derived Demand
工
fi
fi
fi
*derived demand:The demand for resources(inputs) that is dependent
on the demand for the outputs those resources can be used to
produce.
Because most of the time people has the demand of something is not
because they need the things ,is like if the higher the demand is
for cars, the higher the demand is for welders （焊 ） .
Inputs are demanded by a rm if and only if households demand the
good or service provided by the rm.
*marginal product of labor(MPL):The additional output produced by
one additional unit of labor.
=total product 的變化率/labor unit的變化率
*marginal revenue product (MRP) or the value of marginal
product(VMP):The additional revenue a rm earns by employing 1
additional unit of an input, ceteris paribus（其他情況相同）
MRPL=MPL*PX(the price of output)
A shop sells sandwiches but they don’t produce bread and all the
ingredient they used, so the ingredients they use are”Adding Value”
, and the shop is producing is “sandwiches cooking and assembly
service”.
Picture10.1 Deriving a Marginal Revenue Product Curve from Marginal
Product
The marginal revenue product of labor is the price of
output=Px*MPL.If the market wage falls, the quantity of labor hours
demanded rises.If the market wage rises, the quantity of labor
demanded will fall.The marginal revenue product curve has the same
downward slope and shape as the marginal product curve.
The factor’s marginal revenue product curve is its demand curve for
that factor in the short run. It tells us how many workers the rm
will hire at different wage rates.
Labor Supply
fi
Firm and household are both the people who have to accept the
price(wages), both of them are all cannot set up the price, the
price are always be determined by the market.
*market labor supply curve:the horizontal aggregation of
the individual labor supply curves for workers in an area.
If the individual supply curves slope up, then so will the market
supply curves.The number of hours people are willing to work
clearly depends on factors, which can shift the supply curve.
Changes in attitudes toward work ,opportunities for leisure, and
change in wealth can all shift the labor supply curve.The market
labors supply curve is the sum of all individual supply curve.If we
increase the number of individuals in a market, this naturally
shifts the labor supply curve to the right.
Labor Markets
The Firm’s Labor Market Decision
An individual rm’s demand for an input depends on that input’s
marginal revenue product and its unit cost, or price.
Picture10.2 Marginal Revenue Product and Factor Demand for a Firm
using One Variable Input(Labor)
A competitive rm will use that factor as long as its marginal
revenue product exceeds its unit cost.
A perfectly competitive rm will hire labor as long as MRPL is
greater than the going wage, W*.
Hours
Hours
負的會虧，只要畫正的就好
The rm’s value from hiring workers is the marginal revenue product
curve, or its demand curve. A pro t maximizing rm will hire works
as long as the marginal revenue product of that labor exceeds its
market price.
Comparing Marginal Revenue and Marginal Cost to Maximize
Pro ts
Output market:MR=ML<=>q*
Labor market:MRPL=W<=>L*
In this chapter, the rm is comparing the marginal revenues and
costs of employing another unit of input.
Many Labor Markets
fi
-
fi
fi
fi
fi
fi
fi
fi
There are many different labor market.They have the same factor
which make them rise or fall.If labor market are competitive, the
wages in those markets are determined by the interaction of supply
and demand.Remember rms will hire additional workers only as long
as the value of their product>relevant market wage.
Land Market
Land is different with labor and capital, it has a special feature
which is in strictly xed(perfect inelastic) supply in total.
*demand determined price: the price of a good that is in xed
supply; it is determined exclusively by what households and rms
are willing to pay for the good.
*pure rent:the return to any factor of production that is in xed
supply, which means it has a xed supply(a low supply) and high
wages(物以稀為貴）for example: the host of tv shows.
Picture 10.3 the rent on land is demand determined
Because land in general is in xed supply,it’s price is demand
determined
Rent and the Value of Output Produced on Land
A rm will pay for and use land as long as the revenue earned from
selling the product produced on that land is suf cient to cover the
per period price of the land. The rm will use land up to the point
at which MRPA=PA.It is the same that occur in labor market. A
pro t maximizing rm will employ an additional factor of production
as long as its MRP exceeds MP, and it will hiring additional
labor , which for perfectly competitive rms, equals the wage rate.
fi
fi
fi
fi
fi
fi
fi
fi
fi
fi
fi
-
-
fi
fi
Input Demand Curves
Shifts in Factor Demand Curves
The Demand for Outputs
A rm will demand an input as long as it’s MR>MP.In perfect
competition, MRP=factor’s MP of output.
MRPL=MPL*PX
When the demand of product rise,PX rise, because MRPL=MPL*PX, MPRL
and dL will both rise
The Quantity of Complementary and Substitutable Inputs
The productivity of, and thus the demand for, any one factor of
production depends on the quality and quantity of the other factors
with which it works.In general, the production and use of capital
enhances the productivity of labor and normally increases the
demand for labor and drives up wages.For example the machine and
workers they are complement while substitutable.
fi
The Price of Other Inputs
When a rm has a choice among alternative technologies, the choice
it makes depends to some extent on relative input price.
PX rise up, the number of labor will rise ,and K (capital)will
fall, which means MRPL=dL both shift to the right.
Technological Change
The new methods or products to increase the productivity of
existing inputs or raise MP.
MPL raise, which makes MPRL raise, and dL shift to the right
Pro t maximizing Condition in Input Markets
In perfectly competitive rm
Labor: PL=MRPL=MPL*PX=>MPL/PL=1/PX
Capital: PK=MPRK=MPK*PX=>MPK/PK=1/PX
Acre: PA=MPRA=MPA*PX=>MPA/PA=1/PX
The three=
fi
fi
-
fi
When both the two equal are correct, that’s the best optional.
The last dollar spend on the MRPK=MRPL=MRPA.
Capital and Investment
Capital
*capital: Are those goods produced by the economic system that are
used as inputs to produce other goods and service in the future.
Tangible Capital
*physical, or tangible, capital: Material things used as inputs in
the production of future goods and service.The four major
categories are (1) nonresidential structures (2) durable equipment
(3)residential structure (4) inventories.
*Social Capital: Infrastructure
Is capital that provides service to the public. Most social capital
takes the form of public works(roads and bridge) and public
service(police and re protection)
*Intangible Capital
Is nonmaterial things that contribute to the output of future goods
and service.Such an investment as the production of an intangible
form capital called *human capital.
*human capital: A form of intangible capital that includes the
skill and other knowledge that workers have or acquire through
education and training and that yield valuable services to a rm
over time.
Measuring Capital
*capital stock: For a single rm, the current market value of the
rm’s plant, equipment, inventories, and intangible assets.
The indirect measure generally used is current market value.
The Demand for New Capital and the Investment Decision
fi
fi
fi
The grater the demand for goods which capital is used to make, the
greater the demand will be for that capital.
*marginal revenue product of capital(MRPK): The additional revenue
a rm earns by using one more unit of capital, all else equal.
MRPK=MPK*PX
fi
fi
11 Input Demand: The Capital Markey and the
Investment Decision
12 General Equilibrium and the Ef ciency of
Perfect Competition
Figure 12.3 Ef ciency in Perfect Competition Follows from a
Weighing of Value by Both Households and Firms
13 Monopoly and Antitrust Policy
fi
fi
Figure 13.1 The Boundary of a Market and Elasticity.
Figure 13.2 Marginal Revenue Curve Facing a Monopolist
A monopolist’s marginal revenue is below price.
Figure 13.3 Marginal Revenue and Total Revenue
Figure 13.4 Price and Output Choice for a Pro t Maximizing
Monopolist
Will raise output as long as MR>MC.
-
-
fi
!Monopoly doesn’t have a Supply Curve
Figure 13.5 A Perfectly Competitive Industry in Long Run
Equilibrium
Figure 13.6 Comparison of Monopoly and Perfectly Competitive
Outcomes for a Firm with ConstantReturns to Scale
rm in which the most ef cient
fi
fi
Figure 13.7 A Natural Monopoly:A
scale is large.
Figure 13.8 Welfare Loss from Monopoly
Figure13.9 Price Discrimination
14 Oligopoly
15 Monopolistic Competition
Figure15.2 Product Different Reduces the Elasticity of Demand
Facing a Firm
Demand is more elastic than the demand curve that a monopolist
faces because close substitutes for the products of a monopolistic
competition are available.
Figure15.3 Monopolistic Competition in the Short Run
fi
fi
Figure15.4 Monopolistically Competitive Firm at Long Run
Equilibrium
New rm enter ,the demand curve shift to the left.This process
continues until pro t are eliminated